The Investment Wave – Today Or Tomorrow?

The investment wave – today or tomorrow?

A view on the power transmission and distribution service industry

December 2013

www.pwc.se A step change – New market place

Contents In this report we outline Introduction Furthermore the industry as a whole The landscape for servicing our electric- is in a state of flux with Fortum having how we view the current announced that it will divest its grid and A step change – New market place...... 3 ity grid and network is rapidly changing and coming market, and there are new demands to develop on-going regulatory uncertainty with About electricity networks...... 5 opportunities and impact the infrastructure across the Nordics. respect to the overall revenue for distribution companies. Power transmission...... 8 on the Power Transmission End-consumers and regulators place Power distribution...... 19 and Distribution (PT&D) increasing demands on network reliabil- Finally, how much consumers should pay ity. During the last decade storms such to reinvestment is a key topic in several Contacts ...... 26 industry as Gudrun, and recently Simone, have Nordic countries with regulation driving how Transmission System Operators APPENDIX...... 27 hit the Nordic grid owners resulting in major expenditure on repairing and (TSOs) and Distribution System Op- renewing the networks. erators (DSOs) can invest in building, upgrading and renewing the networks. Current power networks approaching end of technical life combined with the Coupled together this creates new busi- expansion of renewable electricity pro- ness opportunities in a changing market. duction require large investments in new connections and new power capacity. In particular the major investment pro- gram in the Nordics create opportunities Integration of the European electricity for PT&D service providers and other market and introduction of grid codes related market players. and homogenized practices across the EU is also driving new expenditure and The PT&D service market has during changing the business environment. the last years mainly been a low-mar- gin industry in fierce competition. New The above leads to a market that is set for entrants and owners of PT&D service a step-change in expenditure levels and companies need to realise higher than new ownership structures – what will historic EBITDA-margins by developing this imply for the PT&D industry? new business models and achieving economies of scale to fully tap a rapidly growing total market.

2 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 3 “Electricity is very valuable – especially when it is not there”

Ståle Eirik Johansen, Head of Energy & Utilities PwC Norway

Key messages Main players on the power service mar- The PT&D industry is becoming more ket have had low profitability and many complex through technology develop- have been acquired by private equity About electricity networks ments and rapid introduction of inter- expecting to realising higher future mittent power sources such as wind and margins. solar. The coming expenditure wave and market flux will have a significant impact on Capex in the transmission grid is expec- The regional grids transport electricity the industry but it will vary depending Electricity networks ted to grow significantly over the coming from the national grid to local grids, on market participant with key areas Electricity networks comprise of both years – national TSOs estimate total and occasionally directly to high volume being: transmission infrastructure and distribu- expenditure in the Nordics to be approx- consumers such as heavy industry. imately EUR 10 bn in 2013-2017 which • Deliverability of capex – prioritising tion infrastructure. is significantly higher than the historical and managing the capex build-out PT&D system can be likened to our Transmission can be defined as the trans- spend. public road network, both being among a fer of large amounts of power around a • Managing complex grids – integrating country’s most important infrastructure country or region or between countries, The investment wave in the Nordics has renewables into the system and – and both subject to frequent congestion from generating power plants to substa- just been initiated but may be delayed prioritising investments and bottlenecks. caused by regulatory delays in conces- tions located near where it is consumed. Power transmission is carried out via sions resulting in the operators inability • Driving higher margins – how service • The voltage level of the power network the national grid (or transmission grid) to materialise the current expenditure companies can focus on profitable determines the transmission capacity which consists of high-voltage power plans on time. PwC estimated that the projects just as the maximum speed on our lines. investments can be delayed at least public roads. 1-2 years leading to a shift in the wave. • Reducing expenditure level – creating Distribution is the final stage in the de- competition in PT&D service market • For both the road network and the livery of electricity from to end users via The power distribution market is in for power network, high capacity for long smaller power lines at medium and/or a similar shift as in power transmission • Procurement strategy – how to distance is used, while lower capacity lower voltage. Power distribution include driven by similar trends. procure service efficiently is primarily used in cities and nearest both medium-voltages power lines form- households. In the same way that no ing the regional grids and low-voltage However the Nordics is a highly frag- • Balance between increasing outsour- Nordic Power Transmission household has freeway access, they local grids. mented marketed with different structu- cing or maintaining control inhouse and Distribution Industry are not directly connected to the res in each country with respect to DSO high-voltage power lines either. ownership and level of outsourcing.

