Network expansion, digitalization and billion-dollar investments in the energy transition are pushing many smaller municipal utilities and network operators to their limits. Is there now a wave of takeovers?
Germany has over 850 network operators, especially municipal utilities, who are facing financial and organizational challenges.
PwC estimates the investment needs of municipal utilities and regional suppliers for climate neutrality by 2045 at around 535 billion euros.
The Association of Municipal Companies recommends cooperation instead of forced consolidation, as fewer network operators do not automatically guarantee more efficient processes.
Municipal shareholders and politicians make mergers more difficult because they insist on the independence of municipal utilities and network companies and participate in supervisory bodies.
Berlin, Düsseldorf. In no other country are there as many network operators for electricity and gas supply as in Germany. There are currently over 850, most of them are municipal utilities. And many are now reaching their limits – financially and organizationally.
“There is a lack of competence in the areas of digitalization and AI, of skilled workers and of investment power,” says Marc Hansmann, Chief Financial and Infrastructure Director at Enercity in Hanover, one of the largest municipal companies in Germany. He is convinced that the number of public utilities in this country must be at least halved in order to make the necessary investments for the future.
Andreas Feicht, head of Cologne's Rheinenergie, also expects that not all municipal utilities will survive the transformation in the next few years: "The business is becoming increasingly complex, difficult and requires a lot of investment. There needs to be a critical size," he tells the Handelsblatt. This realization has slowly reached many smaller and medium-sized municipal utilities, says Feicht.
And the pressure is growing. The municipal utilities must mobilize billions of dollars so that the upcoming investments in electricity and heating networks can be managed. Many are simply overwhelmed organizationally to find the necessary capital.
An analysis published at the end of last year by the auditing and consulting firm PwC Germany for the state development bank KfW came to the conclusion that municipal utilities and regional utilities in Germany will have to invest around 535 billion euros in the transformation to climate neutrality by 2045.
PwC puts the financing gap at 346 billion euros. The municipal utilities and regional suppliers can only raise around a quarter of the funds from their own resources. Almost all companies will need additional equity capital in the next few years. However, many municipalities as sole or majority owners are not in a position to do this because they themselves lack the money.
A study by the consulting firm BET on behalf of the Association of Municipal Companies (VKU), in which the municipal utilities have come together, comes to the conclusion that the existing structures are increasingly reaching their efficiency limits under the current requirements. The challenges “particularly affect smaller and medium-sized distribution network operators who have limited resources and limited opportunities for internal specialization,” says the study.
“Fewer network operators do not automatically mean more speed”
Collaborations could help “to realize economies of scale, pool resources and increase implementation capacity without completely giving up the advantages of decentralized structures.” The VKU appeals to the distribution network operators to consider all forms of cooperation. It is important to go through all options. This could start with joint purchasing and also lead to a merger.
At the same time, VKU boss Ingbert Liebig warns against forcing municipal utilities and network operators to consolidate across the board. “Fewer network operators do not automatically mean more efficiency and speed,” he told Handelsblatt. Liebing points to the example of the Netherlands, where there are only six distribution network operators. However, the Dutch distribution network is still the “fulst network in Europe with corresponding waiting times for network connections,” said the VKU boss.
What is crucial for the energy transition is how efficiently distribution network operators work together, according to the Munich municipal utility company. "Grid connection and transport capacities are primarily determined by the technical design and expansion of the networks. They do not directly depend on how many network operators are organizationally active in Germany," a spokesman told the Handelsblatt. The Munich-based company is one of the largest municipal utilities in Germany.
The diversity of the network operator landscape brings with it the advantage that many companies have a high level of knowledge of regional conditions and customer needs. “If you want to advance the energy transition faster and more cost-effectively, you should promote cooperation instead of discussing forced consolidations,” says association leader Liebing.
Should the Federal Network Agency promote mergers and acquisitions?
Enercity CFO Hansmann sees various options: from partnerships to shared services in individual areas to takeovers. It was only in January that Enercity took over the power grid in the city of Garbsen with around 600 kilometers of lines and around 37,000 households. The gas network (around 800 kilometers) will follow on January 1, 2028. “This is the only way to create economies of scale,” Hansmann is convinced.
Rheinenergie also bundles investments in Rhenag, in which it holds the majority of 54.5 percent, and offers services to smaller municipal utilities, whether in procurement, the joint operation of IT systems or network control.
And smaller municipal companies like Stadtwerke Soltau have also recognized that something has to change. With around 100 employees, the company from Lower Saxony is not one of the largest municipal utilities, but it has taken a lot of steps to master capital-intensive projects such as heat transition, network expansion and digitalization. "We are now also service providers for other municipal utilities. These are the first steps towards collaboration, collaboration and, in the medium term, merger," says managing director Daniel Töpfer.
Töpfer has been at the head of the Soltau municipal utility since 2023. Before that, he was the full-time mayor of the municipality of Weissach for eight years. In his opinion, there is no way around consolidating the municipal utilities: "Many network operators have already come to the realization that they can't do it alone for much longer. The shareholders, on the other hand, often haven't understood it yet," he says.
In most cases, however, the municipal shareholders, i.e. the local politicians, stick to their “own municipal utility” and their “own network company” until the end, insiders report.
Mergers fail in practice because local politicians insist on the independence of the respective municipal utility or network company. Because where municipal utilities and network operators are in municipal hands, there are areas of activity for local politicians. They participate in the supervisory bodies and have to support fundamental decisions.
Enercity CFO Hansmann suggests that the Federal Network Agency could support mergers, investments and takeovers, for example with positive incentives. But the future seems clear: “The savings banks have shown the way: They have more than halved their number,” said the manager. The same development will also be seen among network operators.
