Why municipal utilities can't simply copy the business models of Enpal, 1Komma5° and Co

Not too sluggish, but systemically important: The real reason why municipal utilities don't scale like 1.5° and others

The scaling trap: Why local utilities are bound to lose the battle against national energy startups

Anyone looking at the German energy market today will see two completely different speeds. On the one hand, there are the industry's new "unicorns": companies like Enpal, 1Komma5°, and Octopus Energy, which are revolutionizing the market for residential energy solutions with aggressive growth strategies, billion-dollar valuations, and radical digitalization. They are considered the shining winners of the energy transition, disruptors who make solar panels, heat pumps, and dynamic tariffs as easy as ordering from Amazon.

On the other side are over 800 German municipal utilities. Often ridiculed as sluggish, bureaucratic, or technologically backward, they are increasingly confronted with questions from politicians, citizens, and supervisory boards: "Why can't you do that? Why doesn't our local utility offer the same seamless app experience and all-in-one package as the startups?"

The answer to this question is as uncomfortable as it is necessary: ​​It's not due to a lack of will or competence. It's a matter of hard economic mathematics.

The analysis shows that the call for a simple "copy" of startup business models ignores a fundamental structural flaw. While startups spread fixed costs across millions of potential customers (economies of scale) at the national or international level and finance growth through venture capital, municipal utilities are trapped in a straitjacket of regional limitations, municipal budget law, and the mandate to provide essential public services.

This article illuminates the profound economic and structural differences that prevent direct, level playing field competition. It explains why fixed cost degression becomes a trap for local players, why municipal lending logic precludes venture capital financing, and why the perceived "slowness" of utility companies is, in reality, a rational risk-avoidance strategy. It is an attempt to objectify an emotionally charged debate with sound business facts—and to demonstrate why the future of municipal utilities lies not in imitation, but in differentiation.

The deceptive simplicity of success

At first glance, the energy landscape of new providers like 1Komma5°, Enpal, Octopus Energy, and Neoom appears to be a fascinating success story. They are growing rapidly, gaining attention, and are considered digitalization pioneers in an industry that has been regarded for decades as sluggish and bureaucratic. From the perspective of many municipalities, mayors, and utility managers, an obvious question arises: If these new providers can scale entire business models in just a few years, why can't the municipal utilities do the same, even though they already possess the local infrastructure, customer proximity, and the trust of the citizens?

The intuitive response of many observers is that municipal utilities are simply too conservative, too slow in digitalization, or poorly organized. However, this explanation falls far short. The real cause is economic and stems from structural differences between a locally bound utility company and a nationally or even internationally operating platform provider. The crucial difference lies in the scaling of fixed costs, the financing conditions, and the regulatory logic of the energy market.

The new wave: Energy startups as hybrid platforms

The new energy companies do not operate as traditional energy suppliers, but as vertically integrated platforms. Their business model is based on several levels:

1. Hardware integration: The sale and installation of photovoltaic systems, heat pumps or battery storage systems as a complete package.
2. Financing and leasing: Many providers offer rental or contracting models that eliminate the high initial investment requirement for customers.
3. Dynamic electricity tariffs: Tariffs are offered via digital interfaces that are linked to the electricity exchange prices and achieve savings through intelligent control.
4. Software ecosystem: Home energy management systems (HEMS) bundle consumption data, comparative analyses and optimization suggestions – a key element for customer loyalty and added value generation.
5. Customer data and platform effects: Through proprietary smart meter and app infrastructures, comprehensive data sets are created that not only reflect electricity consumption but also allow conclusions to be drawn about lifestyle, heating behavior and investment propensity.

These providers combine elements of energy sales, technology development, IT services, and platform economics. They monetize not only energy sales, but the entire energy consumption and control chain within the household.

Municipal utilities, on the other hand, have historically operated as energy traders and network operators with fixed tasks: security of supply, network maintenance, billing, and basic service provision. They are heavily regulated, focused on cost recovery, and rarely financed by venture capital. Their logic is stability rather than scaling.