Nord Pool Power exchange Electricity producers The investment wave will lead to a significiant increase in expenditure in renewing the Nordic electricity grid in the next decade which represents a step-change. This will lead to new market opportunities and impact all participants from Electricity trader owners and regulators to service providers. However there is a significant risk that plans may be delayed, postponed or create bottlenecks resulting in a challenging future.

Local grid National grid Regional grid

Power transmission

Consumers Power distribution 4 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 5 The power transmission and distribution industry is Today and becoming more complex tomorrow Complexity & Scale

• Technology developments are making the market increasingly complex • Cross border initiatives drive the need for international players • Increased need for advanced services and know-how • Higher demands on system security and availability also 2000 drive complexity New players due to unbundling • Suppliers are consolidating to benefit from scale and scope advantages • Unbundling in some markets begins • Creating a new service industry and new players 90’s to take advantage of a new market Beginning of electricity market • Emergence of a new outsourcing and service de-regulation industry

• Few and dominating state owned players • Market regulated with few private enterprises • Not seen as a “growth market”

Increased complexity and the need for scale advantages is character- ising the PT&D service industry today and going forward increasing the demand for players with a broad competence base and geo- graphic reach

6 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 7 Transmission of electricity in the Power Nordics is challenging. An electric future requires stronger grids, transmission availability and faster communication.

Transmission of electricity Physical limits on power lines and The bidding areas may get different pric- The Nordic Power system is dominated transformers create bottlenecks in the es, due to bottlenecks in the transmission by hydropower accounting for approxi- transmission system. Due to these bottle- system. mateley 50% of the total Nordic genera- necks, the Nordic region is divided into a tion capacity. The rest of the generation number of bidding areas. As such, bidding areas give a signal consists of a mixture of sources: nuclear where investing in additional transmis- power, thermal power and renewables. The complexity of managing balance in sion capacity is required. the system has increased given the rapid Electricity production differs consid- introduction of renewables – and peak erably among the Nordic countries. prices will be ever more frequent. Hydropower stations are located mainly in northern areas, while the majority of The different bidding areas help indicate our electricity consumption occurs in the constraints in the transmission systems, south. and ensure that regional market conditions are reflected in the price. Just as there can be traffic congestions in the road network, constraints can also arise in the power network.

A constraint arises where the electricity system is unable to transmit the power supplied to the location of demand due SE1 to congestion at one or more parts of the A significant amount of transmission or distribution network. Nordic power production is in the Northern regions with consumption in SE2 NO3 urban southern areas.

NO5 F1 NO1

SE3

NO2 EE

SE4 LV

DK1 DK2 LT

Source: Nord pool 8 The investment wave – today or tomorrow 2013 2013 The investment wave – today and tomorrow 9 All four Nordic Transmission System Operators intend to significantly increase spend on additional construction and grades in the coming years

Transmission system operators TSOs struggle to determine particularly The Nordic TSOs have responsibility for where, how much and when Renewable both security of supply, system opera- Energy Sources (RES) will be introduced tions and ownership of the transmission as well as in some cases how non-RES grid. The Nordic operators are Energinet. sources will be decommissioned. dk, Fingrid, Statnett and Svenska Kraft- nät (SvK). Furthermore, planning and permitting for extensive grid upgrades or new- TSOs are typically state-governed builds in densely populated areas may be entities and operate the high-voltage challenging. national grids (220kV-400 kV). Only a very small share of new build is All the Nordic TSOs have announced sig- performed in-house as TSOs typically nificant increases in their annual capex outsource all or more than 90% of new- to comply with increased transmission build. demands primarily driven by EU regulation and modernising of ageing grids. The tenders for these contracts are readily available as public tenders in all TSOs consider to charge users share of countries. the capex in areas where grid connection costs is high.

