Municipal utilities are not a new phenomenon but in the 21st Century they could help drive the energy transition
GREATER TRANSPARENCY
Public utilities are more upfront with how the funds are spent BEST OF BOTH WORLDS
Municipal utilities can benefit from market experience by partnering with the private sector KEY QUOTE
Being non-profit driven enables you to align your priorities with climate requirements
Spanish utility customers watched in horror as electricity prices reached new heights on an almost weekly basis during the summer of 2021. Pushed by soaring natural gas costs that affected energy markets across Europe, the price rises saw Spain’s top three electric companies raking in revenues of €700,000 ($820,000) an hour in July.
Hard-hit customers grumbled over the profits being pocketed by utilities, but one group at least had no reason to complain. Barcelona Energía’s 4250 customers knew their electricity supplier was not taking advantage of them—because it is not allowed to. Barcelona Energía, launched in 2018, is a not-for-profit energy supplier owned by Barcelona’s city authorities.
As well as serving households and businesses, the electricity provider supplies 100% renewable energy to 4700 council-owned off-takers across the Barcelona metropolitan area. In 2020, after just two years of operation and with an annual growth rate exceeding 109%, Barcelona Energía became one of the top ten electricity suppliers in a city where there are more than 250 available.
As of October 2021, it is the largest publicly-owned energy provider in Spain and its success underscores how city councils can have a direct role in the energy transition by taking charge of electricity supplies. In 2021 the seemingly quaint idea of your city hall providing your electricity supply gained further support as mounting energy costs wreaked havoc among private-sector electricity providers.
Although municipal utilities are still affected by high gas prices, they have to be more transparent and accountable about what happens with their money, says David Hall, a visiting professor at the University of Greenwich in London. They are also less likely to divert subsidies away from core activities and if they own the distribution infrastructure, they can use profits from this to bolster other activities, he adds.
Public utilities’ ability to withstand price shocks—such as those seen in 2021—is a testament to the strength of a model that has been used in markets from America to South Africa for decades. “The municipal energy company model is unevenly spread [in Europe],” says Alix Bolle of Energy Cities, a European association of local authorities committed to the energy transition. “Its development has been based on historic, socio-economic and even ideological factors that vary from country to country,” Bolle adds.
AGE OLD
While the concept is only starting to catch on in Spain—where the public authorities of Cadiz, Valencia, Pamplona and the Balearic Islands either have publicly-owned utilities or plans to establish one—in Germany it has been around for more than a century. In Munich, the Süd cogeneration plant owned by city utility Stadtwerke München has been operating since 1899.
Municipal utilities also have a long history in Austria and Scandinavia, but in Germany the Stadtwerke play a particularly prominent role in the energy sector. There are around 900 of these publicly owned companies supplying more than half of the electricity, gas and heating in Germany.
Importantly, they also own the distribution infrastructure for energy supplies, unlike providers such as Barcelona Energía which are effectively limited to acting as retailers. Another difference between the Stadtwerke and Barcelona Energía’s model is that the latter is wholly owned by the city administration, while around two-thirds of Germany’s municipal utilities have some level of private-sector ownership.
PRIVATE PARTNERSHIPS
“What you had in Germany was that after the liberalisation of the market in 1998, many cities sold their Stadtwerke, or at least the stakes in it, to bigger utilities,” explains Thomas Boermans of European energy giant E.ON. “They did not see, at that time, energy as a core activity of a municipality and could use the money elsewhere.”
Eventually, cities began buying back shares in Stadtwerke to gain more control and push measures to reduce emissions. “Ten years ago, a lot of [national] utilities were not necessarily at the forefront of sustainable energy,” Boermans adds. Meeting climate targets remains a key goal not just for Stadtwerke but also newer municipal utilities such as Barcelona Energía.
DIFFICULT BUSINESS
In the UK, the cities of Bristol, Nottingham and Portsmouth set out in the mid-2010s to combat energy poverty through the creation of council-owned suppliers. Nottingham’s Robin Hood Energy grew to serve 125,000 customers, but in September 2020—ironically for a company that aimed to help those who could not face their bills—it closed with debts of £38 million ($52 million).
Bristol Energy and Victory Energy Supply of Portsmouth also closed in 2020 after racking up losses. Anthony Boden, of the consulting firm Charles River Associates, says the companies may have underestimated the difficulty of operating a modern utility. “It’s getting more complex to provide energy to customers, with the requirement to provide accurate information as well as the complexity of running a big billing system for several tens of thousands of customers,” he says.
More importantly, it is hard to forecast the demand that those customers will have and accurately estimate the amount of money that will be needed to procure the energy up to two years in advance. “That’s when a company will run into financial difficulty,” Boden says. To avoid this, it makes sense for municipal energy companies to partner with private sector providers that can bring hard-earned market experience to the table.
British municipal energy provider, London Power, is one such example. London’s mayor, Sadiq Kahn, launched the public utility in 2019 in partnership with privately-owned utility Octopus Energy. Octopus delivers London Power’s gas and 100% renewable electricity supplies and takes care of customer service, making life easier for the municipal utility. The city, meanwhile, offers Octopus Energy an extra channel to market while securing energy supplies to help address issues such as fuel poverty.
