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Climate action – unresolved business challenges for German municipal utilities

Energy Watch Group – Newsletter 3 – 2024

German municipal utilities are key to the success of climate action. They often operate the local natural gas network, power grid and district heating – all of which need to be transformed and adjusted significantly to achieve CO2-free electricity, heat and mobility.

If municipal utilities push ahead with this transformation and adjustment, climate action is accelerated. If municipal utilities slow walk these changes – as is still the case too often – climate action is slowed down as well. This is not just due to inertia. There are some real obstacles for municipal utilities and municipal governments that need to be resolved: lack of investment capital, vanishing natural gas profits and new business models for which these utilities are not yet sufficiently equipped.

Regarding the lack of capital for investment: municipal utilities need to

  • hook up PV and wind plants to the grid and simultaneously adapt the network to increased electricity consumption by heat pumps, electric cars and process heat in industry.
  • decarbonize district heating and expand the capacity and length of its network in implementation of municipal heat plans due to be completed by 2026 or 2028.

There are varying estimates, how much investment that will require in total. But GEODE, a EU-wide federation of local heat and electricity network operators, estimates that district heating alone will require some 400 billion € investment by German municipal utilities. Due to their overall high debt level, many utilities will have difficulties securing loans for that much investment.

Regarding vanishing natural gas profits: the natural gas service is the main profit pool for many municipal utilities, often providing a significant part of the municipal subsidies for a city’s public transport and swimming pools. As the German Secretary of Commerce and Prof. Dr. Claudia Kemfert, the chair of the EWG scientific board,  say: it will hardly be replaced by green hydrogen. As no other similar profit pool is in sight as of yet, municipal utilities show some reluctance to aggressively reduce natural gas consumption by pushing district heating or heat pumps for building heating.

Regarding new business models, there is a broad spectrum of options available to municipal utilities (some of these can at least partially replace the current natural gas profits). Examples are: generate low cost renewable electricity for local resale, provide joint electricity storage for roof-top-PV owners, and leasing heat pumps. But municipal utilities largely lack the coherent strategy, know-how and entrepreneurial culture necessary to implement these new options profitably and at scale.

A national discussion has begun on how to overcome these obstacles, so that municipal utilities can and will make faster and stronger contributions to climate action in their communities. At the Handelsblatt Jahrestagung „Stadtwerke“ on April 9th and 10th in Berlin, many of the solutions that are currently being developed and tested throughout Germany will be presented and discussed. The Energy Watch Group will contribute solutions to this discussion.