News | July 13, 2000

Lessons from Energy Deregulation in Scandinavia and England (Part 3 of 3)

Kenneth J. Kogut, P.E., CEM
National President, The Association of Energy Engineers, 1998
Kenneth J. Kogut & Associates

Contents
Stockholm
Deregulation
"Choice Power"…"Mega Customers"
Balancing Energy Production
Gas Supply
Oslo
Power Production Strategies
Conclusions
About the Author

SWEDEN
Stockholm (Back to top)
Meetings in Stockholm were held with Stockholm Energi. Representatives from Stockholm Energi, along with U.S. Embassy representatives from the commercial division, met with AEE delegates to discuss energy related matters focusing on deregulation, district heating, and district cooling as related to the city of Stockholm and Sweden.

Stockholm Energi primarily serves customers in the Greater Stockholm area and Central Sweden, and is one of Sweden's leading energy companies. The Company is broadly based, including electricity, heating, cooling, gas, and electricity supply network operations. The unique production mix with electricity and district heating operations of the same size allows flexibility in adapting production in a cost-effective way to different weather conditions. Production of electricity in the district heating operation has become a competitive alternative in dry years such as 1996, when it was important to compensate for the low production of hydroelectric power. Stockholm Energi has its own facilities for production and distribution of electricity, heating, gas and cooling.

The ability to give customers the opportunity of complementing their energy solutions with the pro-environmental district cooling has provided Stockholm Energi with competitive advantages in relation to other power companies as regards to meeting customers' total energy needs.

Deregulation (Back to top)
Deregulation has meant that the Electricity Business Division is no longer restricted by the Local Government Act but may carry out operations without taking into consideration local government restrictions. As a result of the collaboration with Imatran Voima Oy, it will be possible to make use of competence in the Network, Heating and Cooling Divisions on a larger market, both nationally and internationally.

The Group has around 450,000 customers, the major part of whom are customers with domestic electricity. There are over 200 large consumers of electricity, over 3 GWh. Competition for customers became tougher when the electricity market was deregulated and some downturn in electricity sales in the Stockholm region was noted.

Network Supply operations have not been deregulated. The Group still has the sole right to transport electricity to all customers in the Stockholm and Avesta areas on its own networks.

Sales of heating have undergone great expansion during the year, and district heating has now around 65%, of the heating market in Stockholm with around 3,500 customers. The greatest competitor for district heating is the local oil-fired heating boilers. The environmental benefits of district heating, operational reliability, and simplicity for the customer provide important competitive advantages.

The Group's oldest product, city gas, which has been supplied since 1853, is sold to 109,000 customers of whom 102,000 are cooking gas market customers. Stockholm Energi's newest product, cooling, where the first delivery took place in May 1995, has around 80 customers. District cooling is primarily intended for commercial properties in central Stockholm. As in the case of district heating, district cooling's environmental profile, simplicity and operational reliability provide clear competitive advantages.

"Choice Power"…"Mega Customers" (Back to top)
In February 1996, the Electricity Business Division introduced the product "Choice Power," allowing the customer to choose the method of production and account for their purchases of electricity between hydroelectric power, nuclear power or Stockholm electricity. During 1996, this has been broken down to 3,563 GWh of hydropower production, 4,964 GWh of nuclear power production, and 1,112 GWh of Stockholm electric power production. Of this complement, the following produced power was sold: 47% for hydro, 23% for nuclear, and 0.4% for Stockholm electric.

Hydroelectric power production was considerably lower than normal and 1996 went down in history as an exceptionally dry year. Compared with Stockholm Energi's normal annual production of hydroelectric power of 4.8 TWh, only 3.6 TWh was produced, a reduction by 25%. The reduction in hydroelectric power was compensated for by more expensive thermal power.

During the year, a total of 10.4 TWh (10.5 TWh) of electricity was produced in wholly own and jointly owned plants.

In the autumn, Stockholm Energi introduced the concept Mega Customer. Major electricity customers who purchase more than one of the Group's energy products CM become so-called "Mega Customers." They then benefit from favorable contracts with their own customer representative, energy audit, monthly statistic, energy balance, and simplified invoicing procedures, among other things. The intention is to reduce the customer's total energy cost and to simplify administration in contacts with customers.

