FAQs about Vattenfall
Lots of questions are put to us every day. These questions and answers aim to address the most frequently raised issues.
What is Vattenfall’s position on nuclear power?
Why do customers in the Nordic countries encounter so many power cuts?
What is Vattenfall’s stance on diversity?
Vattenfall is owned by the Kingdom of Sweden. Why has Vattenfall left its home market and acquired energy companies outside Sweden?
In the mid 1990s, Vattenfall’s supervisory board decided that Vattenfall should grow and develop its business. But because of the limited market size in Sweden and Vattenfall’s already strong position in the Swedish market, opportunities to expand were scarce. However, deregulation of the European electricity market has made it possible for Vattenfall to grow abroad. Vattenfall acquired companies in Finland, Germany, Poland, and Denmark and integrated them into the Group. Today, these companies contribute substantially to Vattenfall’s profitability, strengthening the position of the entire Group.
Vattenfall has just tripled in size. Recently, you announced that you want to grow even further. Why? And more importantly, how and where?
In the future, we believe that the European power market will be dominated by a handful of players, all with multinational activities. Today, Vattenfall has a considerable market share in northern Europe. But, on the emerging joint European power market that is being shaped, Vattenfall with its current size would be a player of insignificant size. Mid-term, our strategic ambition is to enhance our market share – if possible through acquisition and/or partnership. As a matter of principle, Vattenfall refrains from making any comments regarding ‘target companies’ or potential partners. We are committed to deriving regional synergies and so focus on our existing market and neighbouring markets.
Your financial reports show that you earn a lot of money. Wouldn’t it be a good idea to lower your prices instead of further pressing your customers?
Naturally, we want to offer our customers as reasonable electricity prices as possible. And, we understand that the recent upswing in electricity prices on both the Nordic and German market leaves customers disappointed. Vattenfall has indeed almost reached the profitability targets set by our owner. However, on both the German and the Nordic market, electricity sales have contributed only modestly our profits. It is natural that customers only consider this part of our business since this part of the value chain is visible to them. Currently, the most profitable part of our operations is in fact the electricity generation units. These compete with other producers on the generation market, mainly by undercutting the competitors’ production costs. This part of our business is not very visible to the consumer.
Prices are on the way up and a few companies are making a lot of money. Do you think the electricity market works well? Has deregulation been a success?
Many would answer ‘no’ to this question because they feel that little has changed on their electricity bill, while in other recently deregulated industries (such as telecom or airlines) competitors keep undercutting each others’ offers. The picture, however, is more complex. On the supplier side, the competition is fierce with some 50-100 supplier competing in the Swedish end customer market. Each and every customer can chose freely from whom he wants to buy, which must be seen as a success. On the generation side, the Nordic market has been better connected with the north Europe and therefore more dependent on prices for fossil fuel, gas, oil and coal, which have risen in the past teen years. Yet another change during the last years is the increased environmental costs such as emission allowances for CO2, which has lead to increased prices. Also taxes and other authority fees such as energy taxes have risen with some three times after deregulation. Although the competition in the market has increased, due to increased taxes and fuel prices end-customer prices have risen. As far as the power production market is concerned, the answer is a clear and straightforward ‘yes’ – deregulation has been a success.
Vattenfall’s generation portfolio on the Nordic market is almost free of CO2 emissions, while the backbone of German generation is based on lignite. On environmental issues, does Vattenfall behave differently in Sweden than it does abroad?
No. Vattenfall has an overall environmental policy that is applied consistently in each and every country in which we operate. Naturally, we do respect differences in the environmental legislation of different countries.However, natural resources and preconditions for electricity generation are fairly different. All generation of electricity and production of heat have an impact on the environment; wind power and hydro power are no exceptions. While the Nordic countries can base electricity generation to a large extent on hydro power, this would not be a valid option for a country like Germany with almost tenfold the population and hardly any natural resources for hydro power. Lignite secures more than 30 per cent of Germany’s electricity supply, and even 50 per cent of base load production, which is of utmost importance to the industry. We operate the most modern fleet of lignite-fired plants in the world, and it is mainly thanks to the reductions in our plants that Germany will be able to meet its Kyoto goals. Over 80 per cent of the production of heat in Germany took place in combined heat and power plants, a concept that allow us to use the fuel efficiently and keep emissions low. It is our aim to continue improving our environmental performance and reducing our impact on the environment in all countries where we operate. We address concerns such as reducing the required amounts of raw materials and fuel for construction of power plants and networks, as well as reducing emissions to air, effluents to water and the amounts of waste and by-products produced. Vattenfall’s ambition to be Number One for the Environment is just as valid in Germany as it is in Sweden. This means that our ambition is to be in the lead and set a good example in the markets where we operate.
Why does ETS (Emission Trading Scheme) have such an enormous effect – even on the Nordic power markets where nuclear and hydro power prevail?
The price of electricity is decided by supply and demand. In the Nordic electricity market, the electricity supply capacity can vary greatly between dry years and years with a lot of rain. Depending on reservoir levels, the difference can be as great as +/–80 TWh – which is more than half of Sweden’s annual electricity consumption.
