The electricity market made painful waves in August 2022. The price of electricity rose to record levels and the availability of electricity became uncertain. Many believe that we are heading for a cold winter, not just outdoors but also indoors. In several countries, state ownership of energy companies has become a hot topic of debate. What should the state own and why? The question has resurfaced.
Major deal in the electricity market
On 21 September 2022, the German State acquired a majority interest in the Uniper electricity company from the Finnish company Fortum for approximately EUR 500 million. Uniper had a turnover of €164 billion and a balance sheet total of €128 billion in 2021. These figures had tripled from the previous year. The company is a key gas distributor in Germany, while the German government exercises considerable decision-making powers in determining the price of gas. As a result of the rising gas prices and problems with availability, Uniper got into trouble financially and profit-wise in 2021 and 2022. The German government was keen to secure the supply and distribution of gas, whereas Fortum was anxious to exit the highly volatile natural gas market in Germany.
Earlier in the summer, the French Government had announced the nationalisation of the large French electricity company EDF. Previously, the state had held an 84% interest in the company which plays a key role in nuclear power generation in France. The company had been suffering from problems with energy production and struggled with the challenge of reconciling corporate objectives with those of the government in energy pricing.
Resolution of the crisis
Uniper’s crisis was resolved by resorting to the only alternative available, namely state-ownership. There were hardly any other options, as Uniper had already been publicly branded as a company facing collapse. Public interest was clear enough to provide an incentive to resolve the crisis in a controlled manner.
If Uniper had been a bank, the remedy would have been different. Most likely, it would have been declared failing, there would not have been any private buying alternatives for it and the prerequisite for protecting the public interest would have been met. Hence, it would have been justified to invoke the crisis resolution mechanism for the financial sector. The company would probably have needed the same amount of liquid funds as announced in the press release of 21 September 2022, i.e., EUR 8 billion. While in the banking sector liquidity can be obtained from the central bank against high quality collateral, the electricity sector employs a different logic. There is no comparable operator to offer cash. Consequently, the state is the only actor ultimately capable of calming the market and providing – or promising – additional funding.
The resolution of a crisis affecting a single electricity company is just one aspect of the predicament that the entire electricity market is facing. Also, electricity exchanges may be running into problems. Electricity exchanges would have been in trouble if sufficient collateral had not been delivered on time, when electricity prices shot up. This situation was resolved, thanks to prompt government action.
Why the state-ownership?
Over the past few decades, governments have off-loaded their corporate holdings through privatisation. The trend started in the 1980s and gained momentum in the 1990s. However, the market valuations of state interests have risen to the extent that governments continue to hold substantial stakes in companies in many regions across Europe even after the divestments. In several countries, state-owned companies are not listed, as in Sweden. In others, such as Finland, the state retains sizeable interests in listed companies.
State ownership can be justified by several arguments.[i] Often, it is the state that has initiated the operations, subsequently converting the state undertaking into a limited liability company, listing it and finally privatising it step by step. Even though the processes are drawn out, substantial added value is generated for the state over time. The state may make up for the lack of private investors or fill the gaps in the market economy in specific sectors. Thirdly, the state may wish to serve as a shareholder in strategically important sectors, such as energy or defence.
A fourth argument for state ownership is crises. In a crisis, the state may be the only party capable of and interested in saving a given company or its business. The fifth argument is based on the saving and investment motive. Fact is that shareholdings have given sound returns in the long run, allowing the state to earn on its investments. This last motive is often overlooked when talking about state ownership. At any rate, a market-based and shareholder-driven approach to ownership is required to earn a healthy return.
In conclusion
State ownership is motivated by a number of reasons. It is frequently criticised citing perceived weak ownership policy or poor governance. Arguments in favour of state ownership are presented rarely. And when such arguments are presented, they often overlook its necessity in the face of crises and with regard to the returns it generates in the long term. Crises are followed by renewed development efforts. And that’s what will happen again once we overcome the present crisis.
[i] Timo Löyttyniemi, ”State ownership 2030 – what and why?” (Finnish language), Finnish Foundation for Share Promotion 2011.
The writer is VER's CEO Timo Löyttyniemi.