Stockholm Fastighetsagareforening was the first to enter into a Mega Customer contract for 1,401 properties.

Balancing Energy Production (Back to top)
In a normal year, approximately 45% of the electricity produced comes from hydroelectric power, 45% from nuclear, and 10% from local. Other power is produced in big-fuel, coal and oil-heated facilities. Approximately 75% of all energy produced today comes from sea water.

1996 was an exceptionally dry year with very little precipitation. Precipitation has not been so low since 1969-70. Due to this, the Group lost around 25% of the normal hydroelectric power production. Hydroelectric power was replaced by more expensive production at an additional cost of around SEK 250 million (approximately $34.1 million USD).

Prices on the Norwegian-Swedish energy exchange rose successively at the beginning of the year due to the initially cold period with low precipitation. When the expected spring flood was late and small, energy prices rose further. Price peaked early in the autumn, to fall subsequently as in-flow increased and import of power took place, especially from Denmark.

In the 1990's, Stockholm Energi has aimed to create a balance in its own production of electricity between hydroelectric power and nuclear power. This strategy was followed up in 1995 when further hydroelectric power resources were acquired from Akzo Nobel. The consequences of a phasing-out of nuclear power will affect the whole energy sector.

Present electric rates for Stockholm converted to US $ equate to approximately $0.09/kWh (USD) for residential, and approximately $0.04 to $0.05/kWh (USD) for industrial and commercial sectors. Pricing of electric is broken down to approximately 1/3 for fuel cost, 1/3 for transmission costs, and 1/3 for taxes (varies for industrial and commercial sectors).

On January 1, 1996, the 90-year-old electricity legislation was replaced by a new electricity act, and the deregulation of the electricity market became a reality. Currently, the wholesale level is fully deregulated. Households are slowly being brought into the picture.

Sales amounted to 13.2 TWh (14.2 TWh) of which 1.8 TWh (1.8 TWh) were internal sales. The reduction largely depends on lower sales to other power suppliers.

The deregulation of the electricity sector led to tougher competition to the benefit of customers. It is to be expected that the exchange price and customer price will be more closely related, especially in the sectors exposed to competition. The margin between the price to the customer and the exchange price will diminish, as well as price differences between different suppliers.

The Nordic exchanges will be integrated which will result in the Nordic countries becoming a common market. The free electricity market, especially in northern Europe will develop successively in response to customer pressure. Through partnership and expanded competence, Stockholm Energi intends to participate in this European development.

Concentrated production of district heating makes it possible to use renewable sources of energy and thus reduce emissions compared with individual heating. During the past three years, Stockholm Energi has expanded its district heating market share by a further 10%. Local oil-heated boilers have been replaced by district heating or local heating solutions. During the same period supplies of district heating increased by the equivalent of the annual heating requirement for 25,000 detached houses.

For the third year running, district heating prices were unchanged despite increased taxes and rising oil prices.

New sales during the year amounted to the equivalent of SEK 100 million/year (250 GWh/year) in income. This expansion took place primarily in Sodermalm, and through new establishment primarily in the southwestern suburbs.

In all, sales amounted to 6,981 GWh (5,993 GWh) including deliveries to Sollentuna, Jarfalla and Avesta with 440 GWh (387 GWh). Heat pumps, pellets, bio-oil, and refuse fuel accounted for 60% of the energy supply. Coal, oil and electricity accounted for the remainder. Electricity production amounted to a full 1,627 GWh during the year, of which 515 GWh came from production in condensing power plant. The high proportion of condense production was caused by high electricity prices due to the dry year.

Simplicity is created primarily in relation to customers. Invoices via EDI are already a reality and more and more customers will be able to read consumption statistics etc. via Internet. All customers were given the opportunity of becoming Mega customers of Stockholm Energi.

Gas Supply (Back to top)
In regards to gas supply, the Business Division of Stockholm Energi offers a competitively-priced range of gas products to customers in the Greater Stockholm area. City gas sales amounted to 396 GWh, an increase by 34 GWh. Marketing activities are focused on continuing efforts to make new sales to real estate owners. New agreements equivalent to deliveries of 26 GWh were established.

During the year, SE Gas was given the assignment of creating good conditions for continued gas operations. Active efforts to reduce the annual loss of cooking gas customers, and to develop the home-heating market were initiated. Real estate owners can now, for instance, enter into agreements on residual value guarantees when replacing old gas cookers by new.