HYBRID MODEL
Barcelona Energía has a similar set-up—although the Catalan company’s commercial partner is another municipally-owned entity, Tersa, which has been running Barcelona’s waste-to-energy facilities since the 1980s. “It’s a hybrid model, almost a city-stamped retail programme,” says Constant Alarcon of C40 Cities, a worldwide network of megacity authorities committed to addressing climate change.
This model, “Is getting more traction because it’s simpler to implement,” Alarcon says. “It’s difficult to do it on your own without the backup of a company that has already done it.” As Germany’s Stadtwerke demonstrated, municipal utilities can help city leaders push through ambitious energy transition plans in the face of sluggish progress from national or regional lawmakers.
Barcelona Energía complements its low-cost renewable energy supplies with energy efficiency advice to try to get its customers to use less power overall. “Being non-profit driven enables you to align your priorities with climate requirements,” says Alarcon.
COST BENEFITS
As well as meeting climate goals, municipal utilities are also freer than their private-sector peers to help less well-off citizens. “Tackling energy poverty is always a concern of municipal energy companies, so they always aim at providing cheaper prices to their customers,” adds Bolle at Energy Cities.
Barcelona Energía demonstrated this in June 2020 by cutting its prices by 15% to help customers whose finances had been affected by the impact of the covid-19 pandemic. “In the years we’ve been operating, the company has reinvested all its profits in research and development into new technologies to improve service and efficiency, and to cut tariffs as much as possible,” says Barcelona Energía’s Xavier Balsa.
One thing that helps municipal utilities keep prices low is that most European cities are ideal spots in which to sell energy, with plenty of existing distribution infrastructure and a high density of potential customers. However, focusing too much on price is not always a good idea for municipal utilities, as the experience in Bristol, Nottingham and Portsmouth shows.
There is a reason why private-sector energy companies avoid very low-income customer groups, says Alarcon. Even if a municipal utility does not have to worry about margins it still needs to balance the books. Pricing can also be an issue for municipal utilities because they may not have the buying power of a national electricity provider, leading to higher cost for electricity purchases. But sometimes it is not all about cost.
One advantage that municipal utilities have over national energy companies is that their brands can benefit from the allegiance of the communities they serve. Municipal utility customers may forego the prospect of market-leading low prices in favour of having their provider’s profits shared between citizens rather than shareholders.
Municipal utilities can build on this sentiment by using council facilities for in-person customer service, providing a point of differentiation over the increasingly contact centre-based approach of large national companies.
Finally, municipal utilities are more open to experiment with concepts that profit-driven companies might be wary of, such as solar self-consumption and community-based energy trading.
MODERN COMPETITION
Despite these advantages, however, the future of municipal utilities is far from assured. Some of the benefits of the municipal model, such as offering in-person customer service or addressing citizens’ sense of community, are perhaps more suited to older customers and might not appeal to the next generation of digital-savvy consumers. However, perhaps the greatest threat to municipal utilities is one that threatens all electricity companies in Europe: competition.
The fierce rivalry between energy companies fighting for market share in Europe was laid bare in the UK in 2021 because of price hikes like those that caused consternation in Spain. Because many British energy suppliers had built their customer bases on the back of fixed tariff offerings, they were unable to pass high gas prices onto customers and found themselves trading at a loss.
At the end of September, seven energy retailers had gone bust in a matter of weeks and experts were predicting the figure could rise to as many as 40. While not as exposed to market forces as private sector counterparts, municipal utilities nevertheless operate in an overcrowded environment in many European markets.
The next few years could be decisive in revealing what traits could make municipal utilities more resistant to competition. While experts such as Boden and Alarcon point to the alliance of public and private organisations as a strengthening factor, Hall at the University of Greenwich says that municipal entities that do not own the distribution infrastructure are in the same position as other suppliers.
UNCERTAIN FUTURE
This reality should at least protect Germany’s Stadtwerke, which operate the distribution network under a largely public-private ownership model. Even in Germany, though, the future of public utilities “might come into question,” says Andreas Jahn of the Regulatory Assistance Project, a non-governmental body dedicated to accelerating the energy transition.
Only around 20 of the hundreds of Stadtwerke are innovators, Jahn says. “We don’t have to worry about them,” he says. “They will be successful in one way or another. The question is about the majority. What are they for? Just to be local? Or is there a local added value by also addressing specific local needs?”
Consolidation, therefore, seems inevitable for all but the most resilient of municipal energy providers. Despite this, Alarcon at C40 believes there could be more to come. “The trend is for cities to play a more active role in the energy transition, through different ways, whether it’s the deployment of local renewable resources, supporting community energy projects [or] shifting demand to renewables,” he says.
Municipal utilities are a key tool for the energy transition, but definitely not the only one, Alarcon says. “It’s part of a broader trend towards a more localised energy system.” •
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Jason Deign
PHOTO
Raimond Klavins