Cooperative Principles in Energy Sector Help Small Become Big

Sami Karhu & Tapio Luoma-aho

How should energy production and energy networks be organised and owned? States and state-owned companies are still key players in the energy sectors of many (most) countries. Out of the ten largest companies in the world, counted by revenue, seven do business mainly in the energy sector. Six of these seven are oil and gas companies and four of the top ten companies (Chinese Sinopec, China National Petroleum and State Grid as well as Saudi Aramco) are at least 50% government-owned. Politics influences companies and companies influence politics.

Diversity in business models increases the economic performance as well as the resilience of the whole society.

From a national security point of view, the risk of private enterprises is that in the course of time they tend to become sold to private investors, often foreign. In a vital sector such as energy production and networks, this is often perceived as being too risky. Generally, diversity in business models increases the economic performance as well as the resilience of the whole society.

As an example, in Finland, the experiences of the Second World War created the political will to create our own capacity in oil refining. As the war started, the tankers of foreign oil companies quickly disappeared from the risky markets and Finland was left without access to petroleum products. The post-war political decision to establish a state-owned oil refinery led gradually to the birth of a whole cluster of petroleum and chemical industries.

However, state ownership and private ownership are not the only ownership models around. Cooperatives are a democratic bottom-up model of ownership. Cooperative enterprises and principles have had a significant role in the development of the energy sector in some countries, especially Finland.

Today, Finland is likely to be the country with the most cooperatives anywhere in the world. Cooperative groups are market leaders in many fields, such as finance, banking and consumer products.

From a national security perspective, cooperatives are a safe model of ownership as they cannot be easily sold abroad. The primary weakness of the cooperative model is that collecting large amounts of capital for investments may be slow.

Cooperatives help the EU reach its climate and social goals

Cooperative business models and principles in the energy sector can help EU countries reach their climate goals. For example, forming a cooperative can help small and geographically scattered producers of bioenergy enter the market with their products. Cooperative models can help businesses pool enough capital to invest in sustainable energy production that would otherwise be too large for individual companies.

In Finland, ca. 40% of our electricity produced today is by joint-venture companies, established on cooperative principles. Most of this is fossil-free energy (hydroelectric, nuclear, wind), of which the share is increasing.

In addition, cooperatives are an entity belonging to the “social economy”, with local ownership and democratic principles in decision making. Therefore, cooperatives can also support social cohesion, solidarity, resilience and other goals relating to the European Pillar of Social Rights, along with sustainable energy production and distribution. Many European countries would benefit from more inclusive and democratic business models.

The EU business and entrepreneurship policy must, therefore, take into account the diversity of business models, including the specifics of cooperatives. This includes not only legislation, but also financing and education.

Cooperatives in the energy sector

Consumer cooperatives

A consumer cooperative is formed by the customers/users of the product. In the case of energy, these can be individual consumers, companies, communes or even the state. As an example, in Finland, the largest gas station chain (ABC) is part of a large consumer cooperative, named S-Group. Also, many of the largest producers of wind energy in Finland are at least partially owned by cooperatives or founded on cooperative principles.

Producer cooperatives

A producer cooperative if formed by the producers of such things like raw materials. The most common cooperative in the energy sector is a cooperative of several small producers of biofuels (e.g. wood chips). A cooperative makes it possible for small and geographically scattered producers (in this case forest owners) to enter the market.

Cooperative ownership could be used for organising other forms of energy, such as biogas production. For example, several farms and other companies can invest in a biogas production facility as a cooperative.

Private enterprises can also form cooperatives. By forming a cooperative, small companies have more force in negotiating the price of their energy products. Or they can, for example, create a joint company for their logistics.

Cooperative principles in large energy projects – a Finnish example

Energy production is very capital intensive. In a small country, pooling large amounts of domestic capital for large investments can be very difficult. One power plant may need hundreds of millions, or even billions of euros in investments. Very few companies have such financial resources.

The so-called Mankala cost-price model is a post-war Finnish innovation that helped private companies invest in energy production and create economies of scale. In the model, several companies create together a jointly-owned limited liability company for a common purpose of producing energy (typically electricity). The shareholders pool together resources to finance the construction and maintenance of the plant and, in return, receive electricity from the plant at cost price, in proportion to each owner’s share in the energy company.

The jointly established power company sells the produced electricity and heat to shareholders at no profit. The shareholders commit to paying the power company’s costs in proportion to their holdings in the company and also share risk.

Mankala companies are typically owned by several private enterprises and sometimes communes. The model has helped build facilities that produce hydroelectric power, nuclear energy and, increasingly, wind power.

The most recent example of a major power plant to be completed with the cost price model is the new Olkiluoto 3 nuclear reactor in Eurajoki, Finland. The total estimated cost of the plant will be an estimated 10 billion euros, making it the second most expensive building ever built. While the project has been an economic disaster for the suppliers, Areva NP and Siemens AG, once completed, it will increase the supply of carbon-free electricity with a 1600 MW nameplate capacity.

In summary, cooperative models and principles can help farmers, companies, communes and other interested investors, invest in fossil-free energy production while simultaneously fight climate change. National and EU legislators should take this into account.

All models of ownership have their pros and cons

To curb down climate emissions, we need rapid investment in fossil-free energy production. Whether energy production is owned and run by the state, private shareholders or by cooperatives is an important question. However, all ownership models have their pros and cons and, therefore, should not be dismissed by, for example purely ideological reasons. States, in particular, have a crucial role to play not only in research and development but also because state-owned companies are often the pioneers in new, technologically risky models of energy production. Nuclear energy plant suppliers, for example, have typically been state-owned companies.

Finally, it could be argued that, in the end, good governance and leadership is more important than the ownership model. State-owned companies have their own challenges. Private businesses seldomly are prepared to take major and costly risks in, for instance, pioneering a new type of technology in energy production. In Finland, cooperatives have had difficult times due to poor management decisions by the management and cooperative boards. As Hannes Gebhard, the Finnish pioneer of cooperatives said: “Cooperatives are the most difficult model, therefore they need the best leaders.

Sami Karhu is the CEO of Pellervo Coop Center, Finland. Pellervo is a service and a lobbying organisation for all Finnish cooperatives and a forum for cooperative activities. The goal of Pellervo is to make the cooperative business model more known to the public and offer the cooperative model as a competitive alternative for those thinking about starting a business.

Tapio Luoma-aho is the director of thinktank Kompassi, Finland.

This article has been previously published in the booklet EU Energy Policy: Towards Carbon Neutrality or Fragility? Published by Wilfred Martens Center for European Studies and Ajatushautomo Kompassi 2019. Download the whole publication for free here!