The number of customers was 109,000 (113,000) at the end of the year, of which 101,500 (105,000) were on a cooking gas tariff. Customers are in Stockholm, Solna, Sundbyberg and Nacka. Stepping up the tendency for customers to move away from gas cookers is of decisive importance for SE Gas's future profitability. The Business Division has therefore started active effects to maintain its place on the cooking gas and home-heating markets. The aim is to reduce the loss of gas cookers from 4,000 per year in 1996 to 2,000 by 2000.

City gas production takes place in a cracked gas plant. 41,500 tons of naphtha were used as raw material in 1996.

New sales of building heating are continuing. Use of gas as a vehicle fuel is being developed further. Within the framework of the EU—supported ZEUS project, 180 vehicles will be powered by biogas.

District cooling, with the aid of cold seawater, has been successfully introduced as a new product and a strong complement to Stockholm Energi's traditional supply of energy. After over two years, district cooling has achieved a market share of 35% on the cooling market in the distribution area.

The year's new sales 26 MW were made to over 40 customers. The connection of new customers meant that local refrigeration plants containing around 7,000 kg Freon could be eliminated. At the turn of the year, the total connected capacity was 52 MW (26 MW) and the energy supplied during the year reached 34 GWh (17 GWh). The city system includes a connected capacity of over 120 MW.

Stockholm Energi's unique district cooling investment has met a response throughout the world. The concept for establishment of district cooling can be introduced both in Sweden and abroad.

NORWAY
Oslo (Back to top)
AEE delegates met with ENRON Nordic Energy in Oslo, Norway. ENRON is directly involved with the energy commodities market and NORD POOL. ENRON buys and sells energy contracts for various industrial and commercial customers as determined by the unit cost of energy set by time of day and daily pricing of the Pool.

Norway's total production of electric energy in 1995 was reported at 123.2 TWh, which is an increase of 8.8% from 1994, and 1.4 TWh over the old production record from 1990. Exports of electric power (in 1994) amounted to 4,836 GWh, while imports accounted for 4,968 GWh. Total hydroelectric production capacity with normal supply of water is estimated at 112.3 TWh.

Power Production Strategies (Back to top)
Typically in a dry year, the coal-fired plants are the last to be brought on, and in a wet year, the nuclear plants are the last to be brought on. This is typical for the Norwegian market of Norway, Sweden, Finland, and Denmark, and the power grid system. Total energy consumption for the Norwegian countries is approximately 370 TWh.

There are currently no nuclear power, coal or gas fired energy plants in Norway. Ninety-five percent of the electric supply (in excess of 118 TWh annually) is based on hydroelectric power produced in more than 600 power plants throughout the country. Norway is considered to be the world's largest consumer, per capita, of electricity.

Most of this energy has been generated, controlled and distributed by Statkraft and Statnett Grid, two GON owned entities with an annual investment level of about USD 200 million. However, hydroelectric energy has gradually been liberalized from a strict local monopoly status, and the various power plants are now individually permitted to compete with each other domestically and on international markets.

From the total 1995 production of 27,555 MW, Statkraft supplied close to 30%; municipal and local government utilities supplied 55%, while private and industrial power plants accounted for 15%.

The annual per capita electricity consumption in Norway at present is approaching 25,000 kWh. The average price for electricity to regular consumers was in 1995, NOK .55 per kWh, ($0.086/kWh—USD), while average price for heating oil was reported at NOK 2,55 per liter (NOK 6.40 equals USD 1.00). Norway's energy rates to the end-user are typically broken down to: 1/3 wholesale cost + 1/3 transmission + 1/3 taxes. All transport and distribution lines are operated by Statnett (Norway's state owned Power Grid Company) controlling a grid of more than 200,000 km.

GON, Norway's state owned power grid company, has opened up the local markets to competition so that the nearest power plant does not have its own area automatically guaranteed with monopoly pricing. Local power plants are now delivering electricity to various organizations and customers located in Oslo or elsewhere in the country. Norwegian authorities claim that Norway was the first country in Europe providing free competition among the various domestic energy producers. To date, even with deregulation, no real net savings on energy have been realized at the end-user level. Profits have been basically observed at the transmission level.