Fixed costs and scaling: The core economic question

The real bottleneck for municipal utilities lies in the scaling principle of modern energy platforms. The fixed costs for software development, IT infrastructure, customer service, marketing, and FinTech integration are considerable.

With a provider like Enpal or 1Komma5°, these fixed costs are spread across hundreds of thousands, or soon millions, of customers. This massive scaling efficiency lowers the average unit costs for all processes – from customer onboarding to app development.

In contrast, a municipal utility, which is limited to a single municipality or region, incurs the same fixed cost structure – only it is spread across a few hundred or thousand customers. The result is a significantly higher cost per customer compared to a nationally operating competitor.

Economically, this can be illustrated using the cost function K = F + v × x. F represents fixed costs, v represents variable unit costs, and x represents the number of customers. If the fixed cost degression decreases due to a smaller number of customers, the average cost curve (K/x) never reaches the level of scalable suppliers. The result: competitive disadvantages despite identical pricing.

This scaling logic is not new – it corresponds to the basic principle of the digital economy. However, in the case of energy startups, it is encountering the traditionally locally organized supply sector for the first time.

Local constraints as a growth limit

Municipal utilities in Germany are local government entities. They are owned by cities, towns, or special-purpose associations. Their mandate is to provide regional energy and public services, not to expand beyond their local area.
This mandate is legally, politically, and structurally limited. While an energy startup may advertise its products nationwide, a municipal utility must usually remain within its network concession and customer area.

The principle of regionality, which in the past provided stability for municipal utilities, now acts as a barrier to growth. Modern business models require not only regional proximity, but also scalability that extends beyond municipal boundaries.

A municipal utility company like Enpal, wanting to sell solar panels, would therefore have to build the same IT infrastructure and financing systems – but refinance the costs with 1,000 customers instead of 100,000. This imbalance means that many innovation projects are not economically viable.

Access to capital: Risk financing versus municipal lending logic

Another structural difference concerns access to capital. Energy startups often have risk-tolerant investors, venture capital firms, and funds. They finance growth through equity rounds, venture debt, or long-term leasing portfolios. This capital is not geared toward short-term returns but rather toward value creation. Losses in the initial phase are seen as an investment in market share.

Municipal utilities, on the other hand, operate according to a completely different logic. As public-law or municipal corporations, they are subject to capital constraints and budgetary regulations. They are only permitted to incur losses within a narrowly defined framework. Financing is usually provided through bank loans, municipal guarantees, or equity capital from the sponsoring organization.
These sources of financing are conservative, geared towards budgetary discipline, and tolerate little venture capital. Excessive debt or risky business models also jeopardize the municipality's credit rating – with direct consequences for the city's financial policy.

Therefore, a municipal utility cannot, from a purely structural standpoint, pursue rapid, risk-driven growth. Even if such a model were economically viable, it would fail due to governance rules and access to capital.

The digital infrastructure question

An energy startup is building its IT architecture from the ground up: cloud-based, modular, and API-oriented. Municipal utilities, on the other hand, usually work with historically grown systems, often with separate modules for network operation, billing, energy trading, and customer management.

These legacy systems are durable but difficult to integrate. Introducing modern HEMS platforms, dynamic tariffs, or real-time customer dialogues requires significant interface investments – costs that are hardly recouped with a small customer base.

Furthermore, the organizational capacity to build internal software development or UX expertise is often lacking. While companies like 1Komma5° maintain their own development teams, municipal utilities usually have to rely on external service providers or standard solutions. This turns innovation into an outsourcing project – expensive, slow, and difficult to differentiate.

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Competitive advantage through brand architecture

Energy platforms are increasingly acting as lifestyle brands. They sell not just electricity and heat, but a lifestyle of sustainability, digitalization, and energy independence. Their marketing uses emotional triggers, influencer marketing, and social proof to build customer loyalty.

