PSIRU12/10/18
The Nordic Energy Market
by
Sam Weinstein
Research Fellow, PSIRU, School of Computing and Mathematical Sciences, University of Greenwich
January 01
1. Introduction
2. Norway
A. The Creation of a Power Exchange
How power is exchanged
B. Corporatisation, concentration and public ownership
Table 1 Largest Power Generation Companies in Norway, 1995
Table 2: Major Electricity Companies in Norway, and owners, November 2000
C. Impact of liberalization: industrial prices fall, domestic prices rise
3. Sweden
A. Nord Pool in two countries
B. Generation patterns
C. Residential consumers again lose
Table 3: Major Power Companies in Sweden, November 2000
4. Finland
A. Separation of grid and joining Nord Pool
B. Generation
Table 4: Major Power Companies in Finland, November 2000
5. Denmark
A. Consumer coops and municipal companies
B. Law prevents profit from privatisation
C. Two grids, one Nord Pool
6. Promises versus Realities
A. Ownership
B. Market Power
C. Reserve Capacity
D. Taxation policy
E. European integration will also tend to raise prices
7. Impact on the Baltic States
A. Estonia, Latvia, Lithuania – re-orienting their connections
B. Modernising infrastructure
C. The multinationals in the Baltics
D. Looking for regional solutions: a possible merger of state electricity companies
Table 6: Penetration of multinationals into Baltic Electricity
8. Gas
Table 7: Ownership of gas companies in The Nordic and Baltic Countries
9. Environment and employment
A. Environmental policy
B. Employment practices and trends
Notes
1. Introduction
The countries under consideration are Norway, Sweden, Finland and Denmark and the relationship between the Nordic market and the newly emerging Baltic market. Iceland is considered a Nordic country, but since it is so geographically remote from the others, it does not participate in the Nordic Energy Market yet.[1] In most if not all economies the energy sector, and electricity generation and distribution in particular, is the largest single industry in terms of total invested capital. The Nordic countries are no exception.
For many years prior to liberalisation in any of the Nordic countries there was some cooperation and exchange of power through bilateral agreements to stabilise supply problems (for instance in very dry years when Norway’s dependence on hydro posed problems.) Electricity prices were some of the lowest, not only in Europe, but anywhere in the industrialised world. Creation of a multinational energy pool could be the basis for multinational planning, allowing all consumers to benefit from cheap, environmentally sensitive power based on differing conditions in a much larger geographic area which could include the Baltic countries and beyond. Instead, planning is increasingly being done by market forces.
As a result, vertical integration is taking place in Norway, Sweden and Finland; a greater divergence of price between industrial and residential consumers is developing, with residential consumers suffering price increases even as the overall price of energy falls; and for the first time there are government discussions about the possibility of actual electricity shortages, possibly even interruptions of services.
We are also witnessing the functioning of corporatised state energy companies which are increasingly active in mergers and acquisitions not only on a national but an international scale. As a result concentration is taking place both nationally and internationally.
On the other side of the Baltic sea, the Baltic countries are working to relieve their dependence on former regional ties to Russia, by inviting in foreign capital investment to repair old infrastructure but unfortunately loosing flexibility by doing so. They too are looking for regional solutions, with each other, and their neighbours to the west and south.
Workers in the industry who are used to stable employment will have to deal with a very different world.
2. Norway
In 1991 Norway embarked on a program of liberalisation for the purpose of equalising prices in different regions of the country and to increase efficiency[2]. While Norway is the second largest exporter of oil in the world[3] behind Saudi Arabia, electricity generation is accomplished almost exclusively (99%) with cheap hydro-electric power. Norway has the highest per capita use of electricity in world, much of it being used to pump oil and gas out of the North Sea mainly for export. In 1992 transmission was separated from distribution and generation and put in the hands of Statnett, a wholly-owned, independently-run state enterprise. A system of access tariffs was established to level the playing field for all who wanted access to the grid on a kind of postage stamp basis – the distance between the producer and the distributor had nothing to do with price of transmission.
A. The Creation of a Power Exchange
Statnett was also put in charge of the creation of a Norwegian power exchange called Statnett Marked. Statnett Marked consisted of a spot market for trading power for the next 24 hours to ensure grid stability, and a futures market spanning periods up to three years. Initially created in 1993 for the Norwegian market only, it has since become the chief financial market for the Nordic power exchange, encompassing transactions in all four countries. It is now jointly owned by Statnett and Svenska Kraftnat, the state-owned transmission company in Sweden, and has been renamed Nordpool.
