European energy crisis and how history repeats itself: Losses are borne by consumers while profits are retained by utilities

Author: Milan Vukasović, electricity market expert and former co-convener of the regional ENTSO-E Market Working Group in South-East Europe

In mid-2011, TelDaFax, the former largest independent energy provider in Germany, filed for insolvency and attracted media attention. Just two years after this case, electricity provider Flexstrom AG and its subsidiaries OptimalGrün and Löwenzahn Energie made negative headlines in newspapers, leaving open claims of EUR 570 million after their bankruptcy. We are now in 2022 and it seems that the situation on a retail level didn’t change a lot…

Due to high wholesale energy prices during the second half of 2021, seven so-called electricity discounter companies in Germany have already had to file for bankruptcy: Neckermann Strom, Stromio, Dreischtrom, Otima Energie, Smiling Green Energy, Lition Energie and Fulminant Energie.

The business model of the companies is a relatively simple one. They offer electricity to the end consumers (usually over a fixed price contract) at very low prices, and the energy is bought on the electricity spot exchange in a very short term. Until recently, they often managed to get bargains in order to be able to guarantee delivery contracts on very favorable terms. But that is exactly what has become more and more difficult in recent months as the energy prices have risen sharply.

Such electricity discounter companies cannot just easily pass the actual procurement costs to the end consumers, as the companies are obliged to follow the fixed contract price valid for a longer period of time. And they cannot just unilaterally get out of the contract, even if their own procurement prices have risen. That’s not legally permissible as those companies aren’t insolvent. Nonetheless, there were such cases recently in Germany where the supplier just unilaterally cancels the contract and informs its end consumer to look for a supplier of the last resort.

If this is not legally allowed, then one would need at least try to be more creative… One way would be to give intentionally deceptive claims in the advertising process with the purpose of minimizing financial losses.

A Bavarian energy provider, Jurastrom, has started offering dynamic tariffs since the beginning of November 2021. An offer to switch from fixed prices to a variable tariff occurs exactly in the middle of the energy crisis. In this way, an electricity discounter tends to forward electricity prices from the exchange directly to its customers.

So far so good… but where is the catch? The new product has been advertised with the wholesale energy price development graph of the last ten years. The actual year (2021), when the day-ahead prices were multiple times higher than those on the forward market for the same delivery period, was missing from the curve. Looking only at the graph, existing consumers which are not aware of the recent market events might decide to terminate the valid contract with a price guarantee (fix price) and get a dynamic tariff.

Another trick includes opting out from the network connection or attempts to terminate the existing fixed price contract by using a clause from the general terms and conditions and interpreting ‘unforeseeable price developments & extreme situations on the energy market’ as a force majeure and a valid reason for contract termination.

According to a report from January 2022, a managing director of three companies (Stromio, Grünwelt and Gas.de) from North Rhine-Westphalia was targeted by the authorities after the energy deliveries were stopped overnight and hundreds of thousands of electricity and gas customers’ contracts were terminated.

The German national regulatory authority (Bundesnetzagentur – BNetzA) is currently investigating whether the companies preferred to sell gas and electricity profitably to the traders on the wholesale market instead of supplying their own end customers. This suspicion was voiced by the market participants. In comparison with other energy discounters in Germany, this particular one didn’t declare bankruptcy.

In the end, it is worth mentioning that, although mostly energy discounters with poor risk management instruments failed, there were also innovative energy suppliers that stopped their services due to soaring energy prices. In the current situation, smaller energy suppliers need to pay large amounts of money to hedge their exposure on the wholesale market. All that either leads to a problem with liquidity or a situation of having no hedge at all.

And what happens with the customers that are left without an energy supply contract?

The law guarantees the uninterrupted supply of electricity and that means that end consumers of the insolvent companies will automatically be allocated to the so-called supplier of the last resort. The fact is that currently millions of households are slipping – at least temporarily – into the new, very expensive special tariffs for basic services.

According to data for Germany for January 2022, as many as 3 million households are affected in terms of power supply, with an average cost increase of 95%, all compared to the normal basic supply.

Energy supplier of the last resort, but with substantially higher costs

A large proportion of the last resort energy suppliers were demanding new customer prices that are many times higher than those paid by the previous customer base. After the warning given by the consumer protection center of North Rhine-Westphalia, as unequal treatment violates the applicable provisions of energy law, those energy suppliers announced a reduction in their basic electricity supply tariff for new customers from the beginning of February 2022, to EUR 0.54 per kWh. So far, they have been charging EUR 0.92 per kWh.

There were also cases in Germany that a supplier of last resort rejected to get consumers of insolvent energy discounters on board. The Federal Ministry of Justice and Consumer Protection advised customers to file an objection and claim damages in the amount of the additional costs.

Independence as a keyword: a sustainable solution for the future

Politicians obviously didn’t recognize or at least they have underestimated the effect that gas crises and a potential Russia-Ukraine conflict might have on energy prices across Europe. A skyrocketing energy and gas price has a socio-political aspect, because it hits people with low incomes much harder than people with high incomes.

A set of actions applied by some countries (Germany, Norway, France…) that usually included one-time payments as a heating and electricity bill subsidy can be seen only as a short-term measure to relieve citizens’ financial burden, caused by the energy price crisis.

A crucial way out from the situation that we observed recently could be summarized in just one term: flexibility. Unfortunately, recent events in the energy market led us in a completely opposite direction. The number of active energy suppliers was reduced, the remaining (usually big) players increased their prices and customers are now about to be locked into an expensive fixed tariff with no alternative solution for a better deal.

Exposure of end consumers to high energy prices or to increased price volatility (one shouldn’t forget that we see larger price fluctuations in the energy market mainly due to the stronger penetration of renewable sources and due to closure of base load plants, e.g. nuclear and thermal units) has to be mitigated by proper national transposition of EU directives (such as the Clean Energy for all Europeans package, adopted in 2019).

Demand-side response, combined with own solar electricity generation and battery energy storage system (PV+BESS), is a key element to (partially) mitigate the exposure from the external factors, and to make households self-sufficient and less prone to turbulences on the energy market. Community energy, with optimal energy usage on a distribution level where the electricity is actually generated in a decentralized way, plays an important role for end consumers to get involved in the energy transition.

Let’s finish with the claim from Buckminster Fuller, American architect, inventor and futurist, who said: “There is no energy crisis, only a crisis of ignorance.” Let’s work together towards a bright energy future!