Municipal utilities, on the other hand, fulfill a different communicative role: they symbolize security, local responsibility, and community trust. While this identity allows for customer loyalty in basic services, it makes national branding more difficult.

Today, municipal utilities selling solar storage systems typically communicate in a technically rational manner ("We install your system including maintenance") – while Enpal sells a vision ("Make your home independent of rising electricity prices"). This difference reflects a different market dynamic, where emotion and economies of scale go hand in hand.

Fixed cost intensity as a brake on innovation

Today, a large part of the innovative capacity in the energy industry depends on software development – ​​from the integration of consumption data, weather forecasts, market price signals to the real-time control of devices.

But software development is a classic fixed-cost business: the first code costs millions, the millionth user almost nothing. This gives national providers leverage that a municipal utility can never achieve.

Even when several municipal utilities jointly develop platforms, governance problems persist: Who is responsible for the code, who bears liability, how are updates coordinated? This is why many collaborative platforms have failed in the past due to complexity and inertia. The economic viability of a shared platform depends heavily on uniformity – and uniformity is the exception in the public sector.

The political conflict of expectations

Municipal utilities are not just economic enterprises, but also political instruments. They serve to implement local energy, climate, and social policies. This mandate shifts priorities: security of supply and customer protection take precedence over growth interests.

A startup can lay off employees to increase profitability, a municipal utility cannot without political repercussions. A startup can test aggressive pricing models, a municipal utility must guarantee legal certainty and equal treatment.

This institutional framework means that municipal utilities are not primarily designed for scaling, but for a stable supply. In times of disruptive competition, this stability suddenly appears as a weakness – even though it has been a key to success for decades.

The myth of inertia

In the public perception, municipal utilities are often considered "too slow". From an economic perspective, however, their perceived slowness is an expression of risk-minimizing rationality.

A municipality cannot afford millions of euros in failed digital projects. A startup, on the other hand, can factor that in. In the classic economic logic of the public sector, the focus is not on the expected return on investment, but on avoiding losses.

This explains the inherent contradiction: While energy startups rely on exponential growth and marginal cost reduction, municipal utilities operate under a budget and liability logic. Both serve their purpose, but aim at completely different rationales.

Network operation as a regulatory anchor

Furthermore, municipal utilities usually operate the local electricity and gas networks. This business sector is heavily regulated, certainly profitable, but extremely bureaucratic. It generates stable cash flows that could theoretically cross-subsidize innovations – in practice, however, the regulations tie up funds and resources.

Regulatory profits are subject to so-called incentive regulation; investments must be approved and cost positions verified. These mechanisms prevent network profits from simply flowing into risky innovation areas.

Startups, on the other hand, are free from the regulatory burden of network operation. They can separate infrastructure and product development in an agile manner, thereby gaining flexibility that municipal utilities can never structurally achieve.

The difference in the timescale

Energy startups think in growth cycles of three to five years – until the next funding round. Municipal utilities think in infrastructure cycles of twenty to thirty years. This timescale not only creates different investment logics, but also different innovation dynamics.

A start-up can reconfigure a solar platform every six months, while a municipal utility must plan a stable IT infrastructure that will function for ten years. This long-term perspective, which made sense in the energy sector for decades, clashes with today's pace of innovation.

Cooperation as a way out?

More and more municipal utilities are therefore seeking closer cooperation – through shared platforms, state-owned companies, or equity investments. Examples include Trianel GmbH, the Thüga Group, and the Smart City initiatives in North Rhine-Westphalia and Bavaria. These collaborations serve to distribute fixed costs, harmonize IT standards, and simulate economies of scale.

Success so far has been mixed. While joint development offers cost advantages, decision-making processes remain slow and fragmentation is high. Furthermore, Germany's federal structure hinders centralized offerings: every region, every municipal utility, every supervisory board has different priorities.

Without a unified product strategy, many scaling advantages are lost in the coordination effort.