NordPool has three different pieces: a 24 hour spot market; a regulation market and a futures market. While the first two are for physical power exchange (the regulation market is to ensure grid stability through very short term purchases,) the NordPool futures market was the world’s first electricity derivatives exchange used as a hedge against price fluctuations. Nordpool is not a mandatory market so far capturing only 25% of the total Nordic market. But the majority of power is still traded in bilateral contracts of which some pricing is controlled by Parliamentary dictate.[4]
The futures market is particularly important, because as price instability becomes more commonplace with liberalisation, this financial instrument will allow buyers and sellers to stabilise their markets to some degree. This tends to work more for large industrial consumers who can lock in good prices and often force renegotiations of contracts if prices fall even lower.
How power is exchanged
Source: Norwegian Ministry of Petroleum and Energy.
B. Corporatisation, concentration and public ownership
At the same time that Statnett was created, the generation business that was owned by the government was also made into a separate corporation, Statkraft, owned by the state, but run like a private company.
Statkraft held 30% of the Norwegian generation market when it was first created. Almost a decade later, despite various changes in the rules and laws to further open up the market, that percentage has remained fairly constant. Statkraft has however moved further a field investing in local distributors such as Oslo Energi , a municipal utility of which it owns 20%. Another 49% is owned by Vattenfall, the Swedish state owned producer. The state also owns more than half of the shares in the second largest generator, Norsk Hydro. In total, despite liberalisation, 85% of generation in Norway is owned by the public sector, and nearly all of it by Nordic public sector bodies - and much of the rest will eventually return to state control from long term 60-year leases [5].
However a process of concentration means that while there were some 600 local distribution utilities in 1960, that has now been reduced to less than 200.
Table 1 Largest Power Generation Companies in Norway, 1995
Utility / Mean Annual / Percent Share / Installed / Percent ShareProduction / Capacity
(GWh) / (MW)
Statkraft / 31 700 / 28.4 / 8 264 / 31.1
Oslo Energi / 7 840 / 7.0 / 2 265 / 8.2
Norsk Hydro / 9 362 / 8.4 / 1 720 / 6.3
Lyse kraft / 5 300 / 4.7 / 1 518 / 5.5
Bergenhalvøens komm / 5 350 / 4.8 / 1 444 / 5.3
Trondehim energiverk / 3 030 / 2.7 / 756 / 2.7
Nord Trødelag elverk / 2 515 / 2.2 / 620 / 2.3
Skiensfjorden komm / 2 472 / 2.2 / 569 / 2.1
Hafslund Energi / 2 600 / 2.3 / 456 / 1.7
Vest Agder energiverk / 2 331 / 2.1 / 455 / 1.7
Source: The Energy Sector and Water Resources in Norway, Ministry of Industry and Energy, 1995.
Table 2: Major Electricity Companies in Norway, and owners, November 2000
Company / ParentCompany / Parent
Country / %
Owned / Publicly
Owned
Drammen Fjernvarme / Fortum / Finland / 50% Finnish Govt
Hafslund / Communes / Norway / Communes
Hafslund / Vattenfall / Sweden / 20 / Swedish Govt
NorFra / GdF / France / 35 / French Govt
Oslo Energi / Statkraft / Norway / 20 / Norwegian Govt
Oslo Energi / Vattenfall / Sweden / 49 / Swedish Govt
Statkraft (Norge) / State / Norway / 100 / Norwegian Govt
Statnett / State / Norway / 100 / Norwegian Govt
Source: PSIRU database
C. Impact of liberalisation: industrial prices fall, domestic prices rise
But while every customer was free to switch suppliers as a result of the 1991 legislation, in reality, only large industrial consumers had that ability. Switching suppliers could cost a legally permitted fee of as much as NOK 5000 or more than $550 US and in addition the end user was required by law to have equipment for hourly metering which was also not cheap. The result was that while prices for industrial consumers declined initially, in 1995 prices for residential consumers rose by as much as 14% from January to October, prompting a huge public debate about liberalisation and modification of the law.
Again the attempted solution was “market driven”. The hourly metering requirement was removed and the switching charge was capped at US$27. In addition consumers were allowed to switch suppliers on a quarterly basis. If the hope was to drive prices down by getting residential consumers to “shop around”, it was a failure. By 1996 NVE statistics show that barely one tenth of one percent of residential consumers had switched providers. Removing the metering requirement and switching charge for residential consumers completely in 1997 did have an effect: by April of 2000 some 11.5% of residential consumers had switched. By contrast, the 1996 figure for switching by industrial consumers is about 32%, and reflects their ability to cut deals for cheaper power in the course of normal business. Among all corporate consumers (not just industrials) more than 20% had switched by April, 2000.
