Common European Energy Market 2011

The Common European Energy Market

Electricity, gas and heat

Vattenfall AB (publ)162 87 Stockholm, SwedenVisiting address: Sturegatan 10

T +46 8 739 50 00

For additional information, please visit www.vattenfall.com

A book from Vattenfall AB

Cover: Paulina Westerlind Illustrations: Svenska Grafikbyrån Photographers: Paulina Westerlind, Mikael Svensson, Anders Modig, Vattenfall, Nuon, iStockphoto, Johnér

About Vattenfall Vattenfall is one of Europe’s largest electricity generators and its largest heat producer.

Vattenfall’s main products are electricity, gas and heat. In the areas of electricity and heat, Vattenfall works in all parts of the value chain: generation, distribution and sales. In the gas area, Vattenfall is primarily active in sales. Vattenfall is also engaged in energy trading and lignite mining.

The Group has approximately 34,700 em-ployees. The parent company, Vattenfall AB, is wholly owned by the Swedish state. Core markets are Sweden, Germany and the Netherlands. During 2011 operations were also conducted in Belgium, Denmark, Finland, France, Poland and the UK.

Key facts and figures 2011

• Net sales: 20.25 billion EURi • Operating profit: 3.2 billion EURii

• Total assets: 58.68 billion EUR• Electricity generation: 166.7 TWh• Heat sales: 41.6 TWh• Gas sales: 53.8 TWh• Total number of employees 34,685iii

• Customers as of 31 December 2011: 7.7 million electricity customers, 2.2 million natural gas customers and 5.7 million electricity grid customers

i) Exchange rate used is 1 EUR = 9.554 SEK ii) Excluding items affecting comparability iii) FTE (Full Time Equivalents)

Foreword

Foreword The energy issue cuts across many aspects of our modern society, from industrial competitiveness and private economy to climate change and other environ-mental issues. It is therefore natural that there is a considerable degree of interest in what today’s energy system looks like and how tomorrow’s energy system should be designed.

Vattenfall’s publication on our six sources of energy – biomass, coal, hydro, natural gas, nuclear and wind power – was quickly accepted as a valued source of information. But the energy system as a whole is com-prised of a long value chain stretching from the energy source to final consumer delivery. In order to provide a comprehensive picture, there was a need for a follow-up publication describing what happens following the production stage. We are now filling that need, by providing a detailed description of wholesale markets, transmission and distribution system construction, energy market operation and the delivery of electricity, gas and heat to consumers. We also provide a historical review and a section on transmission and distribution systems of the future.

Our aim is to give readers an overall understanding of how the energy system functions in order to promote further discussion and debate on energy issues.

The energy sector faces many challenges. How do we secure the investments that are needed to meet expectations for reduced CO

2 emissions and continued

security of supply? How can consumers be allowed the greatest opportunity to control their consumption and costs? Where are the bottlenecks in transmission and distribution capacity and how does this affect market operation? All of these issues are relevant to individual households and to society as a whole.

A key element is the ongoing integration process of European energy markets. The integrated and competitive European electricity market will benefit all consumers through greater cost efficiency and better resource utilisation. This will be particularly important as we approach the time when a large part of the European electricity production capacity will need to be replaced.

It is crucial that Vattenfall – as an energy market actor – keep a close eye on developments, and to do this we need to have a well-functioning public dialogue. Needless to say, we cannot deliver all the answers on our own. We need partnerships with all stakeholders, because all of our stakeholders have a role to play. The investment decisions we make today will remain with us for decades. This makes it extra important that the regulatory landscape facilitates the necessary investments.

I hope you find this book interesting. Please visit our website for further information: www.vattenfall.com.

