Uniper Deal Is Lehman Moment for European Energy


Germany’s nationalization of gas giant

Uniper,


UN01 -25.29%

announced Wednesday, lays bare the seismic ructions in the once-sleepy world of European utilities triggered by the new Cold War with Russia. Investing in the sector will change dramatically.

Berlin said it would inject €8 billion, equivalent to $7.9 billion, in return for new equity at a nominal value of €1.70 a share. It will also buy Finnish utility company

Fortum’s

majority stake in Uniper at the same rate.

The deal ups the ante after the state’s first attempted bailout, announced just two months ago, proved insufficient. The shares plunged to €1.31 and are now down over 90% this year. 

There are echoes of the 2008 financial crisis. Uniper is too big to fail and German government officials are warning of further bailouts. After decades of liberalization, there are risks of contagion in what is a very interconnected European power market. Big utilities such as Uniper operate in a host of countries and over 2.7 billion energy-related intercompany transactions were reported in the European Union last year, according to think tank Bruegel. 

France nationalized its own power giant EDF in July, but that was a long-discussed plan. Until recently Uniper was a success story. At the start of 2022 the shares were up 315% since

E.ON

spun it off in 2016, although that admittedly included a premium because many expected Fortum to eventually buy it outright. 

There are other European utilities that would be considered too big to fail, but most are much more diversified, making them less exposed. Uniper is a special situation, says

Wanda Serwinowska,

utilities analyst at

Credit Suisse.

It was a strong backer of the Nord Stream pipelines and relied heavily on Russian supplies.

Dwindling supplies after the start of the war in Ukraine forced the German company to buy gas on the spot market at much higher prices than its contracted sell-on rates—costing around €100 million a day and adding up to over €8.5 billion so far this year, according to Uniper’s chief executive. Some even worry this latest bailout might again prove insufficient.

It all adds a lot of uncertainty for investors. Uniper’s minority shareholders will have little left after the rescue. Investors in most other European utilities seem to be insulated from bailout risk, but they can definitely count on increased regulation, much like what followed the global financial crisis for banks.

Europe’s energy market was deemed fit for purpose only a few months ago, but expensive bailouts and a new appreciation for energy security have swung the pendulum away from deregulation. National governments and the EU are rushing through emergency measures to protect businesses and households from price rises. Discussions of broader market reform are also accelerating and seem likely to overhaul the merit-order marginal pricing of power, which links electricity prices to gas, much sooner than previously expected. 

In one crucial respect energy is quite different from banking: Europe wants more of it. As long as drilling in their backyard remains wholly unacceptable to most Europeans, diversified non-Russian gas imports as well as wind and solar power will be the region’s long-term paths to energy security and independence.

There is some solace for investors here. While Europe will do whatever it takes to get through the next couple of winters, new regulation seems unlikely to throttle utility returns quite as hard as banking profits were after 2008, because officials know they need to attract significant private capital to build a new clean-energy system.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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