It is difficult to see how 11.5% of residential consumers switching their supplier could have much impact on overall prices. Recent declines in wholesale prices are the result of a series of extremely wet years resulting in full reservoirs in a country deriving 99% its power from hydro: “..by a moderate winter and a high water supply for the hydro-power industry, which sent prices on the Nordic power exchange to their lowest level for years.” – Reed Business Information September 1, 2000. However some commentators have suggested that removing obvious impediments to residential consumer switching has allowed prices for this segment of the market to more nearly track wholesale prices (when compared to Sweden which still has a metering requirement for instance[6]) i.e. the residential market is not quite so susceptible to manipulation as it was previously. On the other hand prices to industrial consumers have dropped drastically, in some cases by more than 50%.[7]
It has been worth going into so much detail about the power market developments in Norway because it has driven the pace of change in the Nordic countries and in some ways has been a model for them.
3. Sweden
A. Nord Pool in two countries
In Sweden the state-owned Svenska Kraftnat was created to run the national grid and foreign interconnections on January 1, 1992 as a prelude to opening up the market for competition. And on January 1, 1996 the market was thrown open, allowing all consumers to choose their supplier. At the same time Svenska Kraftnat became co-owner of Nord Pool, and a common Norwegian-Swedish market became a reality.
B. Generation patterns
Swedish generation is dominated by a combination of hydro and nuclear, though it recently shut down one nuclear unit at Basbeck in line with a 1980 referendum that gave direction to phase out nuclear. While there are some 220 suppliers in Sweden, 94% of electricity generation is owned by 7 large producers. Five of these (Vattenfall, Sydkraft, Stockholm Energi, Gullspang, and Graninge) also own 45% or more of the electricity distributors. The largest of these is Vattenfall, a state-owned producer that has been corporatised. Unlike its Norwegian equivalent Statkraft, which has kept within Scandinavian borders, Vattenfall has turned itself into a multinational energy corporation vying for control all over Europe and beyond.
C. Residential consumers again lose
Sweden, had rules which made it difficult for residential consumers to switch suppliers in practice, and so the bulk of any savings remained with industrial consumers. Those rules have loosened as of the end of 1999, but individual residential and small commercial consumers remain at a disadvantage. Even the OECD, a ferocious advocate of liberalisation and deregulation had to comment in a 1999 economic survey of Sweden, “For large business customers, prices (exclusive of indirect taxes) have fallen, whereas households have seen their electricity prices increase.” Again they go on to blame these increases on metering which makes it expensive for consumers to switch suppliers, not the market itself.
But advocates of liberalisation have always claimed that the previous system forced large industrial consumers to subsidise residential and small commercial consumers because the industrial consumers could not shop around and cut their own deals based on volume purchases. If anything the market has reversed that process: since residential consumers are a captive market for all practical purposes, they end up subsidising industrial consumers as retailers protect their own margins while they cut prices to industrials to corner large sales. This is indicated in practice by the fact that generation costs remain constant or fall, wholesale prices fall, prices to industrial consumers fall, and prices to residential consumers rise.