Energinet.dk Fingrid Statnett Svenska kraftnät

Energinet.dk operates the 400 kV transmission grid in Den- The Finnish transmission system is operated by Fingrid owned The Norwegian government owns 90% of the transmission The Swedish Transmission system, covering approx 15,000 mark. Unlike the other Nordic countries, the Danish TSO also by the State of Finland (54%), Mutual Pension Insurance Com- grid, through Statnett, while 10% is held by publicly owned km of 220 kV and 400 kV lines and stations, is operated by operates the regional distribution network, consisting of 119 pany Ilmarinen (19%) and other institutional investors (27%). utilities or the private sector. SvK, which is a fully state-owned entity. stations and a total of 3,367 km of lines. In total energinet.dk’s asset base encompasses 177 stations and 7,448 km of lines. The system consists of 4,300 km 400 kV grid, 2,600 km 220 kV Statnett operates the transmission system in Norway, consist- All service contracts are subject to public tender as state- grid, 7,500 km 110 kV grid, and over 100 substations. Fingrid’s ing of approx 10,000 km high-voltage overhead lines and 100 owned entity. However, some minor maintenance work is Approximately 90% of investments and 80-90% of mainte- outsources all construction and maintenance to service provid- substations. All construction work is outsourced, but most procured within existing framework agreements nance work is outsourced to service providers and contractors. ers and contractors. maintenance work is handled in-house.

10 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 11 Market integration, grid reliability Large capex in the transmission and rapid integration of renewable grid is communicated by the energy are important drivers of capex Nordic TSOs in the Nordic transmission grid

Investment drivers in the A brief mapping of drivers and how they Consequences for market National TSOs expect large Summarising the investment plans of the Nordics affect the investment level is presented players capex the coming years four Nordic countries’ TSOs the capex in Appendix 1. to be spent on the transmission network The rapid integration of RES is spread- From the outlook of the investment plans The Nordic transmission operators will be more than EUR 10 bn 2013-2017. ing all over Europe and c. 80% of the SvK’s planned investments in the short PwC predicts that: expects large investments in the trans- aggregated investments are estimated mission grid the coming years which can term, indicates, shows that only 47% is • Increased demand for cross border There are however indications that the to contribute to RES. The key drivers of be seen in the official investment plan in driven from investing in grid reliability. capabilities and abilities to take on investments will not be carried out to increased capex is in many ways similar each country summarised in the graph The remaining investments are driven by larger and more complex projects the full amounts initially planned for. in the Nordics to rest of Europe. below. cross-border integration and additional By October 2013 SvK is communicating • Difficulties in balancing build and capacity. 15% are directly connected to tangible delays in many of their ongoing The Nordic electricity market is increas- maintenance capabilities As shown in the graph an investment investments in wind power. projects due to problems in finding con- ingly connected to continental Europe wave in the Nordic transmission net- • Increased interest in market tractors and receiving necessary permits. and Germany in particular – the cur- work has been initiated. The growth in Energinet.dk estimates that 40% of consolidation, partnerships and rent rapid introduction of RES coupled expenditures up to 2012 were as high investments will be driven by grid reli- outsourcing with nuclear decommission is placing ability while the remaining 60% will be as 18% annually. Looking forward the increased dependency on the Nordic divided equally between cross border-in- plans indicate a growth in capex of 4% market to act as ‘back-up’ and balancing tegration and wind power. annually leaving the period 2010 – 2017 power, requiring more efficient transfer with a CAGR of 17%. of electricity. Only 16% of Statnett’s planned investments will be driven by reinvestments The growth in demand of more accessi- the coming 10 years. Grid reliability is ble renewable energy will be an import- expected to stand for 31%, cross-border ant driver of grid investments in the Investment split, Sweden 2013- 2016 National TSO’s expected investment cost 2010-2017 integration for 23% and additional con- Nordics where the majority will come nection of renewable energy for 15%. from windpower. 2500 Fingrid does not specify the drivers of its CAGR 4% planned investments. 17% 2013-2017 2010-2017 31% 2000

