Vattenfall Annual Report 2005

Five ambitions for becoming number one annual report 2005

Contents

Financial calendar 2006 Chief Executive Officer’s message 2—4 8 February Year-end Report

a ten vat Mid-March Annual Report 2005 Important events 5 27 April Three-month Interim Report The year in brief 6—7 27 April Annual General Meeting

F Vattenfall’s strategies 8—9 27 July Six-month Interim Report ALL Vattenfall’s world 31 October Nine-month Interim Report

NULRPR 005 20 REPORT ANNUAL The European energy market 12—15 The competition 16—19 Investor Relations Pricing 22—25 Klaus Aurich, [email protected] Monica Edblad, [email protected] Renewable energy and energy efficiency measures 26—29 Susanna Hjertonsson, [email protected] Telephone +46 8 739 50 00 Sustainability work 30—31 Vattenfall’s markets The Nordic Countries 34—36 Other publications September Corporate Social Responsibility Report Germany 37—39 November Electricity Market Report Poland 42—43 All reports can be ordered from Facts about Vattenfall’s markets 44—45 Vattenfall AB, SE-162 87 Stockholm, Sweden Telephone +46 8 739 50 00, e-mail info vattenfall.com Employees and competence 48—49 @ Five ambitions for Corporate Governance Report 50—56 Further information about Vattenfall The Board’s report on internal control 57 can be found on Vattenfall’s homepages: becoming number one www.vattenfall.com (English) The Board and www.vattenfall.se (Swedish) Executive Group Management 58—59 Risks and risk management 60—63

Energy terms Units of power Power is energy per unit of time This is Vattenfall Power is expressed in Watts (W) 1 kW (kilowatt) = 1,000 W 1 MW (megawatt) = 1,000 kW 1 GW (gigawatt) = 1,000,000 kW Vattenfall is Europe’s fourth largest generator of electricity and the largest generator of heat. External net sales and EBIT per market, 2005 Vattenfall’s markets Units of energy The Group’s sales amounted to SEK 129,158 million in 2005. Vattenfall’s vision is to be a Nordic Countries Energy is power multiplied by time Vattenfall generates roughly 20 per cent of the electricity consumed 1 kWh (kilowatt hour) = 1 kW expended over an hour leading European power company. The company currently has operations in Sweden, Finland, in the Nordic countries. Electricity generation is almost exclusively 1 MWh (megawatt-hour) = 1,000 kWh comprised of nuclear power and hydro power. Electricity is sold to 1 GWh (gigawatt-hour) = 1,000,000 kWh approximately 0,9 million customers throughout the Nordic countries. Denmark, Germany and Poland. Vattenfall is active at all stages of the electricity value chain Vattenfall also has considerable heat generation operations, largely 1 TWh (terawatt-hour) = 1,000,000,000 kWh based on biofuel, and sells district heating and so-called thermal heat. — generation, transmission, distribution and sales. Vattenfall is also active in electricity trading Distribution owns and operates electricity networks and distributes Voltage electricity to 1.3 million network customers in Sweden and Finland. 1 kV (kilovolt) = 1,000 volt (V) and generates, distributes and sells heat. The group has more than 32,000 employees and Vattenfall also conducts consulting, contracting and R&D activities, primarily within the energy sector. the parent company, Vattenfall AB, is wholly owned by the Swedish State. 41 Germany Energy units in practice Vattenfall generates almost 14 per cent of the electricity consumed in 1 kWh is enough to run a standard Swedish car heater for about an Germany, making it the country’s third largest generator of electricity. 1 Sales and operating profit Profitability Total electricity generation 14 About 87 per cent of the generation comes from fossil fuels, primarily hour or an 11 W low energy light bulb for almost four days. Sales, Operating profit, based on the company’s own lignite mining. Vattenfall’s coal-fired SEK millions SEK millions % TWh power plants are among the most modern in the world. Vattenfall also 1 MWh is enough to heat a small house for a couple of weeks and 70 150,000 30,000 30 75 Nordic generates heat and has considerable district heating sales, primarily is generated in 20 minutes by Vattenfall’s largest wind turbine in Countries in Berlin and Hamburg. In the electricity network sector, Vattenfall windy conditions. owns and operates high-voltage as well as regional and local 43%

120,000 24,000 24 60 42% networks. There are a total of about 3.4 million network customers and about 2.9 million electricity customers. 1 GWh is enough to meet the energy needs of an average Swedish

37% town with a population of 100,000 for 8 hours and can be generated 35% 90,000 18,000 18 45 9 Poland in one hour by the Harsprånget hydro plant or in 20 minutes by the 0,8 Heat generation and sales comprise the majority of operations and Forsmark nuclear power plant. 10 Poland Vattenfall has a market share of about 27 per cent. Electricity is also 60,000 12,000 12 30 23% generated, but to a lesser degree. Distribution owns and operates electricity networks and distributes electricity to 1.1 million network 1 TWh is enough to run two large news print machines for a year. It is 20% Germany customers, primarily in the south-western part of the country. There also enough to power all of Sweden’s railways, underground railways 30,000 6,000 6 15 are a total of approximately 1.1 million electricity customers. and trams for five months. Ringhals nuclear power plant can generate this power in 12 days. Joint Group operations 0 0 0 0 External net sales per market, SEK billions Vattenfall Trading Services, Vattenfall Treasury and Vattenfall 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 2004 2005 Insurance are central support functions for managing the Group’s EBIT excl. items affecting comparability per market, SEK billions risks and providing market access. ■ Sales (IFRS) ■ Return on equity1 (Sw. GAAP) ■ Fossil-based power ■ Operating profit1 (Sw. GAAP) ■ Return on equity1 (IFRS) ■ Nuclear power ■ Operating profit1 (IFRS) ■ Return on net assets1 (Sw. GAAP) ■ Hydro power Key facts about Vattenfall’s markets 1) Excl items affecting comparability. ■ Return on net assets1 (IFRS) 1) Wind power, biofuel and waste are 1) Excl items affecting comparability. included in these volumes at a total of 0.6 TWh for 2004 and 0.5 TWh Nordic Countries Germany Poland Total for 2005. 2005 2004 2005 2004 2005 2004 2005 2004

1 2 Key figures (IFRS) External net sales, SEK millions 40,712 38,843 70,304 63,514 8,790 7,421 129,158 113,366 Operating profit, SEK millions 16,845 12,215 10,221 4,591 842 711 27,7303 17,1124 2005 2004 2005 (EUR)1

Net sales, SEK millions 129,158 113,366 13,697 EBIT excl. items affecting Operating profit, SEK millions 27,730 17,112 2,941 comparability, SEK millions 13,755 12,246 10,359 7,208 808 691 24,7445 19,3276 Operating profit (EBIT) excl. items affecting comparability, SEK millions 24,744 19,327 2,624 Profit before tax, SEK millions 26,319 14,614 2,791 Net assets, SEK millions 77,190 57,377 68,717 68,040 9,295 7,321 155,237 131,622 Profit for the year, SEK millions 20,518 9,604 2,176

Earnings per share, SEK 146.05 67.91 15.49 ten vat Return on equity excl. items affecting comparability, % 22.0 15.6 Electricity generation, TWh 89.8 88.4 75.9 75.5 3.4 3.2 169.1 167.1

Return on net assets excl. items affecting comparability, % 15.9 13.3 f Total assets, SEK millions 330,421 285,205 35,039 Heat, TWh 7.3 7.6 15.4 15.5 11.4 11.4 34.1 34.5 5 0 0 2 rt o rep ual n an all Equity/assets ratio, % 26.8 29.1 Funds from operations (FFO), SEK millions 31,386 24,302 3,328 Investments, SEK millions 24,497 12,731 2,598 Number of customers 1,291,000 1,278,000 3,399,000 3,393,000 1,104,000 1,101,000 5,794,000 5,772,000 Production: Vattenfall AB and Intellecta Communication AB. Photos: Bruno Ehrs, Electricity generation, TWh 169.1 167.1 Johnér and Vattenfall AB. Illustration: Mikael Jacobsson, Amigos. Printed by: Edita. Heat generation, TWh 34.1 34.5 Number of employees 8,788 8,735 20,096 20,864 3,029 3,309 32,2317 33,0178 Copyright 2006, Vattenfall AB, Stockholm. Average number of employees in the Group 32,231 33,017 1) Total sales includes sales in “Other segment” of SEK 9,352 million. 2) Total sales includes sales in “Other segment” of SEK 3,588 million. 3) Total profit includes 1) Exchange rate 9.43 SEK/EUR. a loss in “Other segment” of SEK —178 million. 4) Total profit includes a loss in “Other segment” of SEK —392 million. 5) Total includes a loss in “Other segment of SEK —178 million. 6) Total includes a loss in “Other segment” of SEK —805 million. 7) Other countries are included, totalling 318 persons. 8) Other countries are included, totalling 109 persons. 117 About energy

120,000 24,000 24 60 42% networks. There are a total of about 3.4 million network customers and about 2.9 million electricity customers. 1 GWh is enough to meet the energy needs of an average Swedish

Earnings per share, SEK 146.05 67.91 15.49 ten vat Return on equity excl. items affecting comparability, % 22.0 15.6 Electricity generation, TWh 89.8 88.4 75.9 75.5 3.4 3.2 169.1 167.1

Contents

Financial calendar 2006 Chief Executive Officer’s message 2—4 8 February Year-end Report

a ten vat Mid-March Annual Report 2005 Important events 5 27 April Three-month Interim Report The year in brief 6—7 27 April Annual General Meeting

F Vattenfall’s strategies 8—9 27 July Six-month Interim Report ALL Vattenfall’s world 31 October Nine-month Interim Report

