The soaring price of natural gas and excessive volatility in European power markets are bringing some electric utilities to the brink of collapse and, in turn, pushing governments to take greater ownership stakes in these firms to keep them afloat. This crisis, triggered by a supply shortage as Russia cuts natural gas deliveries to EU members, comes as the continent works to accelerate its energy transition plans that would cut emissions and reduce its reliance on fossil fuel imports.
In rescuing gas-reliant utilities, however, European governments are also further concentrating their ownership of fossil fuel-based electricity generation. A new analysis of data from the 2021 S&P Global Corporate Sustainability Assessment, or CSA, shows that electric utilities with significant state ownership already have a higher share of natural gas in their generation mix, while utilities without government ownership generate much more of their electricity from renewables. This gap may grow even wider as utilities more vulnerable to conventional fuel market disruption see greater state ownership, while those without state ownership push forward on renewables.
Generation mix
The 2021 CSA captured data on 32 publicly traded European electric utilities, with installed capacity data for 24 of those companies. The data shows that companies with government involvement, defined here as an ownership stake of 5% or greater, have a much higher average share of conventional fuels than utilities without state involvement.
The average share of natural gas in the generation mix for the 14 utilities with government ownership, for example, was 21%, versus only 13% for the 10 companies without. The reverse was true for wind and other renewable energy sources: electric utilities without meaningful government stakes generated 36% of their power from wind and 31% from other renewable sources, while companies with state ownership generated 20% and 19% from wind and other renewables, respectively. Hydropower is an exception in the renewables category with a higher share at utilities with government involvement, given the high upfront costs, risks and customization of hydroelectric infrastructure. Nuclear power is also concentrated in state-owned utilities for similar reasons.
Share of conventional fuels is higher at European utilities with government ownership
Data as of July 17, 2022.
EU (total) refers to the total installed capacity in 2020 in the European Union. Data includes 24 Europe-based publicly traded companies covered in the 2021 Corporate Sustainability Assessment.
Source: S&P Global Sustainable1, International Energy Agency
Electricity market pressures
The concentration of conventional generation sources at state-involved utilities could be on the cusp of growing even more. Governments are considering bailouts for utilities struggling with liquidity crunches, debt payments and high costs, particularly as the collateral requirements on power markets have spiraled and the price of natural gas has risen. Gas-fired power plants accounted for 19% of the total installed capacity in the EU in 2020, according to the International Energy Agency, making the cost of electricity vulnerable to gas price spikes. Europe’s access to natural gas has plummeted during 2022 as Russia, which previously supplied 45% of the region’s natural gas imports, reduced its exports in response to sanctions over its invasion of Ukraine. Prices for natural gas at the Dutch TTF, the benchmark hub for Europe, hit €230/MWh in August, reaching an all-time high.
High-profile rescue plans have already been enacted at some of the region’s most prominent utilities. The German government agreed to a €15 billion bailout of Uniper, the largest importer of natural gas in Germany, for a 30% stake in the company. The deal reduces the majority stake of its parent company, the Finnish state-owned energy company Fortum, to 56%. In turn, Fortum has agreed with the Finnish state on a bridge financing of €2.35 billion to support liquidity need amid power market volatility. Similar financial state support schemes for electric utilities have been offered or agreed to in Switzerland, the Czech Republic, Spain, Sweden and France.
Across the global economy, the electric utilities industry is already characterized by high government involvement. An analysis of 5,496 publicly traded companies included in the 2021 CSA shows that 33% of electric utility companies have government ownership of 5% or greater, compared with an average of 11% of companies across all sectors.
Share of electric utilities with government ownership is 3x higher than average
Data as of July 17, 2022.
Analysis includes 5,496 publicly traded companies covered in the 2021 Corporate Sustainability Assessment.
Source: S&P Global Sustainable1
On a geographic basis, government ownership is already more common in Europe than other regions. More than half the publicly traded electric utilities covered in the 2021 CSA have government stakes of 5% or more, with an average ownership stake above 40%.
Government stakes in electric utilities are common in Europe
Data as of July 17, 2022.
Analysis includes 173 publicly traded electric utilities covered in the 2021 Corporate Sustainability Assessment.
Source: S&P Global Sustainable1
The burden of higher electric bills for end-consumers is also prompting European governments to consider greater involvement in the electricity market. The gas price shock has caused a knock-on effect on electricity prices because gas-fired generation plants often set marginal electricity prices in short-term EU power markets.
The increased operating costs facing gas-fired power plants have helped drive electricity prices to record high levels across Europe. According to the European Commission’s Quarterly Report on European Electricity Markets, end-user electricity prices for residential and midsized industrial consumers jumped 32% and 37%, respectively, in the first quarter of 2022 compared with March 2021. Many European governments have implemented or are planning measures to mitigate these higher prices, such as heating cost subsidies in Germany, fuel vouchers in the U.K. or electricity bill subsidies in Norway.
The EU is also looking to solve the root cause of the energy crisis: reliance on fuel imports, and in particular, Russian natural gas. The Commission proposed a plan in May called REPowerEU that aims to replace natural gas imported from Russia with renewables, a greater focus on energy efficiency and imports from other trade partners. REPowerEU targets €210 billion in new energy investments by 2027, with much of that earmarked for solar, wind and hydrogen infrastructure. It also seeks to streamline the permitting process for launching new solar and wind projects.
The Commission has also outlined a gas demand reduction plan to prepare for more supply cuts from Russia. The plan targets a gas demand reduction of 15% to be achieved between Aug. 1, 2022, and March 31, 2023. Member states have been asked to update their existing national emergency plans to accommodate this target by the end of September, according to the Commission.
The EU is working on additional reforms for the electricity market that could include windfall taxes on low-carbon electricity producers and fossil fuel companies, with the proceeds going to member states to assist consumers facing high prices. Utilities could also receive liquidity support to cope with market volatility.
While the EU is taking steps to reduce its reliance on conventional fuels, it has also included natural gas and nuclear power in its green taxonomy, a kind of dictionary for what it considers sustainable. Inclusion in the taxonomy allows gas and nuclear projects to access green financing.
Natural gas is expected to still play a role as a transition fuel that can meet electricity demand in the short term. But the EU’s medium-term goal is to continue replacing much of its fossil fuel-based generation with renewables. In the short term, a volatile pricing environment for the natural gas Europe’s power plants still rely on is pushing governments to bail out utilities, often in return for larger ownership stakes. If that trend continues, private-sector utilities will continue to have the most “green” generation mix, while state ownership will remain concentrated in electric utilities with a high share of conventional fuels in their generation mix.