47% 1500

18% 22% 2010-2012 1000 EUR in millions Grid reliability 500

Market integration 0 Additional capacity 2010 2011 2012 2013 2014 2015 2016 2017

Norway Denmark Sweden Finland

12 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 13 The planned peaks in capex-level are expected at different times in the Nordic countries

Energinet.dk A shift in the investment level has already been seen in 800 Denmark. However, in the new forecast from ener- 4% Investments in 150 – ginet.dk, the local TSO, another will peak in 2016. 600 400 kV are included Looking at the last five years energinet.dk, has shown a higher expected investment level than the previous 400 2% years, in their five-year investment plan. This indicates that the future investment need has been underesti- 200 mated. Therefore the expected decline in investments

0 EUR in millions 2017 might be postponed. 2010 2011 2012 2013 2014 2015 2016 2017

Fingrid Finland recently made large investments in the 250 cross-border interconnector Estlink2. The completion 57% 200 Investments in 110 of this project will lead to a declining aggregated in- 7% – 400 kV are included vestment level that peaked in 2013. However, looking 150 at the coming investments in the national transmissi- 100 on grid, Fingrid is expected to increase spend in the coming years and peak around 2019/2020. 50

0 EUR in millions 2010 2011 2012 2013 2014 2015 2016 2017 Statnett The Norwegian transmission market is undergoing significant change due to stronger market integration and Investments in 320 – upgrade of aging grids. The cost in Norway is higher 400 kV are included 1200 than the rest of the Nordics partly driven by difficult 15% projects in complex geographies. 900 The national TSO, Statnett, have upgraded their investment forecast significantly and expects a steady 600 59% growth the coming years until the peak around 2018. High activity and cost levels is likely to require a flexi- 300 ble investment portfolio and strong collaboration with

0 EUR in millions customers and suppliers. 2010 2011 2012 2013 2014 2015 2016 2017

SvK The national TSO, SvK, plans to make yearly invest- 800 ments during 2013-2016 corresponding to more than -11% Investments in 220 four times total annual investments during the last 600 – 400 kV are included decade. The peak investment is expected to occur 58% around 2014 which is earlier than other Nordic neigh- 400 bours. The Swedish market can therefore be seen as an indication of how the market players may respond to 200 coming market conditions.

0 EUR in millions 2010 2011 2012 2013 2014 2015 2016 2017

14 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 15 Since the deregulation of the PwC predicts that the planned Swedish electricity market in 1997, rapid increase in capex will be SvK’s planned investments have been delayed at least 1-2 years reached in year 2000