Financial information Administration Report 64—67 Consolidated accounts 68—74 Notes to the consolidated accounts 76—103 Parent company’s Vattenfall AB (publ) accounts including notes 104—111 SE-162 87 Stockholm, Sweden Tel +46 8 739 50 00 Proposed distribution Swedish corporate identity number 556036–2138 of profits,Audit Report 112 www.vattenfall.com www.vattenfall.se Key ratios, definitions 113 Eight-year review 114 Quarterly review 115 Glossary 116 Energy terms 117 vattenfall annual report 2005 ne ne O umber Number for the Customer” the for o become “ become o T o be the employer of choice of employer the be o T ne ne O for the industry industry the for o be the benchmark benchmark the be o T umber Number nvironment” E for the the for o become “ become o T o continue the the continue o T profitable growth profitable performance and streamline operations further. Now we are prepared for the the for prepared are we Now further. operations streamline and performance Now we are concentrating our efforts from the position of a strong and and strong a of position the from efforts our concentrating are we Now with good growth and profitability. and growth good with priorities. strategic several make must we step next the take to order In ambitions: strategic five our are These when it acts responsibly. During 2005, Vattenfall continued to improve improve to continued Vattenfall 2005, During responsibly. acts it when company energy European leading a being of vision our realise to — step next cohesive brand, our values and the conviction that a company performs better better performs company a that conviction the and values our brand, cohesive - - - - The results should be seen in relation to the relationto in seen results be Theshould An important prerequisite for Vattenfall’sdevel important for Anprerequisite ll business units create value create units business ll structure to open and internationalisedand open structureinmarkets to ate value. Settlementsvalue. atebetweenbusiness units shall a competitive Europe that willthatmaintainposition Europe its competitive a investmentsdemands This major supply. power able Vattenfallis and willingriskscompanies – takeand to addition to large sums of investedcapital,largeadditionsumsVattenfallof to coun fourchain throughoutinvalueactiveare the the iscompetence knowledgetheirand of depthand next major step in the energy sector. And the goal is goal the And sector. energy the in step major next resources, the capital, for which we are responsible.are we whichresources,capital, the for rangingoperationswithin electricityWe heat.and that is, everypartis,shallthatcre therebyitself support and marketterms.partcreatesEach on value placetake true secret of our success. We have almostmillionsixhave success.We our trueof secret tries.operationsTheseessentiallyare total,local.In in an increasinglyanGlobalisation globalisedin world. reli a and sustainablewithsolutions combination in is the right one. If used sensibly, size can providecansize sensibly, usedIf right one. the is power industryfundamentallyhas power changed.The integrationthe Deregulationyears. and ten than less more effectively the position of trust we have earned. have trustwe of position effectively the more united brand in allunitedcountriesinbrandmanage develop to and has extensivehaswide-knowledgecapital, on based one of them. of one opment is the increasing openness of the European the increasing of opennessthe is opment creatingimportant of partan ismarkets energy the of customers in Sweden, Finland,customersGermany.Sweden, andin Poland common a operateunder2006, we of As company. the of logicbusiness the forces; market to companies competition and efficiency ensure to need We clear. considerableadvantages. electricitythe markets.Deregulationintroducedhas almostfeudalan from evolved haselectricity sector facingits is Union European The supplies.energy will continue to transform both electricity and othertransformelectricity andboth to will continue we have in excess of 32,000 employees. The breadth32,000Theemployees. of excess in have we The Swedish people, ninemillionpeople,Swedish The citizens, the own The power industry extremelypower iscapital-intensive.The In Vattenfall’s business model is based on a value chain,value a Vattenfall’s on basedbusinessis model A ------

VattenfallJanuaryincorporatedbeenhas1 since

system for emission allowances, introduced in Janu inallowances,emission introduced for system accounts for 2005confirmsaccounts for our growth-strategy that ary 2005, has functioned well, but due to high oil and oilhigh to due but well,functioned hasary2005, allowances for carbon dioxide, and consequently, also consequently, and dioxide,carbon allowancesfor at low cost. The goals we set at Group level have have level Group at set goalswe The cost. low at and sales increased by 13.9 per cent to SEK 129,158 129,158 SEK to cent per 13.9 increasedby salesand tion in combined heat and power and wind power in windpower and power and heatcombined in tion tricity generation, driving up the price of emission of price tricitythe drivinggeneration, up ing increaseding opportunities cross-border for trade is an important one, and means that our core businesscore importantmeansourthat anand is one, ing the year, Vattenfallyear, theestablisheding important an posi improved financial performance. We have also ben also have financialWe performance. improved gasand hedgingoilresults.Record-high improved ity, increased by 28 per cent to SEK 24,744 million 24,744 SEK to cent per 28 increasedby ity, ing profit, excluding items comparabilitems affecting excluding profit, ing between the Nordic countriesNordicGermany. betweenandthe lion and sales SEK 22,431 million. In 1999, operatingmillion. 1999, 22,431 sales InSEKand lion million 27,754 sales SEK 5,515 and SEK was profit prices in Europe led to increased use of coal in elec in coal of increaseduse to led Europe in prices been attained and most of our operations reportedoperations our of most attainedand been more effectively. Growth also provides a broader Growth provides a effectively. also more million. company’s years, Duringthe five past the much higher than many analystsmanythanhigherexpected. much million. Good water supply in Sweden combined Sweden in supply million.water Good gas prices, emission allowance prices have remained have pricesallowanceemission prices,gas knowledge base for more innovativesolutions,more more knowledge for base Denmark.Strategically, acquisitionDenmarkthein offerings to our customers. The strong set of annual of offerings strong customers.set our The to of electricityof operationsthe ourgenerationin and operations outside Europe have been divested.beenDur operationshave Europeoutside operations have grown considerably by meansgrownof operationsconsiderablyhaveby efficient processes and improved product and service and product processesefficient improved and extensiveacquisitionsGermanywhile inPoland and electricity wholesale prices. The European tradingEuropean The electricityprices. wholesale efited from higher wholesale electricity wholesale and prices higher from efited Nordic countriesNordicstrengthened are whilealsoprovid 2005 was a new record year for Vattenfall.Operat for year record new a was2005 Growth is good for the customer the for good is Growth Chief Executive Officer’s message Officer’s Executive Chief with our generation mix produced high volumes high mixproduced generation our with This growth enables us to use our availableourresources useThis growthto enablesus 1992. Operating profit that year was SEK 5,590 mil5,590 SEK Operating was year 1992. that profit

and the day after tomorrow after day the and Vattenfall today, tomorrow tomorrow today, Vattenfall

vattenfall annual report 2005 vattenfall annual report 2005 - - - - - Chief Executive Officer’s message Officer’s Executive Chief supply is alsofacingtechnicalis major supply challenges. sidies must be abolished.be sidiesmust a resource of ever increasingever Thiswillvalue.resourceof to a lead energyseparationsources,storagetheof ableand are becoming a larger part of the consumer’s energyconsumer’s the larger becomingpartareof a terns and improved energy efficiency. The energy The energy ternsimprovedefficiency. and price. Most factorsindicateMostprice. energythatwill become gradualadaptationscustomer consumptioninpat ket conditions,energythereforeprices,andare ket carbon dioxide and new nuclear power are of inter of are power nuclear new carbondioxideand changing. Taxes and economic means of control meanschanging.of economicand Taxes external effects must come at a price; compound sub compound price; a external at come effectsmust Power companiesfacingchallenges.are major Power Mar Carbondioxide-free renewtechnology on based We are facing major challenges major facing are We - - - - Power supply is global, in terms of both supply bothglobal,terms isinof supply Power and demand. The greenhousedemand.measures andThe effect and to aim to be leading in their fields. In order to measure to order leading fields. theirIn inbe aimto to achieve social-economicachieve to devel efficiency. This through operations.efficient business our All units beginning,theonlythis thein marketand the as ing. Well functioning Well marketsing.necessaryareopen ment spiral linked to market development. However, spiralHowever, marketlinkeddevelopment.ment to deal with it require joint efforts from all of humanity. effortsrequire joint of all deal it from with opment requires that every part of the value chainvaluerequires the everypartthatopment of omy based on mutualunderstandacceptance andon based omy our success, we introduced our Key PerformanceKeyintroduced oursuccess, we our covers its own costs – environmental– costsotherown andcostsits covers Indicators (KPI). We have created a positive developpositivecreated a have Indicators(KPI).We

world around us continues to change.continuesto aroundus world A secure power supply demands an open globaldemandsecon open supplyan secure power A - - - - - It is our job and our responsibilityour and contributejob toour is It sustainablesolutionssocietal Such development. strategicrecurringambitions,a thisannualin theme a sustainable market-based global solution. global market-based sustainable a Vattenfall’sfinancialand clout. about knowledge VattenfallEurope.in as represents innovative think report, will guide the way. By being the best we will we best beingthe By report, willway. guidethe nology. Construction at our Schwarze Pumpe plant Pumpe Schwarze our at Construction nology. PresidentExecutiveChiefandOfficer Lars G JosefssonLarsG try as a whole, to act together on this issue and demand and issue this on together act to whole, a as try energytosuitedsolutions of development the to well as Sweden effective energyin supply more a to suc our andpath chosen the on decisivestep the afterdaytomorrow. the to work to persuade our industry, and trade and indus and trade and industry, our persuade to work to ing in the European energy sector. We have takenhave EuropeanWe energythesector. in ing in eastern Germany will begin this summer. Dealing summer. thiswillbeginGermany eastern in become leading. Today’s resources,wisely used,will leading. becomeToday’s loaded from www.vattenfall.com). We will continue willcontinue We www.vattenfall.com). from loaded must include consideration for nature,considerationincludecustomers, mustfor has been deeply involved in this issue: in January 2006,January in issue: this in involved deeply been has develop carbon dioxide-free coal-fired power tech power coal-fired dioxide-free carbon develop demands a global price for carbon dioxide. Vattenfall dioxide. carbon for price global a demands customers,marketcontributestechnologythe and five Our grow. tocontinue canensures cess we that createadditionalandtomorrow both resources for carbon emitting society” (the report can be down be can report (the emittingsociety” carbon employees and society in general.societyinandThis requiresemployees size with the greenhouse effect in a responsible manner responsible a in effect greenhouse the with Climate “Curbing entitled report a published we Change – An outline of a framework leading to a low low a to leading framework a of outline An – Change We have decided to invest in a pilot installationto pilot a in invest to decided have We ------nergy solutions for a for solutions nergy series of opportunities.seriesof challenges transThe be must are investingarefuture proactiveintechnologies, a in annual report shows that we are now considerably now are annual we thatreportshows about the world in which they operate.theywhich in world the about advancedfacilities increasingwith greaterdemands ronmentally-effective technologies. ronmental policy. According to this policy we shall,ronmentalthisAccordingpolicy we topolicy. role in the market and in an open dialogueopen anthewith inmarket and the in role risk-takingrequireslarge-scale companiescanthat regardingfunctionality. busidemandsThe on undergoingaregreat changes.role its The and ness national interest. We will see new solutions and more andsolutions willnew national see interest. We tinually develop our resource base to take advantagetaketinuallytoresource baseour develop that the solutions must be in place for when the rightthe when for placein be mustsolutions thethat formed into commercialintoformed activities; requireswhich is about everythingabout is environmentalfrom efficiency changes.investmentsmajortodaily in our work in balancing environment and economy. We shallalso balancing We environmenteconomy. and leadingEuropeanenergy company. better equipped than we were five years ago. We years ago. five were betterequippedthan we be extremely competitive and also – well informedwellextremely alsocompetitive– be and power companies of today and the futureto theneed andtodaycompanies of power market conditions arise. We are committedarecon marketconditionsto arise. We do our utmost to choose modern, efficient and envi modern,efficient and choose toutmost our do declared our ambition in the shape of a new envi new a of shapethe declared ambitioninour of these opportunities.these of Long-term investmentsand cessfula berealise canbusiness,visionto our we combine competence with financialwithcompetencecombine resources. This sustainable development sustainable E In 2005, we took some important steps. We have important some We steps.took 2005, we In Chief Executive Officer’s message Officer’s Executive Chief when makingwhen assessmentinvestments,sound a make way and to stay a step ahead of the competition. It the of aheadstep a stay to and way world around us. By standingsuc modernand By aroundus. for world Our ambition is to run our plants in the best possiblebest theplants runinour to ambitionisOur At Vattenfall, we perceive this wave of change as a changeas of this Vattenfall,wave perceive At we

