German utilities face 350-billion-euro funding gap for regional energy transition by 2045

Local utilities in Germany will have to invest a total of 535 billion euros in regional electricity, gas, and district heating networks by 2045, but require new financing instruments for a large share of the investments, found a report by consulting firm PwC Germany, commissioned by the state investment bank KfW.

Only around a quarter could be covered by the companies’ own financial resources. A further ten percent may come from new subsidies, leaving a financing gap of around 346 billion euros, said KfW.

“Energy suppliers will have to make enormous investments in the energy transition in the coming years,” said Dirk Schumacher, chief economist at KfW. “For the successful modernisation of energy infrastructure, consideration must also be given at the political level to extend the range of financial instruments.” The report proposed several ways to broaden financing options, including partial government assumption of credit risk or co-financing by development banks.

“A joint effort by local authorities, banks, investors, and development institutions is needed to successfully finance the energy transition," said Henry Otto, head of energy consulting at PwC Germany.

Municipal utilities play an important role in helping Germany reach climate neutrality by 2045 because they distribute a large share of electricity and heating to households across the country. However, these organisations are extremely diverse in terms of their legal structure and financial capabilities. Some of them have been at least partly privatised, but most of the so-called Stadtwerke (municipal works) remain owned by local authorities.

One challenge many local utilities face is the phase out of gas in heating, as gas sales account for a large share of their revenues and are used to finance other municipal tasks. Local utilities are struggling to develop plans to decommission or repurpose their networks of gas pipelines. Industry lobby groups have said that a lack of rules governing the phase-out of gas grids or their conversion to climate-friendly gases like green hydrogen, as well as the question of who will foot the bill, remain major obstacles for utilities to make plans. The government is working on legislation to tackle this issue.