Power-intensive industry such as aluminum works, ferrosilicon works, and wood processing plants currently account for 25 percent of the power consumption in Norway. The rest of the industrial sector, the service industry and transport consume 45 percent. The remaining 30 percent is consumption by households.

Noting that hydroelectric power accounts for virtually all electricity generated in Norway, there is a general consent that a highly developed country cannot base its power supplies exclusively on the weather. The Government has decided to build two gas fired power plants at an estimated value of approximately USD 500 million on the west coast of Norway; Electric energy has always been regarded as an important export potential, particularly to Norway's neighboring countries.

Abundant Norwegian natural gas resources in the North Sea is now scheduled to be pumped into two 350 MW gas fired power plants. The project recently obtained approval from the Norwegian parliament and is managed by Statoil (Norway's state-owned oil and gas producer), Statskraft (Norway's state-owned hydroelectric power utility), and Norsk Hydro (gas producer and industrial flagship, -51 percent controlled by the Norwegian state). Each company has one third ownership in the gas fired plant. The two plants are scheduled to be in operation by 1999 and 2000 respectively.

Conclusions (Back to top)
Since the implementation of electric deregulation/ privatization in England in 1990, the impact of full deregulation in various countries visited and reviewed, has yet to be realized. While much has already been achieved since privatization, many challenges remain in England and the Scandinavian countries.

Some of these challenges, future areas of change, and general comments include:

  • On the generation side, efforts must be made to insure that competition continues to drive down costs and that these savings feed through into further price reductions for the customers.

  • In general, the transmission portion of the electric utility industry must be deregulated to fully realize the impact of end-user cost reductions.

  • In England, the regulated parts of the business, electricity companies will have to meet more demanding targets set by the Regulator, which are imposing real price reductions from year to year.

  • Privatization does not appear to be in the near picture for the Netherlands.

  • Eventual liberalization of the Danish electric utility system will come about after Norway, Sweden, England, and the surrounding countries accomplish deregulation/privatization. Denmark's focus is on developing and enhancing the electric system and infrastructure for the Danish, with little or no outside influence.

  • In Sweden, currently the wholesale level is fully deregulated. Households are slowly being brought into the picture.

  • The Nordic exchanges are shifting towards an integrated exchange which will result in the Nordic countries becoming a common market.
In summary, the expansion of electric deregulation will create expanding opportunities which will result in enhanced energy cost savings to the end-user. Controlled deregulation of the electric utility industry would be a prudent course to follow. This would still allow for end-user savings to occur, and focus on not diminishing the overall integrity of the electric utility system. As we are about to enter the twenty-first century, we are beginning to see the future of the energy industry and its impact on our world environment.

About the Author (Back to top)
Kenneth J. Kogut, P.E., CEM, maintains a professional energy management consulting firm serving clients in the commercial, industrial, institutional, and governmental sectors. Through the efforts of Mr. Kogut, professional energy consulting services have been provided in the areas of energy audits and the development and implementation of energy management programs for his firm's clientele. Mr. Kogut has been actively involved in the energy field in the capacities of designing, developing, managing, and implementing energy management programs and energy conservation projects for over twenty-five years.

Mr. Kogut has accomplished energy reviews and assessments for the firm's clientele across the North American continent, Canada, and Puerto Rico. Prior to the establishment of his Firm, Mr. Kogut assisted in developing testimony to the Washington, D.C., Public Service Commission in one of the first time-of-day rate cases in the country. Mr. Kogut was also involved in the development of one of the first electric rate structures for the eastern part of Saudi Arabia.

He has consulted to various electric and gas utilities in aspects of utility operations, and, as a consulting engineer, was responsible for technological forecasting and development of electric usage rate structures, and feasibility studies associated with the state-of-the-art and advanced energy systems for the electric utility industry. Mr. Kogut has published a number of papers on the subject of energy, is a registered Professional Engineer (P.E.) in Illinois, and a Certified Energy Manager (CEM). He holds a bachelor of mechanical engineering (BME) and a master of engineering (ME) degree from the University of Detroit, and was also an Alfred P. Sloan Fellow at the University. He was president of the Association of Energy Engineers (AEE) for 1998.

Kenneth J. Kogut & Associates, 5232 West 170th Place, Oak Forest, IL 60452; (708)560-0083.