vattenfall annual report 2005 Important events

Important events

Storm caused major network disruptions Vattenfall’s coal-fired power plant Schwarze Pumpe In January 2005, southern Sweden was hit by a in eastern Germany with an investment of approxi- widespread storm with hurricane-force winds. The mately SEK 370 million. The plant is expected to be damage to forests, infrastructure and the electricity put into operation in 2008. network was enormous. Vattenfall’s costs for network repairs, disruption guarantees, damages and addition- Investment in wind power al work amounted to more than SEK 500 million. In October, Vattenfall decided to build a wind power farm at Lillgrund in Öresund. Lillgrund represents the Major acquisition in Denmark largest investment in wind power in Sweden and one In April, Vattenfall acquired 35.3 per cent of the shares of the largest in Europe. Vattenfall has also acquired the in the Danish company Elsam for approximately SEK rights to develop the Swedish part of Kriegers Flak in 10.3 billion. In June, an agreement in principle was the Baltic Sea. signed with the Danish oil and gas company Dong in which Vattenfall, in exchange for shares in Elsam and New energy law in Germany our holdings in Avedöre 2, acquires production assets. On 13 July, the new German energy industry act (Read more on pages 36 and 64). (EnWG) came into force. As a result, the new Ger- man network regulator, Bundesnetzagentur, was able Open annual general meeting to begin its work. Initially, all tariff changes must be On 26 April, Vattenfall held its first open annual gen- approved in advance by the regulator. The aim is to eral meeting. Previously, the meeting had only been make the transition to an incentive-based regulatory open to members of the Swedish parliament. More model in 2007. than 250 people attended the meeting. After the formal procedures, the public was offered the oppor- Squeeze-out of minority shares in Germany tunity to pose questions directly to the Chairman of In August, Vattenfall announced that its sharehold- Vattenfall’s Board of Directors and Chief Executive ing in the listed German subsidiary Vattenfall Europe Officer. AG exceeds 95 per cent. In December, the decision was made to hold an extra general meeting in March Closure of Barsebäck 2006 at Vattenfall Europe AG for a decision on the In line with government decision and current law the squeeze-out of the minority owners’ shares. Swedish nuclear power plant Barsebäck 2 was closed down on 31 May. Following negotiations between the A common brand is being built Swedish state, E.ON and Vattenfall, an agreement was On 1 January 2006, Vattenfall’s German subsidiaries signed in November on fair compensation for the loss Bewag and HEW, as well as the Polish subsidiary EW of production from Barsebäck 2 (see page 65). was renamed Vattenfall and in Vattenfall’s Polish subsidiary GZE the business units now operate under the Vattenfall brand. Pilot installation for a carbon 5 0 0 2 rt o rep ual n an fall ten vat dioxide-free coal-fired power plant In May, Vattenfall announced that it will build the Increased energy taxes in Sweden world’s first installation for a carbon dioxide-free The Swedish parliament decided to increase property coal-fired power plant based on so-called oxyfuel tax on hydro power as well as the tax on installed technology1. The installation will be built adjacent to nuclear power capacity, effective 1 January 2006. For Vattenfall, this entails increased annual costs of 1) Carbon dioxide from the combustion process is captured, liquefied and finally stored in the bedrock. approximately SEK 1.5 billion.

- - - 2005 2004 2003 0 20,000 60,000 40,000 80,000 profits. The improve profits. The how Poland,in ment mainlytois due ever, exchangeeffects,rate i.e. strongerPLN. debt,quarterlyNet The increaseoperatThein primarily is profit ing attributableGermany,to althoughNordic the countriesPoland and also showed have operatingimproved SEK millions SEK 100,000 0 0,9 1,5 1,2 0,6 0,3 times 2005 2005 2004 2004 2003 2003 0 0 Net debt Net Total liabilities Total (Sw.GAAP) times net, ratio, Debt/equity (IFRS) times net, ratio, Debt/equity 7,500 2,500 5,000 20,000 60,000 40,000 80,000 12,500 10,000 ■ Indebtedness ■ ■ ■ SEK millions SEK Operatingprofit, quarterly millions SEK Net debt increased by SEK SEK by increased debt Net billion 64.3 SEK to billion 8.9 year previous the to compared acquisition the to primarily increaseddue debt Net (SEK Elsam company power Danish the in shares of dividend large a of distribution the and million) 10,325 million). 5,600 (SEK state Swedish the owner, the to 100,000 Operating profit, excluding excluding profit, Operating comparability, affecting items to cent per 28.0 by increased (19,327) million 24,744 SEK ef -

i 2005 2004 2003 n br n 0 i Maintenance investments Maintenance investments Growth 5,000 15,000 10,000 20,000 25,000 ■ ■ Investments millions SEK higher sales volumes in volumes sales higher and countries Nordic the rate exchange and Poland EUR stronger i.e. effects, PLN. and Sales increased primarilyincreased Sales elec higher of result a as prices wholesale tricity somewhat Germany, in

2005 2005

2004 2004 , quarterly, 1

2003 2003 0

0 he year year he activitiesminusmaintenance investments. Cash flow from Cash from flow operating 7,500 1,500 4,500 3,000 6,000 1) 1) Free cash flowcash Free millions SEK Net sales,Netquarterly millions SEK 10,000 SEK 14,341 million (15,684) million 14,341 SEK Free cash flow totalled flow cash Free Earnings per share increased by by increased share per Earnings (67.91) 146.05 SEK to cent per 215 30,000 20,000 50,000 40,000 Sales increased by 13.9 per cent cent per 13.9 by increased Sales (113,366) million 129,158 SEK to

The year in brief: Key ratios (IFRS) ratios Key brief: in year The T

vattenfall annual report 2005 vattenfall annual report 2005 1 2 S&P A—2 A—2 A—2 A—2 A—2 2005 35.9 5,800 16,178 05

Short-term 03 P—1 P—2 P—2 P—2 P—2 Moody’s 01 47.6 2004

5,600 11,776 99 A— A— A— A— A— S&P 97

2003 26.3 95 Long-term 9,123 A3 A3 A3 A3 A2 2,400 2005 Moody’s 6 0 12 18 24 Returns, % Returns, 30 2002 22.1

1,675 7,566 2005 2004 2003 2002 2001 2004 2001 24.6 4,190 1,030 for 2005 for

1 2003 990 2000 33.3 amounted to 15.9 15.9 amountedto 1 2,970

(Sw. GAAP)(Sw. The year in brief: Targets and outcomes and Targets brief: in year The (Sw. GAAP to Q3 2004) Q3 GAAPto (Sw.

2002 0 Target return, 15% return, Target Return on equity after tax, after equity on Return values four-quarter rolling tax, after equity on Return (IFRS) values four-quarter rolling tax, after equity on Return values four-year rolling rating from A3 to A2 as a resulta asA2 rating to A3from GovernmentRelatednew its of Bothmethodology.(GRI) Issuer ratingagencieschangedtheir positive.to stablefromoutlook amounted to 22.0 per cent (15.6). (15.6). cent per 22.0 to amounted (13.3). cent per Moody’s upgradedVattenfall’s Moody’s Return on equity after tax after equity on Return assetsnet Return on times(5.9). The outcome excl items affectingitemsexcl comparabilityoutcome The 8.4 was 2005 for

9,000 4,500

Outcome Value creationValue assets) net on 11% of return required Group’s the and achieved results between(Difference million SEK

