Municipal or local utilities: a strategic puzzle (Part 1)

In many countries exist these local utilities. They are not necessarily the dominant model as in Switzerland and partly in Germany (with the Stadtwerke) but they all share the same characteristics:

  • Their shareholding is local or even municipal (they can even be a service of the city like the Services Industriels de Lausanne)
  • Their local roots are very strong, and they are almost seen as a regional service
  • They are often multi-fluid and can cover a very large field of activities like in Salzburg with electricity, gas, heat, telecom, water and public transport. The Services Industriels de Genève manage waste treatment and the Stadtwerke München municipal swimming pools and baths. Global energy reasoning and strategies are therefore easily accessible to them.

But, for all that, are these characteristics really assets for their strategy and their future development? How will these actors be able to position themselves in a deeply upset energy world?

Today I am going to focus my observations on the utilities that will be subject to the unbundling of network operations and energy supply. The criteria differ according to the country to determine which ones will be subject to this European regulatory alignment but consider, as a first approximation, that it concerns the utilities with more than 100000 customers. I will speak about others very soon.

Historically, these municipal “utilities” have developed local services for all local actors: municipalities when managers of public lighting, residents and all economic actors. They never needed to clarify their different missions to develop a strong local anchorage.

The unbundling of distribution and supply may seal different destinies for these two activities.

Power distribution remains a monopolistic activity and is part of the regulated world. The development of energy infrastructure (electricity, gas, heat) and their operation will therefore remain strongly linked to cities stakes. This configuration has several advantages:

  • Local network operators will certainly be better positioned to support their city shareholder in its energy transformation and in the progressive development of eco-urbanism.
  • They will be able to offer the city more easily a global energy system including local energy sources ( heat recovery, geothermal energy …)
  • They will be able to optimize a multi-fluid system
  • The city may decide to invest in slightly more sophisticated infrastructure, particularly in terms of digital capabilities, so that services delivered by providers to citizens are more important.

These advantages still remain, in many cases, a possibility and network operators have to manage a change of positioning, the acquisition of new skills, their inclusion in a wider ecosystem of actors than before. Their potential will be truly recognized if they take the leadership of the energy transition on their territory: it is not enough for this to carry out symbolic and superficial actions but to show a true and global innovation.

However, the complexity of their task, the numerous programs they will have to carry out and the associated investments will be expensive: it will be essential to reduce some of their expenses. Network operators will quickly feel the urgent need to get closer to share costs of anticipation studies, skills or even lessons learnt, to reduce their purchasing costs by volume effect, to act in a consistent manner to answer to the regulator.

The supply part, meanwhile, is preparing a very different destiny. Unbundling of activities is in many cases accompanied by an opening of the electricity and gas markets to competition. Adapting these companies to the competitive world will be neither easier nor more difficult than for all energy companies. Their local character gives them some specific characteristics:

  • First of all, the supply of heat remains a “protected” domain: today the networks are developed under a concession of 30 years minimum which looks like recreating mini-monopolies. Local energy companies managing such networks will be able to rely on a fairly stable business pipeline.
  • The investments of network operators, decided by the city so that citizens are offered richer services, will eliminate opportunities for differentiation by value and service to suppliers. And the network operator may be perceived, depending on the case, as the true vector of value, especially if it ensures the operational management of the energy programs decided by the city (public charging infrastructure of electric vehicles, energy savings programs etc …)
  • The local scope of these suppliers will have to be questioned: if it is maintained by tradition, the number of customers of the supplier will only decrease: its sustainability will quickly be a concern. If it is extended, ie if the local supplier leaves its historical area of ​​operations, the local shareholder will soon wonder if the local or municipal capital is intended to finance a business and an activity. which are no longer local services but benefit a much larger population.

Local utilities subject to the unbundling of activities, will not have the privilege to be less concerned by the energy revolution in progress: they have, as of now, to prepare to face major disruptions in their activities.

Nevertheless, their job as a network operator seems to have more advantages than that of national companies, while their supply business seems to be in the opposite situation. It will take a lot of intelligence on both sides (distribution and supply) to let consumers keep a high quality service and local presence.

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