Vattenfall: Turning in wind's direction

WORLDWIDE: Vattenfall, Sweden's state-owned utility, is getting out of coal and cutting back on nuclear in favour of increased investment in renewables, especially the combination of hydro and wind.

Selling… Vattenfall is divesting its east German lignite mining andcoal power plants. But it will still need investment for growth
Selling… Vattenfall is divesting its east German lignite mining andcoal power plants. But it will still need investment for growth

Like many other European energy companies, Vattenfall is struggling. The Swedish state-owned utility clocked up a post-tax loss of EUR 1.31 billion in the first nine months of 2014, only a slight improvement on the EUR1.67 billion post-tax loss for the same period in 2013. Low wholesale electricity prices, prompted by over capacity in generation and sluggish demand across the continent, are cited as the main cause.

This does not look like the best starting point for Vattenfall's new strategy to step up investment in wind projects. Unless, that is, the company's plan to sell its lignite mining and power generation operations in eastern Germany, announced in October, can be implemented swiftly and the earnings rolled over into clean energy projects. However, Vattenfall is not being given much choice over its direction of travel. Sweden's new Social Democratic/Green government, elected in September, has made clear that Vattenfall's future must lie in developing renewables and energy efficiency.

There is plenty of room for wind to grow in Vattenfall's portfolio. Fossil fuels (48%), nuclear (29%) and hydro (20%) dominate its business activities in Scandinavia, the UK and continental Europe (mainly Germany). Wind contributed just 2% of its 2013 total generation of 181.7TWh. The Swedish hydro operations should help in wind's expansion. "Hydro power production is essential when building wind power since hydro power is used as the best regulating power (for the grid) when the wind stops blowing," a Vattenfall spokesman points out.

The turnaround begins with the company's plan to grow wind energy by 11-15% a year to 2020. It came close to achieving that in 2013, adding 145MW of capacity, bringing its wind total to 1.45GW at end 2013.

If its average growth is 13%, Vattenfall would add around 1.7GW of wind by 2020, finishing at 3.15GW. That means an addition of 244MW a year over the period, which, assuming an average investment of EUR 1.9 million/MW, is equivalent to EUR464 million a year. Around EUR 1.2 billion has been earmarked for wind development over the next four years, which equates to EUR 300 million a year, according to a company spokesman.

This, in turn, indicates Vattenfall's planned growth can only be achieved if partners contribute about one third to the investments. The company has already gone down that route in the past, for offshore wind at least. The East Anglia project in UK waters, which could total up to 7.2GW, with the 1.2GW first phase already permitted, is a joint development with Iberdrola subsidiary Scottish Power. Two of its German offshore projects, Dan Tysk and Sandbank (both 288MW), are shared with German municipal energy company Stadtwerke Munchen.

Vattenfall, still adapting to the change in direction demanded by the government, and with a new CEO, Magnus Hall, who has only been in place since September, is reluctant to be drawn on future plans or likely collaborators. "We can't comment on potential possibilities to bring in partners right now," a company spokesman says. Offshore development remains high on the agenda, but the company appears to be steering clear of the growing low-wind onshore market. Vattenfall "will only invest in wind farms where it is profitable, which most likely equates to high-speed wind projects", the spokesman says.

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