Project delays – a normality in The main reasons for the inability to SvK themselves claim that the invest- Project delays is a problem all A majority of the investments in the up- Deliverability of capex is a problem and Sweden deliver planned capex are due to ment plan is supposed to be interpreted over Europe coming ten years are driven by increased it is well known in todays’ transparent delays caused by the following reasons: as the maximum, but not always intend- integration of the European electricity markets. If and when the underlying The yearly investment plans from SvK At the European level ENSTO-E states ed, investment level. market. Cross-border projects add an ad- factors will be resolved, a bottleneck tends to be optimistic looking at the 1. SvK’s project plans have been built on that a third of all projects are delayed ditional layer of complexity and risk for disappears that might result in a second history of actual delivered capex. too optimistic, and thus not feasible mostly because of social resistance and In essence deliverability of capex means delays if other countries will not be able wave of investments that has been wait- scenarios. longer than initially expected permitting that financing of the major TSO projects to keep up on their respective side. ing to be carried out. The average yearly outcome has been procedures. The average delays are esti- 2. An extended process in receiving nec- is usually not the main issue. Rather 25% lower than the initial plans which mated to over two years. essary permissions for executing the there are other constraining factors that Projecting the historical inability to de- have been reached only once. At most planned projects, and prevent capex plans for materialising on liver planned capex in the Nordic coun- the actual outcome has been less than Problems in carrying out the planned in- time. tries PwC expects the investment wave to 50% of the planned investment cost. At vestments has as well as in Sweden been 3. Problems in finding contractors that be delayed at least 1-2 years. Therefore PwC we term the concept deliverability seen in Norway where a revised invest- have the knowledge to handle the the expected CAGR is expected to be of capex or rather as is the case – the ment plan shows that projects are taking increasing complexity to carry out 13-19% in the period 2013-2017. undeliverability of capex. the projects as well as finding enough 1-2 years longer than the initial plan. contractors to meet the demand.

Year Plan Outcome Year Plan (MSEK) Outcome (MSEK) Deviation Deviation %

2012 3 000 2 375 -625 -20,8% PwC expect the investment wave to be delayed 2011 3 290 2 771 -519 -15,8% The graph illustrates a two-year delay scenario projected on the Nordic market

2010 2 265 1 276 -989 -43,7% 2500 2009 1 755 1 527 -228 -13,0% PwC's estimated capex 2008 1 080 963 -117 -10,8% 19%

2007 800 596 -204 -25,5% 2000 TSO's planned capex

2006 670 478 -192 -28,7%

2005 625 338 -287 -45,9% 1500

2004 520 410 -110 -21,2% 2003 645 411 -234 -36,3% 1000 2002 620 460 -160 -25,8% EUR in millions 2001 810 363 -447 -55,2% 500 2000 700 998 298 42,6%

1999 2 028 1 381 -647 -31,9% 0 2010 2011 2012 2013 2014 2015 2016 2017 1998 1 610 1 053 -557 -34,6% TSO’s planned capex PwC’s etimated capex 1997 840 589 -251 -29,9%

16 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 17 The delay of capex in the transmission grid can have major consequences for Power the industry – service providers will most likely be the winners, or losers? distribution

Market impact • If the investment wave is delayed the PwC concludes that there is a significant existing PT&D service players will chance that future capex will be both temporarily face increased competi- lower and realized later than planned by tion and lower margins due to lower each countries’ TSO. Inability to deliver tender volumes hence putting further capex may delay the Nordics contri- burden on some of the service players bution to achieving a fully integrated with strained finances European electricity market and may have a slowing effect on the introduction • Several scenarios could play out – if of RES. Consequences for the market some TSO’s fulfill their plans and players can be: others are delayed it could lead to dramatic highs and lows in the overall • There is a significant risk that future tender volumes and need of resources large increase of capex will be both in the Nordic market lower and realized later than planned by each countries’ TSO. • The importance of optimized resource planning and utilization, flexible • Inability to deliver capex may delay operations, contract and bid manage- the Nordics contribution to achieving ment among the service players will a fully integrated European electricity dramatically increase market and may have a dampening effect on the introduction of RES. • Service players with sound finances, scalable and adoptable operations can look forward to an booming but vola- tile demand driven by the anticipated investment wave

18 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 19 There are more than 600 DSOs A massive potential for economies in the Nordic countries (2012) of scale and scope benefits