Table 3: Major Power Companies in Sweden, November 2000
Company / Parent / ParentCountry / %
Owned / Publicly
Owned
Birka Energi / Communes/Municipal / Sweden / 50 / Communes
Birka Energi / Fortum / Finland / 50 / 50% Finnish Govt
Flens Energi / Vattenfall / Sweden / 99.7 / Swedish Govt
Gavlen Energi / Communes/Municipal / Sweden / 100 / Communes
Gestrikekraft / Vattenfall / Sweden / 40 / Swedish Govt
Goteborg Energi / Communes/Municipal / Sweden / 100 / Communes
Graninge / EdF / France / 51 / French Govt
Gullspang Kraft / Communes/Municipal / Sweden / Communes
Gullspang Kraft / Fortum / Finland / 92.9 / 50% Finnish Govt
Halmstad Energi / Communes/Municipal / Sweden / 100 / Communes
IVO Energi / Fortum / Finland / 100 / 50% Finnish Govt
Kalman Energi / Communes/Municipal / Sweden / 100 / Communes
Karlskoga Energi & Miljö / Fortum / Finland / 49 / 50% Finnish Govt
Kinnekulle Energi / Fortum / Finland / 23 / 50% Finnish Govt
Lund Eastern / TXU (via Eastern Energy UK) / USA / 50 / -
Nacka Energi / Vattenfall / Sweden / 100 / Swedish Govt
Nouukoping Energi / Vattenfall / Sweden / 100 / Swedish Govt
NPI / Vattenfall / Sweden / 100 / Swedish Govt
Orebro Energi / Sydkraft (See its own listing) / Sweden / 100 / 22% Communes
Östra Roslags Elverk / Vattenfall / Sweden / 90 / Swedish Govt
Ryssa Elverk / Vattenfall / Sweden / 63 / Swedish Govt
Säffle Energi / Vattenfall / Sweden / 100 / Swedish Govt
Skelleftea Kraft / Communes/Municipal / Sweden / 100 / Communes
Smalands Kraft / Communes/Municipal / Sweden / 100 / Communes
Stockholm Energi / Communes/Municipal / Sweden / 100 / Communes
Svenska Kraftnat / State / Sweden / Swedish Govt
Sydkraft / Communes / Sweden / 22 / Communes
Sydkraft / Eon (Preussenelektra ) / Germany / 18 / -
Sydkraft / Statkraft / Norway / 21 / Norwegian Govt
Umea Energi / Communes/Municipal / = / 100 / Communes
Uppsala Energi / Communes/Municipal / = / 100 / Communes
Vattenfall / State / = / 100 / Swedish Govt
Vattenfall (Sverige) / Vattenfall / Sweden / 100 / Swedish Govt
Source: PSIRU database
4. Finland
A. Separation of grid and joining Nord Pool
In Finland the market was opened up in 1995, and completely deregulated by the autumn of 1998, when all consumers could choose suppliers without the burden of additional costs which clearly give the capacity to change suppliers to high volume industrial customers.
While all producers were given similar access to the transmission grid using the same kind of model of tariff as used in Norway and Sweden, running the grid was put in the hands of a partially state-owned corporation called Fingrid in 1997, jointly owned by industrial consumers, power producers (including partially state-owned Fortum) and the state in its own name. In 1998 the Finnish electricity exchange, El-Ex, was bought by Finngrid, and half the shares sold to the Swedish state-owned transmission company, Svenska Kraftnat. While the ownership structure is different, El-Ex in essence became the Finnish branch of Nordpool and is often referred to as El-Ex/NordPool.
B. Generation
Since Finland has almost no natural energy resources, most generation is based on fossil fuels and nuclear. Combined heat and power production (CHP or cogen) is extensively used in order to take advantage of the energy efficiency it provides. It remains a net importer of energy.
Concentration of generation has also taken place in Finland, dominated by a 50% state-owned corporation, Fortum, created by the merger of the state electricity company Imatran Voima Oy (IVO) and Neste, the country's oil, gas, and chemicals monopoly. By the time of the merger, Neste had been partially privatised. With more than 17,000 employees worldwide, Fortum now operates through some 30 subsidiaries in more than a dozen different countries, while remaining a dominant force in Finland itself. It has more than a third of Finnish generation capacity. Another large corporation, Pohjolan Voima Oy (PVO) is two thirds owned by the paper and pulp industry (a very heavy consumer of electricity,) with some municipal investment as well. Fortum and PVO control almost two thirds of Finnish generation.
Table 4: Major Power Companies in Finland, November 2000
Company / Parent / ParentCountry / %
Owned / Publicly
Owned
Etela-Pohjanmaan Voima. / Vattenfall / Sweden / 10.9 / Swedish Govt
Fingrid / State / Finland
Fingrid / Fortum / Finland / 25 / 50% Finnish Govt
Fortum / State / Finland / 50
Heinola Energia / Vattenfall / Sweden / Swedish Govt
Jyllinkosken Sahko / Vattenfall / Sweden / 35 / Swedish Govt
Kainuun Shk / EdF (Graninge) / France / 13.1 / French Govt
Keski-Suomen Valo / Vattenfall / Sweden / 100 / Swedish Govt
Lansivoima / Fortum / Finland / 65.1 / 50% Finnish Govt
Lapuan Sahko / Vattenfall / Sweden / 100 / Swedish Govt
Pamilo Oy / Vattenfall / Sweden / Vattenfall Latvia
PVO / Paper/Pulp Industry / Finland / 66 / Some Municipal
PVO / Municipal / Finland
Revon Sahko / Vattenfall / Sweden / 100 / Swedish Govt
Savon Voima / Communes/Municipal / Finland / 64
Savon Voima / TXU (via Eastern Energy UK) / USA / 36
Source: PSIRU database