German fossil fuel firms too big to fail?

The 2008 global financial crisis spurred the debate about whether irresponsible banks were "too big to fail." Now the same question is being asked of energy companies that built their business model on Russian fossil fuels. 

A longtime proponent of importing gas from Russia, on Friday German energy supplier Uniper asked the government for a bailout amid a growing gas supply crisis. Governments across Europe are scrambling to secure energy supplies in time for the winter as Russia's war in Ukraine continues to disrupt the once substantial flow of oil and gas.

Uniper, Germany's largest importer of natural gas, says its supply of Russian gas is down 60% from normal levels. Reduced flows are forcing the company and its competitors to fill the gap by purchasing from other sources on the expensive spot market — essentially buying the commodity at its daily value. The price of natural gas is up more than 60% compared to a year ago.

The German government on Friday approved legislation making it easier to provide emergency funding for struggling energy suppliers like Uniper. In June, the government already provided a €10 billion ($10.1 billion) loan to Gazprom Germania, a former subsidiary of Russia's state-owned gas giant, to secure Germany's energy supply. More companies are likely to follow.

Bad business 

"These are bailouts for companies that had a bad business model," Tilman Eichstaedt, professor of logistics and supply chain management at the bbw University of Applied Sciences in Berlin, told DW.

He pointed to Uniper's financial report: released in late February, the day before Russia invaded Ukraine, the company classified the financial risk to its business as "moderate."

"This means that in the worst case there is only a 1% probability that a loss from this category/subcategory will be higher than an average of €20 to 100 million per year," the report reads.

As of Friday, politicians were discussing a €9 billion bailout package for the company.

Other major German players released similar reports, Eichstaedt said, even as Russia amassed soldiers on Ukraine's border, and despite the fact that energy prices had already spiked. 

"There were good signs and strong signs for these companies to change plans, and they didn't do that," he said.

The next Lehman Brothers?

Cheap Russian energy has been an integral part of the German business model, accounting for about 35% of Germany's oil imports and around 55% of its gas imports in 2021. Along with industry, Uniper is also a major energy supplier to German households.

"If this minus becomes so big that the companies can't bear it any more and they fall down, the whole market threatens to fall down at some point — so a Lehman Brothers effect in the energy system," German Economy Minister Robert Habeck said in June, referring to the US investment bank's 2008 collapse that rippled through global financial markets.

But US regulators did let Lehman Brothers fail in the end, after determining the business was no longer viable. Could the energy system bear the collapse of critical infrastructure if it meant freedom from business models that threaten the climate and national security?

Letting key players like Uniper fail and triggering a hard transition towards decarbonization might be a way of speeding up the green transition, acknowledged economist Michael Koetter, vice president and head of financial markets at the Halle Institute of Economic Research. Germany currently aims to cut carbon emissions by at least 65% by 2030 compared to 1990 levels. But the political fallout would likely be substantial, he said. 

"If we are not able to sustain warmth in apartments and core industry production over the next year, we will lose the political closeness that we have right now, which is necessary to battle back the Russian aggression," he told DW.

Sharing the loss

On the one hand, a bailout disincentivizes responsible management behavior, for the company at risk as well as for its competitors. But having the government hold a stake in the company, another option included in the emergency legislation, could be a good thing in the long run.

"The government can, of course, much more directly try to implement its energy transition politics," said Koetter. "Whether they're going to be doing it efficiently now, that's another question."

If there's to be a bailout, it's important that the high costs a company is struggling with still get passed onto those who profited from the bad business model, says Eichstaedt, whether that's businesses or household consumers.

"Whenever you keep the prices low, you keep the people from changing their behavior," he said. "But that's what we need to achieve. We need to achieve a behavioral change towards less gas consumption."

Avoiding the solar trap

And how to avoid falling into this kind of dependency trap again? Koetter suggests creating an economic environment that allows alternative energies to compete with each other. Moving towards reliance on a portfolio of different technologies would mitigate past dependencies on one source of energy, like Russian gas. It would also protect from becoming overly reliant on one key technology provider, like solar panel powerhouse China.

"I'm very concerned that China is watching carefully," said Koetter. "And our dependence on China is equally as important as it is on Russian gas, just different items."

Edited by: Uwe Hessler

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