Nordic distribution network An ageing network and increased gov- Electricity distribution networks in the ernment demands on network avail- Nordics are natural monopolies and ability and reliability have led DSOs In Norway several therefore regulated and supervised. to increase annual capex on network modernisation projects. When construct- companies have both The distribution industry is character- ing new network, DSO’s typically opt for distribution and ized by many independent network com- investments in measures that reduce the regional grid, and a panies with differences in both size and network vulnerability to severe weath- density of the underlying customer base. er (such as underground cabling) and few also own parts of smart grids. the central grid. DSOs own the regional and local electrical networks*. They are responsible for As these investments are associated with 95 ensuring that the electrical energy reach- higher equipment costs and workload es consumers. The voltage in regional than reinvestments, capex levels are grids is 40 kV– 130 kV, and in local grids generally higher than historical rates 40 kV and lower. which implies a larger market. However, as more and more of the network is mod- Revenues are typically based on distrib- ernised, the long-term need for mainte- 140 uted amount of electricity and a tariff nance is expected to decrease. set, based on an allowed revenue by the regulator, and through connection fees. Fewer DSOs leads to better asset management and lower maintenance costs. 170 The cost base is mainly composed of operation and maintenance, costs for electricity losses in the grid and cost for electricity flows from and to higher voltage connected grids. 76

*All the Nordic DSOs except Denmark operate the regional and/or local grids. In Denmark, Energinet. dk also operates the regional distribution network in addition to the national grid.

20 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 21 DSO market share by nr. of connections 2012

39 Main DSO players Denmark A trend towards increased outsourcing 18 is seen in the Nordic countries 2 2 16 Country overview The relevant market shares of the DSOs in the Dong SEAS-NVE Nordics vary depending on country. SE NRGI Energimidt Other • The Danish DSO market is more consolidated than the rest of the Nordic markets, top 10 DSOs cover approx. 80% of total customers. 19 Outsourcing levels in the • In Finland, DSOs have increased the We expect to see a market Nordics use of external providers, with regards • In Finland, the three largest DSOs hold a com- to both construction and maintenance growth for outsourcing Slightly more than half of the Nordic bined market share of 42% of customers. The projects. Thus, the performance by the 12 power distribution market is currently services in all the Nordic large DSOs generally have networks covering 50 Finland providers is growing in importance. voltage levels from 0.4 kV – 110 kV although, outsourced to service companies such as countries except Finland Eltel, Relacom, Empower, Infratek and 110kV customers are very rare. • Sweden is moving towards compet- going forward. Increased 11 One. itive tendering and is increasingly focus on core business in • The Norwegian distribution market consists 5 using outsourcing in both mainte- 5 However, the split varies significantly of a few larger players and a large number of nance and build of DSO networks, but Sweden and large in- within the Nordic countries, with Fin- local DSOs. The large DSOs are geographically smaller DSOs still carry out service Fortum Elenia land outsourcing nearly 80%, Sweden vestments in Norway is concentrated to the South around Oslo region, Helsingin Tampereen Sähkölaitos work in-house. Stavanger, Bergen and Trondheim. and Norway outsource less than half of expected to increase the Satapirkan Säkhö Other the total service market and Denmark • In Norway, large investments and lack outsourcing levels espe- running its network services in-house to • The Swedish market is dominated by the three of resources are expected to drive a large extent. cially among the local largest DSOs with a total estimated market share outsourcing. Small DSOs generally do 20 of 55%. In total there are 170 DSOs. not tend to outsource at present. DSOs in the coming years. • Denmark is regarded as a rather im- mature market for network services, In Finland, high level of Many small DSOs are owned by 7 with many of the DSOs still running outsourcing but still some municipalities 56 Norway in-house departments for field work. Nordic DSO market potential where in-house In the Nordics local DSOs are generally owned 6 by number of connections by municipalities while ownership of large DSOs service companies lack 5 differ between the countries. In Norway, the own- In house Outsourced skills. ership of large DSOs is generally a mix of govern- 5 ment, municipalities and private entities while in Finland private companies or a combination of Hafslund Skagerak Nett municipalities own the larger DSOs. BKK Agder Energi Eidsiva Energi Other • Local DSOs in Denmark generally own and operate low voltage grids. 52 48 • In Finland, there are about 80 local DSOs and 30 they generally have customers ranging from a few hundreds up to 80,000. 39 Sweden • In Norway, many of the local municipality owned DSOs perform services in-house. About 4,000 customers on average. 12 The level of outsourcing of services in the Nor- 5 dics vary considerably between the countries. 6 8 • In Sweden, local DSOs carry out maintenance and building work in-house to a larger extent E.On Vattenfall than the large utilities. Fortum Göreborg Energi Kraftringen Service Other 22 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 23 Consequences for the market players