In a deregulated market, the wholesale electricity price is set by the marginal generation cost of the last running unit in the order of merit, i.e. the running power plant with the highest marginal generation cost. This means price-setting plants on the Nordic market are Danish fossil-fuelled power stations. The prices on the German market are generally more stable during the year. This is because winter temperatures do not cause the same peak in demand as in the Nordic countries, and the German production portfolio is based on lignite, hard coal and nuclear power, all of which vary little in price.
The ETS for CO2 allowances has led to sharp price increases on both the German and Nordic market. Even if the Nordic market deploys fossil fuels to a lesser extent, there are still similar market mechanisms in place.
Allowances must be regarded as part of production costs, irrespective of how they were obtained. The CO2 allowances are traded between actors within the whole ETS and therefore the price for emitting CO2 is the same within the scheme. Allowance costs lead to more expensive CO2-emitting power production (natural gas, coal, lignite) – and the marginal costs of these were already price defining. Since the whole sale electricity price is set by the production cost for the last running unit, that in most cases uses fossil fuels, the cost for CO2 allowances now is added to the production cost i.e. the electricity price. This means that the price on CO2 allowances get a direct impact on the wholesale electricity price even though non CO2 emitting production prevail.
We are now witnessing an increasingly similar pattern of power price developments within Europe, and the Nordic market still shows a lower price average.
What is Vattenfall’s position on nuclear power?
We see nuclear power as a generally good choice for electricity production from financial, environmental and technological viewpoints. Nuclear power plants have hardly no emissions to the air and do not contribute to the green house effect. We accept that in the two countries where we operate nuclear plants,Sweden and Germany, the political decision was made to phase out nuclear power following a risk evaluation process. The possibilities for future use of nuclear power in Germany and Sweden are, to a great extent, subject to decisions concerning operating permits, taxes and fees. We are committed to operating our plants in a responsible and secure way that safeguards cost-effective electricity generation and minimising risks.
Why do customers in the Nordic countries encounter so many power cuts?
The most common recurring reason is that the weather (snow, gales and thunderstorms) often causes problems. Sweden’s national grid and local electricity supply networks total 500,000 kilometres of electric cable. They are exposed to a tough climate, and many kilometres of cable pass through forests, archipelagos and rough terrain. These factors increase the risk of power failures, especially with the older, non-insulated type of cables. Another factor is that modern society is much more dependant on electricity than ever before and Vattenfall has not strengthened the supply net in line with the increase in demand. We are now in the middle of our big investment to make the supply net more robust and shorten the duration of power failures.
What is Vattenfall’s stance on diversity?
For many years, equal opportunities have been a high priority at Vattenfall. In fact, we have just established a new equal opportunities plan at Vattenfall AB. Despite this, there is still a disproportionate number of female managers within the company. We are striving to have the same number of men and women working in management positions. We are also committed to equal pay for equal work. For Vattenfall diversity and equal opportunities means that all employees should have the same opportunities and rights regardless of ethnic and racial origin, disability, religion or belief, age and sexual orientation. To achieve our diversity strategy - our employees should reflect the societies in which we operate as regards gender, age and ethnic/cultural background - we work with clear and measurable objectives, active leadership commitment, especially on senior level and discussions in conferences, seminars, educational courses and meetings. We also use best practice methodology, highlight “good examples” and show role models on the Vattenfall intranet and in our employee newspapers. Example of activities that we conduct is an International network for female managers, mentoring programmes and young graduate projects. In Germany, our customer care in Berlin, for example, is structured in such a way that customers of Turkish origin can be individually advised and served in their mother tongue.
When only a fraction of the power produced is actually traded, how can you say that power exchanges provide a fair reference price?
The total trading volumes are seven to ten times higher than the total generation. Most of these volumes are traded on the future markets. This long-term trading is mostly done for hedging purposes. The prices seen on these markets indicate the expectations of market participants and serve as important signals for future investments. The prices on the spot markets reflect the actual fundamental situation, which is the ratio of demand and offer, mainly determined by available capacities and the weather. The daily spot price serves as a reference price for the future contracts when it comes to physical delivery or financial settlement of these contracts. In order to create more trust in the market, Vattenfall has taken the lead and started two initiatives in its core markets. In the Nordic area, Vattenfall decided to place all bids for buying and selling electricity at Nord Pool, which became effective in April 2006. Volumes at the Spot market of Nord Pool have increased significantly up to 60 per cent of the physical demand. However, one cannot expect that all physical consumption is traded at the exchange, as for example big industrial companies dispose of own electricity production and use this directly, instead of selling the volumes to the market and buy electricity from there. In Germany, Vattenfall has started a transparency initiative which other competitors have followed. Since April available capacity, breakdowns and maintenance work is published daily on the EEX webpage. This gives everybody the chance to understand spot price development as these are mainly influenced by shortages or surplus in generation, weather, precipitation and electricity consumption. Volumes traded at the EEX are increasing. Currently the spot market covers approx. 17 – 20 per cent of the physical consumption.
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