—9,000 —4,500 SEK millionSEK year the for Profit Dividend incomenet of % Excl.compensation 1) closureBarsebäcktheforof 2. Proposed 2) dividend. • ■ ■ ■ Excl.itemsaffecting 1) comparability. • • • ■ - -

able expansion possibilities.expansion able a credit rating in the singlecreditratingtheA a in after tax. Recalculated into the the into Recalculatedtax. after ability goal is 15 per cent on equity on cent per 15 is goalability requirement is called the Gap. If the If Gap. calledthe is requirement the business unit can look for profit for look canunitbusiness the the owner is recalculated to indirecalculatedisto owner the long-term dividend which, under under which, dividend long-term Financial targets targets Financial during normal circumstances, shall circumstances, normal during outcome exceeds the required level, level, required the exceeds outcome created by the business unit and thisand unitbusiness the by created coverage ratio shall be 3.5 to 5 times.5 to shall3.5ratio coveragebe category. cent before tax. before cent equal one third of net income. net of third one equal Dividend policy Dividend Rating Profitability vidual targets for each business unit.business each vidualtargets for Interest coverage Interest Group’s required return on net assets net on return required Group’s (RoNA) this corresponds to 11 per per 11 to corresponds this (RoNA) The profitability requirement set by profitability set requirement The value the between difference The The owner’s goal is that the interestthethat goalis owner’s The The intention is to maintain a stable, stable, a maintain to is intention The The owner’s long-term profit long-term owner’s The Vattenfall’smaintainto intentionis Value creation Value p i

es for for es i

uropean leadersh uropean trateg Institutional decisions, on both European and national levels, such as those regarding the the regarding those as such levels, national and European both on decisions, Institutional Possible changes to legislation and taxation can affect Vattenfall’s competitive edge and ultimately ultimately and edge competitive Vattenfall’s affect can taxation and legislation to changes Possible Competitors continue to expand and can gain a more dominant position in Vattenfall’s home home Vattenfall’s in position dominant more a gain can and expand to continue Competitors Vattenfall’s experience with various types of power provides a strong base upon which to develop develop to which upon base strong a provides power of types various with experience Vattenfall’s Our experience with competitive markets and with integrating acquired companies makes makes companies acquired integrating with and markets competitive with experience Our developed. further be can Europe Northern in position strong Our Consolidation of the European energy market creates opportunities for new acquisitions. acquisitions. new for opportunities creates market energy European the of Consolidation The aging state of power plants in Europe and the resulting need for replacement facilities creates creates facilities replacement for need resulting the and Europe in plants power of state aging The allocation of emission allowances, can affect Vattenfall’s competitive edge negatively. edge competitive Vattenfall’s affect can allowances, emission of allocation markets. profitability. our decrease environmental demands. environmental the company’s production facilities in order to achieve increased efficiency and meet tougher tougher meet and efficiency increased achieve to order in facilities production company’s the Vattenfall well equipped to act offensively. act to equipped well Vattenfall interesting opportunities for investment in new power generation. power new in investment for opportunities interesting and investments. All of these have a common guiding principle: to contribute to our efforts to be a be to efforts our to contribute to principle: guiding common a have these of All investments. and company. energy European leading Vattenfall has formulated a number of strategic ambitions that govern future decision-making decision-making future govern that ambitions strategic of number a formulated has Vattenfall • • • • There are also challenges, however, to be faced on the road towards our vision, such as: as: such vision, our towards road the on faced be to however, challenges, also are There • • • • • • • • opportunities, including: including: opportunities, • The power industry has entered a new development phase, one in which Vattenfall sees many many sees Vattenfall which in one phase, development new a entered has industry power The company. This shall be achieved primarily through profitable growth. At the same time, Vattenfall Vattenfall time, same the At growth. profitable through primarily achieved be industry an shall in This efficiency company. operational enhance further and maintain to strive continuously continue. must to expected are squeezing price and competition increased where Future strategies will focus primarily on Vattenfall’s vision: to be a leading European energy energy European leading a be to vision: Vattenfall’s on primarily focus will strategies Future and to integrate and consolidate acquired companies. Both aspects have been carried out with with out carried been have aspects Both companies. acquired consolidate and integrate to and results. successful After a period of rapid growth, Vattenfall has been working to consolidate its operations since 2001. 2001. since operations its consolidate to working been has Vattenfall value growth, create rapid to of ability period a company’s After the improving aspects: two of consisted primarily has work This Vattenfall’s strategies Vattenfall’s

E S

vattenfall annual report 2005 Vattenfall’s strategies

Our five strategic ambitions

To continue the profitable growth How? The past five years have seen Vattenfall’s sales quadruple, while ✔ Regularly evaluate possible acquisitions and investments in we have simultaneously created a good platform for future increased capacity and ability to deliver. Geographic expansion growth. Profitable growth is required if Vattenfall is to continue will primarily take place in or around those regions where Vatten- to be competitive, to create value and to be a positive force in fall is already established. the industry with regard to contributing to sustainable develop- ✔ Grow with a focus — even in the future — on being a vertically inte- ment in society. Size provides a range of strategic advantages, grated power company with a focus on the generation of electri such as market position, financial strength and the ability to bal- city and heat. Natural gas can also be an attractive acquisition ance risks. There are also operational advantages, such as more area, partly as a source for heat and electricity generation and costeffective procurement and more effective administration, partly with consideration for the increased convergence between which also increases profitability. the electricity and gas markets.

To become the benchmark for the industry Increased competition and price squeezing will be an enduring ✔ Broaden optimisation work to encompass the entire organisation. trend in the European energy market. In order to meet this chal- ✔ Continue to improve our follow-up systems. lenge, and to maintain our competitive edge, Vattenfall must continue to focus on operational efficiency and value creation. In ✔ Implement strategies for taking advantage of economies of scale recent years, Vattenfall has been considerably streamlined and in IT investments and purchases. we have reduced our costs, but this has primarily taken place on ✔ Further improve and centrally coordinate capacity management. a regional level. The next challenge is to take advantage of the synergies and opportunities for optimisation throughout the company and in this way facilitate expansion while retaining good profitability.

To become “Number One for the Customer” Vattenfall has approximately six million customers. Having ✔ Guarantee competitive pricing while providing the best possible satisfied customers that have confidence in the company is service. both a requirement and a condition for gaining acceptance for ✔ Create a united brand covering all parts of our company in order to the company’s operations and being able to develop new solu- meet the customer in an enhanced and more distinct way. tions. The goal is for us to gain market shares while continuing to increase customer satisfaction — all the while with retained or ✔ Simplify things for customers in all points of the sales chain. improved profitability. ✔ Measure and follow up on customer satisfaction in order to carry out improvement measures. ✔ Create coordination between customer service in all business units.

To become “Number One for the Environment” The challenge for the energy industry is to contribute to the sus- ✔ Invest in energy production that generates little or no carbon tainable development of society while continuing to grow. At the dioxide emissions and technology to reduce emissions in the fossil- same time, knowledge concerning the environmental problems fired power plants. we must face continues to grow. In light of globalisation, tech- ✔ Increase capacity in existing facilities that do not generate carbon nology development and a transition to stricter legislation, the dioxide. relevance of our ambition to lead the industry in environmental issues has been further underlined. Our goal is to find solutions ✔ Continue to invest in wind power and increase the proportion of that reduce carbon dioxide emissions and to have a leading role biofuel, assuming attractive commercial conditions. in renewable electricity and heat generation. ✔ Increase efficiency in the generation and transmission of electricity. ✔ Create better systems and processes for controlling and following up on environmental work.

To be the employer of choice Vattenfall’s success is dependent upon our having good leader- ✔ Strengthen leadership through a first-class management planning ship, the right competence and highly dedicated employees. process and a Group-wide program for management development. Vattenfall is facing a generation shift that entails major chal- ✔ Carry out long-term strategic competence planning throughout lenges. At the same time that people with unique skills leave the the Group. company, students’ interest in technology is decreasing. Vatten- fall, however, has the resources and strategies to create the con- ✔ Develop employee competence on an ongoing basis, based on ditions required to attract, develop and retain leading expertise business requirements.

and motivate employees to perform to the best of their abilities. 5 0 0 2 rt o rep ual n an fall ten vat ✔ Conduct the annual “My Opinion” employee survey in order to secure a basis for improvement work and strengthen employee commitment. ✔ Offer all employees a safe, healthy and stimulating working environment, on both the physical and psycho-social level. ✔ Continue to develop flexible compensation and benefit models that support the Group’s long-term goals.

- - - - on”

i t i e product e Theresultclearlyis annualseenthein accounts: increasing lated,”saysJacekDrezewski, Managing Director Vattenfallof HeatPoland Warsaw.in tion of thispositivetionof earnings highcostawareleveloftrenda is reducetocosts, all through ManagesuchmeasuresFuel a as profit (twofold increase since 2002) successivelyand increased ness.Vattenfall HeatPoland veryworksstructureda in manner mentoptimisingSystemfor amountthegeneration.fuel inof generationbothelectricityof andheat. One important explana electricitypricesmarketthegone haveasbeenhas up deregu iv - - ncrease prof ncrease i table growthtable i ly ly i nue the prof the nue i th more effect more th

e stead e i

“Heatgeneration throughout company’stheofall facilities is now complementednowis withelectricity generation, whichhas Doubledsalesnet per employee comparisonin withourpeers tion of CHP, thatis,simultaneousthe CHP, tionof generation heatandof merlyEW)gonehas fromonesuccess another to servesand now steadilyincreased volumetheelectricity. of samethetime,At as a benchmarka as Polishthein energy market. During 2005, the andsuccessively reduced costs. Vattenfall HeatPoland (for

companyoptimised energy generation increasingby proporthe electricity. w “ to cont to W

vattenfall annual report 2005 0 1 vattenfall annual report 2005 11 The dealThealsostrengthens Vattenfall’s investment renewablein The purchaseThe entails Vattenfall taking coal five andthe over “Thedevelopment Europeannationala a fromenergyto market “In addition to the fact that we see this as an investmentan asthis“Inseeanaddition infactwe thethat to heat. Europe’s largestfive producers wind power. of ElsamE2.and MergersHeadAcquisitionsof & Vattenfall. at increasesfactortwentycompanyofthea and becomes by oneof In Junemonths2005,In fewnegotiations aftera energythewith means it is necessary to continue to grow if we are to maintainnecessaryto aremeansisour weit continue ifgrow to to positionreachleadingvisionourbeingabletobeand ofa European powercompany,”Mikaelsays Kramer. marketsNordicthein countries Germany,”andMikaelsays Kramer, MajorinvestmentDenmarkin for the Nordicthefor countries, Denmark alsobrings together primaryour energysources. Vattenfall’soneblow,With windpowercapacity companyDong,agreement an Vattenfallplacetake forin was to generationthe ofpercent 24 capacityover Danishtheincompanies effectiveprofitableand operation strategywell with our that in fits gas-firedlarge a portion CHP wind plants turbines,the well as of as correspondinggenerationofpercent 24 capacityto Elsam/E2.at Annualgeneration TWhelectricityplantsthefrom6 is TWh 6 and - - - - In accordanceIn EU’swiththedirectives, countriesall thein In 2002,InVattenfall HeatPoland hadalmost 3,000 employees “There’sbeforegoliberalisationthe longto still waya theof chal this meet can we and future the for ready is company our “But “We have slimmed“Wehave ourorganisation considerably andcanprob “Webegan ourrestructuring and2001sinceinthenratio have lenge from a strong market position,” concludes Jacek Drezewski. Jacek concludes position,” market strong a from lenge Polishmarketcompleted.is There’scertain a amountresis of tancesomeincompanies.” thistakesplacePoland, in Vattenfall HeatPoland mustjustbeas Unionderegulatedshalla have electricity Whenmarket2007. by prepareditsstrongestas competitors. nalisedoperationsall andoutsourced majorparts our serviceof ably continue to do so a littleablycontinuea moredone.soarebeforedo wewe Now to focusingare purelyouractivities:core on generating heatand electricity,”saysJacekDrezewski. efficient production. organisation,”JacekDrezewski explains. Themostnoticeable costreductions, moreduetoare however, — todaynumberthelittle— downto moreisthan 1,200 people. Vattenfall’s world: The European energy market

The energy market in transition

In 2005, a new trading system was introduced for emission allowances for carbon dioxide in the EU, which clearly has affected electricity prices. The European electricity market still has a certain excess capacity, but in the long-term, new power plants will be needed.