TSOs DSOs PT&D service providers This report has outlined • Implement better and more precise • Implement better and more precise • Bid management – which contracts the current market situa- asset management asset management to focus on and how to increase margins on won projects tion and future potential • Procurement strategy – how to optimise • Procurement strategy and given a brief overview procurement of service providers • Contract prioritisation – should • Tendering process to ensure the company target certain niche of a market in change. The • Tendering process to ensure competitive competitive bids markets? changes described will lead bids • Balance between increasing outsourc- • Industry consolidation – will it to a changing business and • How to incentivise market while keeping ing or maintaining control in-house happen and if so is there a first costs down mover advantage and economies new opportunities but these • Availability of service providers – how of scale that can be achieved by • Deliverability of capex to develop good service provider differ depending on market procuring small local providers? relationships? player. Below we highlight • Availability of service providers – how • Scalable and adoptable operations, to develop good service provider • Integration of new generation the key challenges: strong skills in resource planning and relationships? capacity, network optimisation utilization and planning • Managing increased complexity of grid • Ability to deliver more complex and and forecasting build out of renewables • Uncertainty on tariff and regulation cross border projects to prioritise investments impacts expenditure plans

24 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 25 Contacts APPENDIX

Martin Gavelius Erik Wall Carl-Wilhelm Levert Head of Energy, Partner, Strategy & CDD, Senior Manager Utilities & Mining, Nordics +46 709 29 31 40 PwC Sweden +46 709 29 31 25 [email protected] +46 709 29 35 29 [email protected] [email protected]

Ståle Eirik Johansen Mauri Hätönen Jukka Metsälä Head of Energy, Head of Energy, Assistant Director Utilities & Mining, Utilities & Mining, +358 40 563 3756 PwC Norway PwC Finland [email protected] +47 95 26 04 76 +358 50 2898 [email protected] [email protected]

Contributing authors Sofia de Maré Anders Höglund

26 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 27 APPENDIX 1 – investment drivers APPENDIX 2 – investment drivers of the Nordic transmission grid of the Nordic distrubution grid

The shift in investments levels in the Nordics are mainly driven Aging networks is a key driver for investments. Higher demands by aging grids, rapid integration of renewables and increased and requirements for reliability of the network will require more demands on load management. maintenance and reinvestments.

• Age of local and regional distribution networks approaching Driver strength end of technical life • Ageing networks will not be able to cope with new requirements on effective load management driven by rapid introduc- Driver strength • Current transmission lines approaching technical life and in tion of intermittent power sources (particularly RES) significant need of reinvestments • Several lines older than 60 years requiring replacement to • Stricter requirements by regulators to increase network avail- allow for network reliability and safety Aging ability and reliability drives reinvestments and maintenance of networks existing networks. One example is the Norwegian N-1-criteria. • Vulnerability in distribution infrastructure, e.g. in connection to Aging extreme weather conditions, driving investments to increase • ENTSO-E, regional and national regulators have identified security of supply grids Network several key projects to reduce grid congestion and allow availability for higher degree of electricity market coupling (i.e. increas- and reliability • General trend towards DSOs viewing maintenance and repairs ing transmission flow between countries). as non-core business and increased use of external providers • Construction of new lines to reduce identified transmission • DSOs looking to make more use of turnkey solutions Integration of bottlenecks Outsourcing and EPC contracts (engineering, procurement, construction) the European • Large part of TSO capex plans relates to interconnectors & contracting electricity market of services