Scalable logic versus local public services

Essentially, two paradigms are at play: scalable platform economics and local public services.
The platform economy is based on the logic of the network effect – the more users, the greater the benefit per customer. Public services, on the other hand, operate according to the territorial principle – nationwide, regardless of demand concentration.

What was considered fair and stable in the old energy world (equal price, equal service for all) contradicts the efficiency logic of modern platform providers. Therefore, municipal utilities can only adopt the new business models to a limited extent without abandoning their own core values.

Economic efficiency: The crux of the matter of "non-copyability"

Whether a business model is "profitable" depends on three dimensions: margins, volume, and capital commitment.
A startup can sustain losses per customer for years as long as growth is exponential and an investor believes in its future.
A municipal utility, on the other hand, must present balanced budgets every year; negative contribution margins are politically and accountingly untenable.

Therefore, from a municipal utility's perspective, a dynamic tariff with HEMS infrastructure simply doesn't "pay off" because the customer base is too small, the margin per customer too low, and the capital commitment too high. Even if the business model were technically feasible, it remains economically unattractive.

The national context: Fragmentation as a locational disadvantage

Germany has over 800 municipal utilities, which together supply millions of customers. This fragmented structure prevents the development of standardized products nationwide. While France (with EDF) and Italy (with Enel) have national providers, the German market is a patchwork.

For startups, this is an advantage – they can expand virtually unhindered through regional markets. For municipal utilities, however, it means that each player would have to finance the same innovation path on their own. In economic terms, this fragmentation leads to a "coordinated market failure" – everyone acts rationally on their own, but collectively the market remains inefficient.

As long as no overarching municipal utility platform is created that truly centrally organizes scaling, the start-up model remains structurally superior.

The future perspective: Municipal utilities as integrative platform partners

Despite all the structural disadvantages, there is a plausible future for municipal utilities – but not through imitation, rather through strategic integration.
Instead of copying the Enpal or 1Komma5° model, municipal utilities could become regional distribution partners for such platforms: they contribute customer proximity, trust, and local logistics, while the startups provide digital systems, brand communication, and economies of scale.

This would create hybrid structures: national platforms for IT, billing, and contract management – ​​local partners for installation, service, and customer diagnostics. Such a symbiosis would mitigate the scaling problem without calling into question the identity of the municipal utilities.

From imitation to differentiation

The crucial step lies in recognizing differentiating factors: municipal utilities can monetize trust where startups first have to build credibility. They can offer social programs, neighborhood solutions, heat planning, and energy communities – areas that are hardly accessible to startups.

This complementary strength lies in the depth of the customer relationship, not in the breadth of the market. When municipal utilities focus on local solutions that incorporate political and social added value, a different kind of profitability emerges – less scalable, but more firmly rooted.

New coordinates for economic efficiency

In the long term, municipal utilities could redefine profitability – not through unit costs, but through value creation within the overall system. This could be achieved,
for example, by linking energy services with grid support, regional storage solutions, or flexibility management. These areas will remain locally relevant but do not require national expansion.

While companies like Enpal or 1Komma5° grow through volume, municipal utilities can grow through system integration. For example, those who can combine local heat supply, e-mobility, wastewater heat recovery, and photovoltaics create regional energy efficiency, which translates into stable returns – even without a national brand.

Structural rationality instead of backwardness

The notion that municipal utilities are "too slow" or "too old-fashioned" ignores the actual economic reality. They act rationally within their institutional constraints. Their mandate, their capital structure, and their market size prevent scaling – but these limitations are the result of political and regulatory decisions, not a failure.

New energy providers like Enpal or 1Komma5° represent the scaling logic of the platform economy. Municipal utilities, on the other hand, embody the stability logic of public supply. Both models fulfill societal functions that complement each other but cannot replace one another.

This also answers the initial question: municipal utilities do not copy these business models because they are not allowed to, cannot, and – from an economic perspective – should not. Their rational approach lies in precisely identifying which innovations are profitable and which are not.

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