Highly regulated historically, the energy sector has increased competition in this segment has progressed changed radically in the past 15 years. Deregula- more slowly than in the electricity market (see the tion and internationalisation, largely driven by the gas market fact box on page 15). EU, has resulted in several electricity markets now being totally open to competition (see map on page Uneven development in the 13). According to the EU Electricity Directive, the electricity markets intention is for all countries to have deregulated their The changes have resulted in pressure to cut prices electricity markets and have totally opened them to and costs, lower margins in the supply business and competition by 1 July 2007 at the latest. increased competition. Consumers now have the The differences in how far the various countries opportunity to freely choose their electricity suppliers have progressed with this deregulation are still sub- and increased ability to customise price and risk pro- stantial and as a result the European Commission con- files. Several studies, such as the Swedish Electricity tinues to drive development and integration across and Gas Market Survey, have shown that the deregu- borders. The goal is to increase competition and inte- lated market in the Nordic countries is working well. grate national markets into larger regional markets. Some other electricity markets in Europe have still not The intention is also for the natural gas market to developed into liquid regional markets. In national be deregulated by 2007, but development towards markets, there is a high level of market concentration and customers have a narrow range of choice available. Price trends The trading system for carbon dioxide allowances during the past two years have led to strong protests from customers, above all from the power-intensive industries in Europe. Against this background, the EU’s anti-trust authority began a so-called Sector National authority Allocation of National authority emission allowances Inquiry into the electricity and gas markets in June 2005. Accounting of emissions Trading in emission The Marketplace allowances One of the most serious environmental problems of our time – the a e ala a e t2005 0 0 2 rt o rep ual n an fall ten vat ongoing climate change – is an issue that not only dominates the Euro- The different countries national allocation plans for emission allowances places a cap on how high emissions can be. Power plants and industrial installations then are allocated emission allowances up to the total pean environmental discussion, but cap. The emission allowances trading system creates opportunities for the company to prioritise the most economical method of reducing emissions. The producers can choose between implementing technical that also affects the global energy measures in order to lower emissions, purchasing additional emission allowances or refraining from market to a large degree. According producing altogether and instead selling their emission allowances on the market. This will ensure that the measures to reduce emissions are managed in the most cost-effective way. to the Kyoto Protocol, the EU mem-

12 vattenfall annual report 2005 13 - - - - 4 Marketopening 143 7 200 householdfor customers throughoutEU the Tradingin 2005 emissionallowances begunEU thein 31 51 7 7 88 10 53 7 Green Marketopening for 4 26 131 38 200 non-householdcustomers throughoutEU the 1 146 62 13 2 62 12 322 36 120 554 60 The EU’s new ElectricityDirectivenew EU’s The

To begin with, the system only covers power plants power covers only system the with, begin To 6 3 110 arious methods for regulating regulating for methods arious

sionanddistribution, which arenatural monopo system has worked well. On the other hand, prices for for prices hand, other the On well. worked has system and certain heavy industry segments. The conclusion conclusion The segments. industry heavy certain and the that is allowances emission in trading year’s a after technical measures to reduce emissions, which results which emissions, reduce to measures technical elec affected has which predicted, analysts most than under more (read expected than more prices tricity in choosing the most cost-effective method. method. cost-effective most the choosing in panywithout anyobligations regarding disclosure. beenopened forcompetition,up while transmis lies,haveremained regulated. network companies network distributionandsupply, belonged thetosame com emission allowances have been considerably higher considerably been have allowances emission Pricing on page 24). 24). page on Pricing valuechain, consisting production,of transmission, with regulationsconcerning,with otheramong operations.separation of things,the Sweden certificates introduced in 200 V Afterderegulation, production andsupply have As a rule,Asa intheold monopoly structure, theentire 88 Danish 477 Vattenfall’s world: The European energy market energy European The world: Vattenfall’s -

390 1999 marketderegulated 2004,TWh)

German 9 25

1998 marketderegulated 260 (Consumption 51 Swedishmarket 1996 deregulatedandEU’sfirst ElectricityDirective Finnish electricity

5 199 marketderegulated Norwegian

1991 electricitymarket deregulated EU candidateEU country to be deregulated 2007. deregulated be to countryEU Completelyderegulated. Partiallyderegulated. deregulation.Expectedsome or No UK electricityUK The purpose of the trading system is to contribute contribute to is system trading the of purpose The

2003. Source:International EnergyAgency

1989 marketderegulated shall take place in a cost-efficient manner and in a way a in and manner cost-efficient a in place take shall allowances to plants (with capacity >20 MW) that MW) >20 capacity (with plants to allowances rise. will price market their scarce, become allowances that is effective from a socio-economic perspective. perspective. socio-economic a from effective is that to attaining the EU’s climate goals and living up to the the to up living and goals climate EU’s the attaining to their total emissions of greenhouse gases by 8 per cent cent per 8 by gases greenhouse of emissions total their investments in generation with lower carbon dioxide dioxide carbon lower with generation in investments ber states have committed their countries to reduce reduce to countries their committed have states ber the reduce to order In 1990. with compared as 2012 by dioxide only. The first trading period runs between between runs period trading first The only. dioxide options of either buying emission allowances or taking or allowances emission buying either of options commitments made under the Kyoto Protocol. This Protocol. Kyoto the under made commitments emissions. Companies will always have to balance the the balance to have always will Companies emissions. emit carbon dioxide. The cap limits emissions and as and emissions limits cap The dioxide. carbon emit es in January 2005. The system currently covers carbon carbon covers currently system The 2005. January in es emissions that give rise to the greenhouse effect, the the effect, greenhouse the to rise give that emissions Hence, an economic incentive is provided for increased increased for provided is incentive economic an Hence, EU introduced a system for trading emission allowanc emission trading for system a introduced EU 2005 and 2007 and the second covers 2008–2012. 2008–2012. covers second the and 2007 and 2005

Source:EURELECTRIC LatestIndustry statistics. 1) 1989—2007 Importantevents The degree of deregulation is based upon the upon based is deregulation of degree The the of estimationCommission’s European (basedvolume energy total the of portion the which for consumption) consumer on deregulated. is market The European electricity market electricity European The This is achieved by capping the allocation of emission emission of allocation the capping by achieved is This

Vattenfall’s world: The European energy market

Network operations are natural monopolies since • Provide network operators the possibility and it would not be economically rational from a soci- incentive to increase efficiency and reliability of etal point of view to introduce competition by, for supply example, building parallel sets of power lines. Net- • Protect the customer from being abused by the work tariffs are therefore regulated and monitored monopoly by an independent authority. The principles that govern network regulation vary between countries In Sweden, the regulator has developed a calcula- and there are different regulatory models, such as tion model, the so-called network performance returns-based regulation, cost-based regulation and assessment model, to judge the fairness of the net- incentive-based regulation. In addition, regulation work companies’ network tariffs. The model uses can take place in two different ways: ex-ante regula- a fictitious network to assess network companies’ tion, where network tariffs (or at least a model for performance. In principle, the calculated network how tariffs are calculated) must be approved by the performance provides, according to the model, the regulator prior to implementation, and ex-post regu- permitted income level. The relation between the lation, where the network tariffs are examined by calculated income level and actual income, the the regulator after they have been charged. The EU so-called charge ratio, then provides the basis for Commission recommends ex-ante regulation. Com- the regulator’s examination of the company’s net- mon to all legislation and monitoring models is that work fees. The model and its application have been they must: strongly questioned by many network companies • Enable connection and use of the network for all and Vattenfall is of the opinion that the model can users under non-discriminatory conditions not be strictly applied for regulatory purpose in the • Provide operators a reasonable return on invested manner that it has been applied to date. capital In Finland, a new returns-based regulatory model was introduced in 2005.

