As a result of deregulation that began in the early 1990s, many energy companies built up operations and acquired energy companies outside their national home markets.
Acquisition-driven growth was the theme of the day. Risk diversification, economies of scale and synergies were key drivers. Large, diversified production capacity was considered to be an essential competitive advantage.
The energy companies shifted their focus
This period ended as the financial crisis took hold in 2007 and 2008, when many European countries turned their focus inwards and began adopting more nationally focused energy policies, at the expense of European integration. The pace of integration work stagnated, and demand for electricity fell as a result of the ensuing recession. The energy companies shifted their focus to strengthening their financial positions through cost-cutting, scaled-back investments and divestments. The traditional value chain began to be complemented by a more customer-based perspective.
Sustainability aspects have gained a great impact
During this entire period, the climate issue has gained in importance, an in recent time all sustainability aspects have gained a great impact – initially as something that could affect business in the future, to something that today permeates the entire business planning process. To some extent Vattenfall’s journey was characterised by the logic and the conditions that prevailed in the market during the period, but is also a result of the company’s history and strategic choices.
Operating environment 1990–1994
Deregulation of European energy markets begins
Starting in the UK, Europe’s electricity markets begin to successively deregulate. The Swedish electricity market is deregulated in 1996, and new, foreign players begin to establish operations in Sweden. The German and Dutch electricity markets are deregulated in 1998. Deregulation results in the opening of electricity generation, trading and sales to competition, while electricity distribution remains a price-regulated monopoly. One of the aims of deregulation is to give consumers more choices and to create conditions for greater competition for electricity supply. It is believed that this would lead to a more efficient electricity market, with lower prices for consumers.
Operating environment 1995–2006
Structural transformation of the electricity market
An increasingly integrated and open electricity market emerges in Europe. Large international energy groups are formed through mergers and acquisitions. In the German market, four large integrated companies are created: RWE, E.ON, Vattenfall and EnBW. All are active throughout the electricity value chain and each own a share of the German high voltage grid. Electricity exchanges are formed, and pricing in the market becomes more transparent. Trading in CO2 emission allowances within the EU begins in 2005, which drives up electricity prices.
The modern Vattenfall takes shape
The public utility Statens Vattenfallsverk is transformed in 1992 into a state-owned limited liability company, Vattenfall AB. In parallel, the Swedish high voltage grid is detached from Vattenfall and is transferred to a newly formed public utility called Svenska Kraftnät. Vattenfall strengthens its position in electricity distribution and in the end customer market by acquiring a number of local, Swedish networks. Smaller acquisitions are made in Norway, Denmark and the Baltic countries. Through its subsidiaries SwedPower and Nordic Power Invest, Vattenfall also establishes a number of power projects in Southeast Asia and South America.
Vattenfall’s board of directors decides in 1995 on an international growth strategy. In Finland, Vattenfall acquires the company Häämen Sähkö in 1995 along with a number of other energy companies. In Germany Vattenfall acquires the companies HEW, Bewag, VEAG and Laubag in the early 2000s, and thereby becomes Germany’s third-largest generator of electricity and the largest producer of heat. In Poland the combined heat and power (CHP) producer EW and the distribution company GZE are acquired.
Vattenfall’s international establishment is concentrated to northern Europe, and projects in Asia and South America are divested. Focus turns to integrating the newly acquired companies. Starting in 2006, all operations in Germany and Poland are conducted under the Vattenfall brand. In 2006 several CHP and wind power assets are acquired in Denmark.
Sales and operating profit, SEK million, 1990–2015
1) Starting in 2004, Vattenfall reports in accordance with IFRS. Prior to this, reporting was conducted in accordance with Swedish GAAP.
2) Underlying operating profit is defined as operating profit excluding items affecting comparability.
Operating environment 2007–2009
Climate targets and financial crisis
Awareness about the risks posed by climate change increases around the world. In response to this, the EU adopts a set of climate and environmental goals for 2020 – the so-called 20-20-20 targets. Electricity prices rise sharply as a result of the new EU Emissions Trading System (ETS) for CO2 emission allowances. A shift is begun towards more gas-based power generation. New technologies, such as carbon capture and storage (CCS), are developed in an effort to reduce CO2 emissions from coal power.
The European energy map continues to be redrawn through continued international acquisitions and divestments. A global financial crisis unfolds in 2007 and 2008, triggered by the collapse of the US home mortgage market. The crisis is regarded as the worst since the Great Depression in the 1930s and threatens the euro cooperation. Initially, Europe’s electric utilities are affected considerably less than companies in other sectors.
Operating environment 2010–2014
A new energy landscape
The European energy sector now faces substantial challenges. The economic recession leads to a sharp drop in demand for energy, which strikes a hard blow to the earnings capacity of electric utilities. At the same time, new production capacity is added above all in renewable forms of energy, which puts further pressure on electricity prices. Large scale production of shale gas gains momentum in the USA, which leads to exports of cheap hard coal to Europe. This and low prices of CO2 emission allowances in the EU ETS system leads to a fundamental change in the profitability ratio between coal- and gasfired power generation.
A new era dawns as many companies begin to divest assets to lower their debt at the same time that integration of the European energy markets stagnates. As a result of the nuclear power accident in Fukushima in 2011, the German government reconsiders its nuclear power strategy and decides that all nuclear power in Germany is to be shut down by 2022 at the latest. In Sweden, the law is changed to make it possible to replace ageing nuclear power reactors with new ones.
CO2 emissions, Mtonnes, 1990–2015
Climate focus and acquisitions
Vattenfall formulates its climate vision, calling for operations to be climate-neutral by 2050 at the latest. This goal is also adopted by the European electricity industry through the organisation Eurelectric. In 2008 Vattenfall inaugurates the world’s first pilot plant for separating carbon dioxide in connection with coal combustion (CCS) using oxyfuel technology at the Schwarze Pumpe power plant in eastern Germany. However, a lack of political support and acceptance by the general public in Germany prompts Vattenfall to abandon its CCS-projects in 2011.
Vattenfall completes construction of wind farms and acquires several wind power projects in the UK. In 2009 Vattenfall acquires the Dutch energy company N.V. Nuon Energy in an effort to diversify Vattenfall’s operations and geographical market position. Among other objectives, Vattenfall wants access to Nuon’s assets and expertise in gas power and trading. This acquisition and high electricity prices lead to a sharp rise in Vattenfall’s sales, reaching SEK 205 billion in 2009.
New strategic direction
As a result of lower demand, falling electricity prices and increased debt following the acquisition of N.V. Nuon Energy, Vattenfall reconsiders its growth strategy and begins divesting non-core assets. The Germany high voltage grid is sold, as are operations in Finland, Belgium and Poland. Extensive efficiency improvement programmes are launched to reduce the company’s costs.
In 2010 Vattenfall sets the goal to reduce its annual CO2 emissions to 65 million tonnes by 2020 at the latest. Achieving this goal requires the sale of parts of the Group’s fossil-based production. In autumn 2014 Vattenfall decides to look into the possibility of selling the lignite operations in Germany. The focus on wind power continues, and to accelerate the pace of expansion in this area, partnerships are established with municipality-owned energy companies and institutional investors, among others.