• Connection of renewable energy sources (particularly wind and solar) will drive investments in regional and local distribution Power • Higher load variability is driving investments in transmis- Connection networks Distribution Power Rapid introduc- sion network upgrade of RES • Planned roll-out of RES across EU may however be slower market Transmission tion of renewable than envisaged due to low or insufficient subsidies and slow • Peak load power to increase significantly through intermit- market energy sources permitting processes tent RES power (particularly wind and solar power) coming • Wind power connection is a significant growth area, even with online until 2020 Change in reduced subsidy levels maintenance • Total installed energy capacity to increase across EU due • RES also poses a challenge from so called “prosumers” i.e. spend micro producers of electricity connecting to the networks (e.g. to expansion of RES Increased solar power) demands on load • Energy regulators’ requirements on DSOs to increase network management Smart • Increased significance of RES, smart meters, electrical ve- reliability and safety driving increased use of underground grids hicles will increase need for congestion management and cables which reduces maintenance over time. However, it will load variability due to intermittent power sources, requiring take time before an effect is seen on the maintenance spend, modern transmission network as well as driving reinvest- and it will not materialize during the forecast period (2013-2015) ments and maintenance needs • Networks approaching end-of-life, driving increased mainte- Deliverability Regulatory nance spend of capex uncertainty

• All TSOs have presented significant increases in invest- • Introduction of new technologies to manage increasing ments over the next decade, but even assuming full demands on networks financing is in place, significant local bottlenecks remain to achieving envisaged roll-out plan • Key bottlenecks are particularly planning and permitting processes and local public objections to large scale new • Particularly in the Norwegian market, some uncertainty transmission lines and stations regarding RES subsidies slows down market growth

28 The investment wave – today or tomorrow 2013 2013 The investment wave – today or tomorrow 29 APPENDIX 3

Main players on the power service market have had low profitability and many have been acquired by private equity expecting to realising higher future margins

Type of player Finnish player owned by PE company 3i. Eltel was established in the carve-out • The large players on the PT&D mar- of IVO Transmission Engineering by Fortum in 2001 and made a significant ket typically have a turnover in the number of acquisitions in 2001-2010. Construction & maintenance within region of EUR 300 – 1,100 million. electricity, telecom and IT. Nordic geographical presence: DE, NO, FI and SE. • However, the service companies differ in their service offering and Owned by Nordea, DnB Nor and HSH Nordbank. Previously owned by Altor geographical presence. Equity Partners. Its services are divided into Telecom, Power Supply and M2M Systems. Launched Orbion Consulting in 2011 with services in telecom • Recent years the trend has been and energy. Has decreased its geographical footprint from 17 to 5 countries. declining EBITDA margins with most Nordic geographical presence: DE, NO, FI and SE. of the companies reporting margins less than 5%. Owned by PE company AAC Capital Partners. Delivers construction, maintenance and services within Energy, Telecom, and Industry sectors. 3200 • The majority of the service compa- employees. Decreasing margins and cash problems in recent years. Has lost nies are owned by PE companies. position within maintenance in SE. Nordic geographical presence: FI and SE. • The major energy companies such as Fortum and E.ON have divested its Owned by PE company Triton. Its services include power supply, railway service companies, only Vattenfall systems, fibre-optic networks, district heating, lighting and technical high-se- has maintained its service company curity solutions. Nordic geographical presence: NO, FI and SE. within the Group.

• Within the overall PT&D service Owned by PE company Altor (90.5%) & E.ON (9.5%), previously operated as market there are additional large E.ON ES. Strong within Power in Sweden and Norway. Nordic geographical players such as for instance ABB, Sie- presence: NO and SE. mens, Dalekovod etc that typically focus on large scale integration projects such high-voltage transmission Company within Vattenfall group providing services in the PT&D. More than and subsea cables. 70% of the Vattenfall Services Nordic’s total revenue in 2011 derives from in- ternal sales within the Vattenfall Group. Among its key customer are E.ON and Svenska kraftnät. Nordic geographical presence: SE

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32 The investment wave – today or tomorrow 2013