Germany previously had voluntary industry Projected electricity consumption agreements, but has now introduced ex-ante regulation. On 13 July, the new German energy indus- Projected annual Electricity demand growth, % p.a. try act (EnWG) came into force. As a result, the Countries/Regions TWh, 2004 2002—2010 new German network regulator, Bundesnetzagen- Cyprus and Malta 6 5.82 tur, could start its work. Initially, all tariff changes Greece 53 4.7 Ireland 25 3.9 must be approved by the regulator, although tran- Iberia 311 3.6 sition to an incentive-based regulatory model is Italy 322 3.1 Benelux 204 2.1 planned for 2007. Other Eastern Europe1 162 2.0 In Poland, network tariffs are regulated in UK 390 1.9 accordance with an ex-ante cost plus model where Austria 62 1.7 Poland 131 1.73 tariffs must be approved prior to charging. As of France 477 1.6 2005, capital costs are allowed to be included in the a e ala a e t2005 0 0 2 rt o rep ual n an fall ten vat Switzerland 60 1.4 Nordic Countries 397 0.63 calculation of the total cost. Germany 554 0.53 Supply and demand in Europe’s Source: EURELECTRIC Latest Industry statistics. 1) Includes the Czech Republic, Estonia, Hungary, Latvia, electricity markets Lithuania, the Slovak Republic and Slovenia. 2) Growth projections for Malta are estimated. There are in total 240 million electricity customers 3) Vattenfall’s projection. in Europe, of which almost 20 per cent in Germany

14 vattenfall annual report 2005 5 1 - - - - - small businesses,22% small Russia, 24% Russia, Domestic,59% 10% Algeria, Domestic,7% 5% Other, Electricitygeneration,22% 35% Industry, Householdand The advantages of district heating are that it it that are districtheating of advantages The as well.as and increasingand otherwisecompetitionin strongly willoccur power and heat combined in increase able nants and waste, which has resulted in a successive successive a in resulted has which waste, and nants that districtthat heatingwillprioritised future be the in that has no other alternative use, such as logging rem logging as such use, alternative other no has that taken the initiative to create a regionalinitiativethe takenthemarketcreatea in to becomingincreasingly importantEuropean the in primaryThe alternative2010. to and now between Use of gas in Europe(2004)in gas of Use misingtransmission capacitycountriesbetweenthe districtmarkets largestfor fourheating.mar The generate electricity. The EU believes that a consider a that believes EU The electricity. generate kets in Europe are Poland (105 TWh), GermanyTWh), (90 (105 Polandare Europe in kets heating in recent years. It is primarilyis years. It heatingrecentNordic in the Gas supply in Europe(2004)supplyinGas districtheatingnaturalis gas, mainly Germany. in decrease in carbon dioxide emissions. A large portion large A emissions. dioxide carbon in decrease oil. District heating plays a large role in reachingDistrictoil.inlarge role heating a plays of the Europeandistrictthe of heatingmarket. also that plants CHP from comes districtheating of concentratednational markets. countrieslargeEasternformerhaveand thatEurope project is planned for southern Norway (Grenland and Oslo) with with Oslo) and (Grenland Norway southern for planned is project Sweden. to extensions possible environmental goals in Europe and there is a beliefenvironmental a is thereand goalsEurope in energy market. This has led to an increasedistrictanin energy to market. Thisledhas fuel of use the and fuel of use efficient more enables Benelux countries. The reasons for thisopticountries.Beneluxincludereasons for The sian gas and a pipeline under the Baltic Sea to Germany. The other other The Germany. to Sea Baltic the under pipeline a and gas sian Environmentally-friendlyheatingalternatives are gas projects are planned in proximity to Sweden. One involves Rus involves One Sweden. to proximity in planned are projects gas Growing market for district heating district for market Growing (41 TWh), which togetheter represent more thanhalftogetheterrepresentmorewhich TWh), (41 The trend is for gas and districtgasand for replaceheatingistrendto The TWh), Sweden (52 TWh) and the Czech Republic Czech the TWh)and (52 Sweden TWh), The Dutch, Belgian and French governmentsBelgianDutch,Frenchhave Theand Vattenfall’s world: The European energy market energy European The world: Vattenfall’s - - - - - - - Growth in the Germanthe Growthelectricityin alsomarketis The Polish electricity market is growingfasterelectricityis market Polish The There is still a certain level of surplus capacity in capacity surplus of certainlevel stilla is There Swedish gas usage is relatively moderate, about 10 TWh per TWh 10 about moderate, relatively is usage gas Swedish So far, the overwhelminglythe far, dominantSo transporting meansof

sumption. In the Nordic countries increase in electri in increase countries Nordic the In sumption. a “normal year” i.e. when the so-calledhydrological the when i.e. year” “normal a Finland will in reactor nuclear fifth a 2009 from as and are taken out of operation and through increased con increased through and operation of out taken are and about 12–13 per cent in the UK, France and France UK, the in cent per 12–13 about and consumpAnnual2004. in TWh 3,150 to amounted renewable energy is expected to increase in coming in increase to expected is energy renewable Natural gas is the secondthelargest EuropeNaturalenergyisand gassourcein the use of Liquefied of increased use has Natural (LNG) the Gas dramati liquidform,thena cooled to nearbyis market.gasThe a lack that transferredspecialtransportimportingtanker shipstheto for to than the Nordic and Germanmarkets.Deregulaand Nordic the than particularlyadvanced and fast not has however, tion, accordance inplants power upgradeand process tion tion is expected to increase by an average of 1.7 per 1.7 of average an by increase to expected is tion in cominginyears. increase capacity. In addition, capacity in the area of of area the in capacity addition, In capacity. increase in Europe (EU 25 plus Norway and Switzerland) and Norway plus 25 (EU Europe in power plants over the next ten years. ten next the over plants power projected to be low. Wind power generation in Gergenerationin power Wind low. be toprojected renewed replacedor begenerationbased willto need balance is normal, supply and demand is in balance. in is demand and supply normal, is balance many has increasedmanyhas significantly duringyears recent due to extensivefossil-largesubsidies.portionto of A due central eastern Europe. easterncentral During low. remain to projected is consumtion city cent until 2010, primarily in southern Europe and Europe primarilysouthern in 2010, until cent marily in the North Sea and the Netherlands,Norththeandthe Seamarilyconsiderable in a but imported,is cent)permajority theportion Russia. from (about41 Europe, but this is being reduced as older power plants power older as reduced being is this but Europe, Italy respectively. The total electricity consumption consumption electricitytotal The respectively. Italy Upgrades of existing Swedish nuclear power plants power nuclear existingSwedish of Upgrades Poland will therefore need to up speed its deregulaits speed up to need willtherefore Poland 2004.Europeancomesfromgasmajority fields,Thethe of pri years. There is also a great need to replace agingreplace to need great a alsois There years. years, in both Sweden and Norway. and Sweden both in years, annum or about 2 per cent of total energy use. However, in the the in However, use. energy total of centper 2 about or annum and then fed into the ordinarythenetwork. intogas fedthen and accounted for about 24 per cent of the total energytotalsupplythe in of centper aboutaccounted 24 for geographical area that has access to gas, primarily the west coast, coast, west the primarily gas, to access has that area geographical major Two use. energy of centper 15—20 about for accounts gas gas for import is via pipelineimportrecentyears,Europe.via however, forIn gas is to producedfieldsgloballygasbothEurope.iscally, LNGin in and gaseousre-converteda statebemustthen country,where it to generationindustrialand processes. Natural gas in Europe in gas Natural with stricterenvironmentalwith regulations comingin The mostimportantTheheating, naturalaregas electricityforuses

Vattenfall’s world: The competition

M & A activities picking up momentum

After a couple of years’ of inactivity, the trend was broken, with major structural transactions once again seen in the European energy market in 2005. During the year, a range of major transactions were carried out or initiated. In addition, Europe’s largest electric utility, France’s EDF, was floated in 2005.

When, in the beginning of the 1990s, the national kets. Several utilities also failed to deliver promised power utilities were exposed to competition, profit synergies. In 2002/2003, the major utilities changed margins dropped. This triggered a wave of strategic their stratiegies. They stopped growth investments acquisitions across national boundaries. After deregu- and instead concentrated on consolidation and the lation and privatisation in England and Wales in the integration of acquired companies as well as on beginning of the 1990s, the privatised companies reducing debt and divesting non core assets. This were acquired by primarily American energy compa- “back-to-basics” focus has been successful and the nies. When these companies left Europe, the English financial position of these utilities have improved. utilities were acquired by German E.ON and RWE Electricity and gas utilities have worked towards and by French EDF. Several southern European upstream integration in order to back up trading power utilities ventured in Latin American growth. activities with physical assets. In some countries, pol- Some electric utilities also broadened their operations iticians have tended to support development that has to new product areas such as telecommunications. favoured national champions, i. e. large, integrated utilities, rather than creating a market with high Back to core business competition and less market concentration. This, primarily debt financed, expansion led to dramatically weakened balance sheets, rating down- Resumed M&A and privatisation activity grades and lessened confidence from the capital mar- Overall, utilities reported stronger operating profits

Major M&A transactions in the European energy market in 2005

Company Acquisition target Amount Company Divestments Amount Suez 49.9% of Belgian Elec- EUR 11.2 billion RWE British and American EUR 13—16 billion trabel. 100% holding water utilities; Thames (sales not after acquisition Water and American completed) EDF and AEM 80% of Italian Edison EDF EUR 7 billion Water AEM EUR 1.2 bil- E.ON Real estate company EUR 7 billion lion Viterra Dong Danish Elsam, E2, Nesa, not disclosed Enel Telecom operator Wind EUR 12.4 billion Copenhagen Energy Endesa Telecom operator Auna EUR 2.1 billion Vattenfall Elsam 35.3% SEK 10.3 billion 32.7% a e ala a e t2005 0 0 2 rt o rep ual n an fall ten vat Enel 66% of Slovakian SE EUR 840 million Union Fenosa Telecom operator Auna EUR 1.2 billion Gas Natural Bid for Spanish Endesa1 EUR 22.5 billion 18.7% and Iberdrola (not completed) Scottish Pacificorp (USA) EUR 4 billion EDF Motor Columbus 17.3% not disclosed Power EnBW 16.8% of EVN. 30% not disclosed Fortum Oil company Neste oil EUR 1.4 (for 15% holding after acquisition (85% spin-off) sold) Fortum E.ON Finland, 99.8% EUR 744 million EDF Edenor (Argentina) not disclosed

1) On 21 February 2006 German E.ON launched a counter bid for Endesa of EUR 29.1 billion.

16 vattenfall annual report 2005 17 - - Vattenfall’s world: The competition The world: Vattenfall’s capacitybeenhaveandplacedeach player’s in ‘home market’. The circlesTherepresent eachplayer’s totalEuropean generation 1) 1) The expected privatisation wave in Eastern Europe Europe Eastern in wave privatisation expected The Marketposition numberonlyprivatised oneif companies included.are Marketposition numberonlyprivatised iffour companies included.are state-owned Gaz de France (GDF) and Electricité de de Electricité and (GDF) France de Gaz state-owned announced increased supervision with an eye towards towards eye an with supervision increased announced about 80 per cent of the shares in GDF and 85 per cent cent per 85 and GDF in shares the of cent per 80 about in due delayed, been has enlargement EU the after renewed its bill regarding the demerger of the distribu the of demerger the regarding bill its renewed now the only major non-listed power utility in the EU. the in utility power non-listed major only the now operations rationalise to ability the and requirements tion network from the existing players. The timetable timetable The players. existing the from network tion has EU the momentum, gaining is shift structural this through staff cutbacks. Czech CEZ, however, has however, CEZ, Czech cutbacks. staff through for this has been moved from 2007 to 2008. While 2008. to 2007 from moved been has this for in the region. In the Netherlands, the government has government the Netherlands, the In region. the in limiting market concentration. market limiting part to uncertainty regarding regulations, investment investment regulations, regarding uncertainty to part of EDF. The market introduction of EDF was the larg the was EDF of introduction market The EDF. of est initial public offering in Europe in 2005. Vattenfall is Vattenfall 2005. in Europe in offering public initial est grow to ambitions clear has and considerably expanded France (EDF) took place. The French state now holds holds now state French The place. took (EDF) France 1) 1) 2) Onlyheatgeneration. 3) NordictheIn countries. 4) , 7 , SE 1 2 2 3 Fortum,11 - 1 — 7 6 6 - 1 - PPC,12 - - - Poland CEZ,12 3 1 4 3 E.ON,45 Verbund,8 Top 3 Top Vattenfall,33 Edison,10 Germany

4 4 4 1 2 3 4 Enel,45 Statkraft,11 EnBw, 14 EnBw, Top 3 Top Axpo,9 Finland RWE, 44RWE,

4 4 4 1 2 1 4 Nuon,4 Essent,5 Top 3 Top EDF, 114 EDF, Sweden , 4 , Electrabel,28 Drax Endesa,32 British12 Energy, Scottish Power, 6 Scottish Power, Iberdrola,23 UnionFenosa,7 Scottish&Southern,10 While at the same time that utilitiestimethatsamestreamWhilethe haveat EDP, 11 EDP,

Electricity2004,EuropegenerationGW capacity in

sale of major assets to Iberdrola. In 2005, the long- the 2005, Iberdrola.assetsmajorto In of sale standingminority sharesBelgianin Electrabel, EDF Vattenfallassets,andDanish bought power Dong son, a hostile takeover of Endesa in combinationEndesainthewith hostileof takeover a nesses,severalutilitiesas again act began toonce through profitability and growth through acquisitions acquisitions through growth and profitability through to cost-reductions and divestments – have improved improved have – divestments and cost-reductions to from their core energy operations during the year. year. the during operations energy core their from buyers. Several M&A transactionsSeveralbuyers.M&A takenplace have lined their operations by divestinglinedoperationstheirby busi non-core has increased. increased. has Dramatically increased wholesale prices – in addition addition in – prices wholesale increased Dramatically discussed and anticipated public offerings of the French French the of offerings public anticipated and discussed or were initiated.out purchasedwerethe Suez Frenchor cash flow and credit metrics. Pressure from sharehold from Pressure metrics. credit and flow cash enske ElektrarneenskeSpain, NaturalinGas and initiated ers to either raise dividends or to create further value value further create to or dividends raise either to ers Enel acquired a majorityacquiredSlovakiana holdingEnelin Slov finally managed to acquire 50 per cent of Italian of finally Edi cent per managedacquire 50 to Vattenfall’s market positionmarket Vattenfall’s ElectricityGeneration Electricitytrading Distribution Supply Districtheating

Vattenfall’s world: The competition

Comparison of certain European energy utilities (As of 30 September 2005 unless otherwise stated)

Net sales Operating profit (EBIT) Operating margin Operating cash flow

EUR millions EUR millions % EUR millions

Vattenfall Vattenfall Vattenfall Vattenfall E.ON E.ON E.ON E.ON RWE RWE RWE RWE EnBW EnBW EnBW EnBW Dong Dong Dong Dong EDF EDF EDF EDF Enel Enel Enel Enel Fortum Fortum Fortum Fortum Endesa Endesa Endesa Endesa Essent Essent Essent Essent

0 20,000 40,000 0 4,000 8,000 0 7 14 21 27 35 0 6,000 12,000 10,000 30,000 50,000 2,000 6,000 10,000 3,000 9,000 15,000

Vattenfall E.ON RWE EnBW Dong EDF Enel Fortum Endesa Essent

Country Sweden Germany Germany Germany Denmark France Italy Finland Spain Netherlands

Listing Not listed Listed Listed Listed Not listed Listed 2005 Listed Listed Listed Not listed 100% state owned (EDF owns 45.01%) 100% state owned (French state owns 85%) (Italian state owns 32.2%) (Finnish state owns 51.5%) Electricity sales 186 (207 incl. 404 296 100 — 610 158 62 181 (of which Europe 129) 49 2004, TWh deliveries to minority (Of which Europe 356) (258 incl. resellers) owners) Number of Electricity: 6 (incl. Electricity: 22 Electricity: 21 Electricity: 5 Gas: 0.1 Electricity: 42 Electricity: 30 Electricity: 1.1 Electricity: 22 Electricity: 2.5 customers, millions network) Gas: 8 Gas: 10 Gas: 0.4 (of which Europe 36) Gas: 2 (of which Europe 21) Gas: 1.9 Water: 15 Telecom: 1.4 Gas: 0.4 Primary products Electricity, heat Electricity, gas Electricity, gas, water Electricity, gas, water Gas, oil Electricity Electricity, gas Electricity, heat Electricity, gas, water Electricity, gas, heat

Primary markets Nordic Countries, Central Europe, Germany, UK, Central Germany, Central and Denmark, France, UK, Germany, Italy, Italy, (Spain, France, Nordic countries, Spain, Portugal, Netherlands, Germany, Germany, Poland UK, Nordic and Eastern Europe Eastern Europe (Sweden, Germany, Eastern Europe Slovakia, Bulgaria, Baltic States, Russia Latin America, Italy, France Belgium Countries, Russia Netherlands) Rumania) Strategies Five strategic • To Integrate and • Focus on electricity • Be number three • Secure its gas supply • Stabilise ownership • Focus on core energy • Expand in Nordic • Consolidate its position in • Strengthen its core ambitions: strengthen its and gas in its four in German energy structure in its foreign business (water and Countries, Baltic States, Spain and Latin America operations electricity and gas primary regions market • Integrate gas and holdings telecom divested) Poland and Russia • Profitable growth in operations electricity operations • Develop activities in • Selective growth in the the neighbourhood • Divest water • Develop positions in • Divest non-core • Expansion in Eastern • Oil and shipping France and Italy neighbourhood area • International growth area through both • Reinforce its gas operations in UK and Central and Eastern businesses Europe operations separated (Sweden, Germany, • Telecom operations have • Divest non-core M&A and new supply position USA Europe 2005 Netherlands) • Improve productivity • Convert all oil-fired power been divested operations production facilities through own gas • Develop its plants to gas or coal fields and potentially • Invest in gas assets in • To become the strategic alliance LNG order to be able to offer Benchmark for the with EDF customers both electricity industry • Expansion in Russia, Italy and Spain and gas • To become Number

a e ala a e t2005 0 0 2 rt o rep ual n an fall ten vat One for the Customer

• To become Number One for the Environment

• To be the employer of choice

18 Vattenfall’s world: The competition

Comparison of certain European energy utilities (As of 30 September 2005 unless otherwise stated)

Net interest cover EBIT/Capital employed Capital employed Debt/equity ratio, net

times % EUR millions %

0 3 6 9 12 15 0 5 10 15 20 25 0 30,000 60,000 0 40 80 120 160 200 15,000 45,000 75,000

Vattenfall E.ON RWE EnBW Dong EDF Enel Fortum Endesa Essent

Country Sweden Germany Germany Germany Denmark France Italy Finland Spain Netherlands

One for the Customer 5 0 0 2 rt o rep ual n an fall ten vat

• To become Number One for the Rolling 12-month values as of 30 September 2005 for all companies except EDF, Endesa and Essent, which are as of 30 June 2005. Environment Sources: Diagram values: Barclay’s Capital. • To be the employer Electricity sales, Number of customers, Primary products, Primary markets, Strategies: of choice Vattenfall research, annual reports, interim reports and company homepages. Definitions: Total Capital = interest-bearing liabilities + equity incl. minority interests. Operating cash flow = FFO +/— changes in working capital.

19 - - t” i That paid off. Ever since the middle of the 1980s, Forsmark’s Forsmark’s 1980s, the of middle the since Ever off. paid That “Before Forsmark was built, we conducted a benchmarking project project benchmarking a conducted we built, was Forsmark “Before three reactors have delivered far more than was predicted. And now, now, And predicted. was than more far delivered have reactors three mark, Deputy Managing Director of Forsmark. Forsmark. of Director Managing Deputy mark, and saw how others, at the best nuclear reactors in world, worked.” world, in reactors nuclear best the at others, how saw and Vattenfall is investing SEK 6 billion to hone the reactors even further. even reactors the hone to billion 6 SEK investing is Vattenfall duced unit and low environmental impact,” says Claes-Göran Runer Claes-Göran says impact,” environmental low and unit duced The facilities are to be modernised, both with regard to technology technology to regard with both modernised, be to are facilities The “We are among the world leaders, both with regard to cost per pro per cost to regard with both leaders, world the among are “We ndustry i s a world leader, leader, world a s i

ecome the benchmark for thebenchmark forthe ecome B

orsmark orsmark In 2005, availability for the three reactors was almost 93 per 93 almost was reactors three the for availability 2005, In in use, all the trends are positive for Forsmark — a model facility in in facility model a — Forsmark for positive are trends the all use, in Deep down in the reactor pool the heart of Forsmark is concealed: concealed: is Forsmark of heart the pool reactor the in down Deep the nuclear power industry. power nuclear the the reactor. Here, every second, 1,600 litres of water are boiled into into boiled are water of litres 1,600 second, every Here, reactor. the needs. steam for further transport to the turbine. After some twenty years years twenty some After turbine. the to transport further for steam

cent on average and electricity generation almost reached 25 TWh. 25 reached almost generation electricity and average on cent no matter how you look at at look you how matter no to “

That corresponds to more than a sixth of the electricity that Sweden Sweden that electricity the of sixth a than more to corresponds That F

vattenfall annual report 2005 20 and safety. The turbines in the different units, for example, were replaced between 2004 and 2006. An increase in generation capac- Benchmark for the industry: ity is planned to be carried out 2008—2010, assuming the Swedish The Vattenfall Group’s Key Performance Indicators government approves the necessary permit. All in all, these mea- In accordance with our ambition to serve as a benchmark for our sures can result in increased generation capacity corresponding to industry, so-called Key Performance Indicators have been defined more than 4 TWh. for each business unit and, as of 2006, these will be followed up Forsmark is also a leader in environmental issues: the facility was monthly at Group level. the first in the world, for example, to supply electricity with a certi- Generation fied environmental declaration and is also certified in accordance Cost per MW, availability and average sales price with ISO 14001. One key component of the facility’s success is, of course, the staff. Electricity Networks Number of disruptions, operating costs and maintenance The level of expertise is very high among the 800 people working investments

here and many of them have long experience and are highly edu- 5 0 0 2 rt o rep ual n an fall ten vat cated. Sales Eva Pettersson, for example, began as a station technician in Customer satisfaction index, number of customers, cost-to-serve per customer and margin per customer segment 1988. Today, she is one of the country’s few female reactor operators. She is responsible for supervising the operation and safety of Heat the reactor facility. Cost per MW, availability and average sales price “It’s a very special job, but very enjoyable too,” says Eva.

21 Vattenfall’s world: Pricing

Large price differences between regions but higher correlation

In 2005, European electricity wholesale prices rose sharply, mainly due to increased fuel costs and the new trading system for emission allowances. But during the year prices in Europe also exhibited higher correlation.

Electricity wholesale prices are still dependent on transmission capacities between countries are further local production conditions, although price correla- improved, this trend will continue. tions between countries have increased. Previously, water supply was the factor with the Supply and demand determine greatest impact on price development in the Nordic electricity prices countries, as hydro power represents a very large part In a well functioning market, it is market equilib- of power generation. Despite good water supply, in rium, i.e. the point where supply meets demand, that 2005 we saw Nordic electricity prices climb in unison determines the wholesale price. Production facilities with prices in Central Europe as fossil-based power in are taken into operation in accordance with the ‘merit Denmark and Finland from time to time determines order dispatch’ system, which means that the plant prices in the Nordic market. International trade in with the lowest variable costs is the first to be taken coal, oil and gas has contributed to increased covari- into operation. Supply and demand therefore deter- ance, primarily in countries with similar production. mine which type of production is used. Actual price levels still vary between different regions, Competition in the electricity market leads to pric- but prices in the European electricity market are ing based on this wholesale price, which leads to: levelling out to an increasing extent. If cross-border • Effective resource allocation. The most cost efficient

Electricity prices and taxes in Sweden Household electricity prices in Europe

Öre/kWh EUR/kWh 120 0.25

100 0.2

80 0.15 60 0.1 40

0.05 20

a e ala a e t2005 0 0 2 rt o rep ual n an fall ten vat 0 0

1970 1975 1980 1985 1990 1995 2000 2005 Italy EU25 Spain Poland Greece LatviaCroatia Finland France Ireland BulgariaEstonia Sweden Slovenia Austria BelgiumSlovakiaNorway Lithuania Romania Hungary Denmark PortugalGermany ■ Tax + green certificate ■ Electricity ■ Network tariffs Netherlands Czech Republic United Kingdom

20 000 kWh/year, variable prices, in 1990 monetary value ■ VAT ■ Tax ■ Electricity + network tariffs Source: SCB, Svensk Energi Household customers 3,500 kWh/year, January 2005 Source: Eurostat

22 vattenfall annual report 2005 3 2 - - - - - city i Marketplaces electricity on traded is Electricity market. OTC the in or exchanges resellers producers, as such Actors companies industrial large very and exchanges. electricity the on trade produc both are actors major Some both as act and suppliers, and ers electricity the on seller and buyer which market, OTC the In exchanges. actors exchange, the outside is Pric another. one with directly trade reflects often market OTC the in ing electric the regarding expectations The price. wholesale exchange’s ity over electricity of export and import depend place take borders national wholesale in differences the on ing countries. the between prices Localnetwork

End- Vattenfall’s world: Pricing world: Vattenfall’s customers In the Nordic countries and in Germany, extensive extensive Germany, in and countries Nordic the In etwork business needs stable needs business etwork Resellers not suffice to meet demand. meet to suffice not standard contracts. standard sale electricity prices are largely based on the forward forward the on based largely are prices electricity sale and reflects market expectations for future electr future for expectations market reflects and the but demand, and supply of function a as set also the electricity networks, is regulated and supervisedregulatedelectricityand is networks,the trading takes place on the Nord Pool and EEX electri EEX and Pool Nord the on place takes trading exchanges electricity the on place takes also trading so- the on EEX, the outside traded are volumes the by special authorities. From the customer perspectivecustomer the specialauthorities.From by price applies only to the individual contract. Good Good contract. individual the to only applies price whole since crucial is market forward the in liquidity traded EEX On good. is liquidity Pool’s Nord prices. however, there is no price difference between electri between difference price no is there however, regulatory framework regulatory on a par with Nord Pool. In Germany, a large part of of part large a Germany, In Pool. Nord with par a on city exchanges, which set market prices daily. Forward daily. prices market set which exchanges, city practice, In market. Counter) The (Over OTC called long-term for prices OTC and prices exchange city N Network business, i.e. the transport of electricitytransportin of the business,i.e. Network volumes and liquidity have increased, but are still not not still are but increased, have liquidity and volumes wholesale prices. In the forward market, the price is price the market, forward the In prices. wholesale “expensive” price, as the low cost productiondoescost low the asprice, “expensive” Ownsales units Othersales companies Sales Privatepersons andindustries signdelivery agreements withthe differentactorssalesthe atstage. Pricesregulatedare variousvia typesagreementof between sales companiesandcustomers. - - - -

Regionalnetwork Distribution Regionalandlocal electricity networks transport electricity end-to customers.Vattenfall andotherlarge players sharemarketthe with regionalandlocal network companies. networksThe shalloperatedbe by separatelegalentities, regardless majorownedaretheybypower if utilities, municipalitiesotherorplayers. As the price is set for for set isprice the As If all electricity sellers are are sellers electricity all If Marketpricing Marketplaces (Electricity ex- (Electricity Marketplaces As the variablethevarycosts As changes, OTC) Export/Import OTC) changes, Electricitytrading Vattenfallandotheractors sellelectricity marketplacesvia salestocompanies or majorresellers.to certainA portion of Vattenfall’sgeneration goesdirectly to Vattenfall’ssalesunits. priceThepaid salestheunitsby determinedis thein marketplaces. A prerequisite for a well-funca prerequisite for A Nationalgrid lear signals for future investments.future for signalslear Vattenfall Generation sellers, which have access to power sources with low low with sources power to access have which sellers, a “cheap” price and which customers should get ancustomers getwhichshould andprice “cheap” a riskingmarketmanipulation. requiresMarginalit. pricingensures everyelecthat tricity sellers compete on equal terms, regardless how how regardless terms, equal on compete sellers tricity electricity prevents This generated. is electricity the tioning market is that all bids are anonymous.thistioningareallthatIfbids marketis tricity generation plant covers – at least – its variableits – least at tricity – generationcoversplant between different types of production, it would be would betweendifferentproduction, it types of production assets to abandon the market. the abandon to assets production paid the same price in a transparent system, the elec the system, transparent a in price same the paid power sources are taken into operationfirsttakeninto sourcesare and power more expensive power sources only when demandwhensources only expensive power more generationcosts. difficult determine to customersget should which Fair pricing for consumers.pricingfor Fair All players get the same price. same the get players All Increasedtransparency. variable cost, from dumping electricity prices. Other prices. electricity dumping from cost, variable variable costs could “guess” other producers’ costs,producers’other variable “guess” couldcosts wise this could force sellers without own electricity electricity own without sellers force could this wise was not the case, an electricitycase,an thelow with producernot was signal as to whether futurewhethersignalinvestments toeconomi are as the lastgenerationutilised,the clear a generatorsreceive callyviable. Vattenfall and the electricity value chain value electricity the and Vattenfall • • • C • •

Distribution chain Distribution national grids in Eastern Germany and the Hamburg region.Hamburg the and GermanyEastern in grids national Transmission networkshigh-voltagelarge the are grids national The longer electricityover of volumes transportlarge that state-ownedpart most the for are grids Nationaldistances. they Germany in whilePoland, and countries Nordic the in owns electricity companies.Vattenfall the by owned are fuelandsmaller proportions windof biofuelpower, andwaste.Vattenfall’s generationconsists powerhydroof nuclear(23%), andfossilpower(35%) fuel(42%). Generation generationThe electricityof from nuclearpower,hydro fossilpower,

Italy

Germany

Portugal

Ireland

Norway

Slovakia

Belgium

Netherlands

Austria

United Kingdom United

Denmark

France

Spain

Slovenia

Hungary

Sweden

Finland

Croatia

Czech Republic Czech

Latvia

Romania

Greece

Lithuania

Poland

Estonia

Bulgaria EU25 Vattenfall’s world: Pricing

it is important that the regulatory models provide sta- allowances, which in turn led to higher electricity ble conditions. Returns on capital must be sufficient prices. to provide incentive for maintenance and new invest- As there is a market price for emission allowances ments. (Different regulatory models are described on (regardless if the emission allowances have been pur- page 14.) chased or received free of charge), electricity producers must include this as an opportunity cost. The Emission allowances affect electricity prices emission allowance is either used to generate electric- Trading in emission allowances has functioned ity, which creates emissions, or sold in the market. As well, but prices have been higher than most ana- more players become involved in the selling of emis- lysts expected. The average price in 2005 was 16 sion allowances, prices will be moderated and even- EUR/tonne with a peak of about 29 EUR/tonne in tually stabilise. However, uncertainty about which July. High oil and gas prices during the year led to allocation principles will apply to the next trading increased use of coal in electricity generation. This period, 2008–2012, is great, and it is therefore difficult increased demand for – and the price of – emission to make any reliable price forecasts.

Electricity price development

Spot price development Forward price development In 2005, average base-load spot prices on the Nordic electricity In the Nordic countries, forward contract prices