Øystein Løseth

CEO and President, Vattenfall

Table of contents

Introduction

The Energy Triangle ...................................................................9

Competitiveness ..........................................................................10

Security of supply ....................................................................... 11

Climate and environment ........................................................ 12

An energy system in balance................................................. 13

Summary ....................................................................................14

The Energy System – Electricity, Gas and Heat

The Electricity Market ...........................................................20

The Gas Market ........................................................................22

The Heating Market ................................................................24

Summary ....................................................................................26

Historical Background – Electricity, Gas and District Heating

Development of Electricity...................................................30

Milestones in the history of electricity ............................. 30

Development of electricity grids ..........................................32

Development of a European electricity market ........... 34

Development of a Nordic electricity market .................. 36

Development of a German electricity market ............... 38

Development of a Dutch electricity market ................... 39

Development of Gas ...............................................................40

Development of gas in the Nordics .................................... 40

Development of gas in Germany ..........................................41

Development of gas in the Netherlands ...........................41

Development of District Heating .......................................42

Development of district heating in Sweden ....................42

Development of district heating in Germany ..................42

Development of district heating in the Netherlands ..42

Summary ....................................................................................44

From Energy Source to Consumer

Energy Sources .......................................................................48

Biomass............................................................................................ 49

Coal power ..................................................................................... 49

Hydro power .................................................................................. 50

Natural gas ..................................................................................... 50

Nuclear power ...............................................................................51

Wind power .....................................................................................51

Electricity ..................................................................................52

How is electricity transported and distributed? ...........52

Overhead or underground power lines ............................ 54

How does the electricity market work?............................ 56

Vattenfall and electricity ........................................................ 64

Gas ...............................................................................................66

How is gas distributed? ............................................................ 66

How does the gas market work? .......................................... 66

Vattenfall and gas .......................................................................72

District Heating ....................................................................... 74

What is district heating? ...........................................................74

Combined Heat and Power plants .......................................74

How does district heating work? ..........................................75

Vattenfall and district heating ...............................................78

Summary ....................................................................................80

Electricity Grids and Markets of the Future

Future Challenges for the Energy Market .......................84

Conversion towards a sustainable energy system ... 86

Guaranteed energy security .................................................87

An integrated and interconnected market .................... 89

A more integrated grid.............................................................. 90

How can we reduce transmission losses? ....................... 90

Smart Grids ...............................................................................92

What are smart grids? ................................................................93

Energy storage – future possibilities ................................ 94

How are consumers affected? ............................................. 95

Everyday Energy Efficiency .................................................96

One Tonne Life ............................................................................. 96

Summary ....................................................................................98

Glossary .................................................................................. 100

Informationsplattform

7INFORMATIONSPLATTFORM

The Common European Energy Market

Page 8 Page 16

Page 46Page 28

Page 82

Infrastructure systems for energy are integral to the economy. A well-functioning energy market is a prerequisite for the efficient consumption of resources with competitive prices.

Introduction

THE COMMON EUROPEAN ENERGY MARKET8

Introduction | The Energy Triangle

Meeting society’s energy needs requires balancing three key dimensions: competitiveness, security of supply, and climate and environment. In other words: How much are we prepared to pay for our energy? How much energy does society need? And what impact on the environment are we willing to accept? This energy triangle can be used to illustrate the pros and cons of each energy source, and also to demonstrate how transmission and distri-bution systems – which transport energy to end users after conversion – and markets for electricity, gas and heat-ing contribute to the different dimensions.

Infrastructure systems – such as grids and pipelines – for different types of energy are one of the most crucial elements of a society’s infrastructure. Electricity, gas and heat flow through large networks and pipelines and are distributed through progressively smaller branches, similar to the way the body’s blood is pumped from the heart to the major arteries and on to smaller blood vessels.

The Energy Triangle

9THE COMMON EUROPEAN ENERGY MARKET

Climate and environmentReduced environmental and climate impact is a goal in the supply of electricity, gas and heat. Infrastructure for electricity, gas and heat has an impact on the local environment – such as

constructing power lines and pipelines – but is also important for minimising transmission and distribution losses. The expansion of the distribution system is in turn an important measure for

bringing the advantages of an increased share of renewable production to consumers.

CompetitivenessEnergy is fundamental for all economic activity, and thus to human welfare and progress. Competition benefits society by eliminating

excess capacity and pushing down operating and maintenance costs. A well-developed, functioning energy market is a vital requirement for

achieving competitiveness and thus affordable energy.

Security of supplyFuel shortages and unreliable energy supplies create major problems for societies and economies. In order to provide a high level of security

of supply in the energy system, it is necessary to both manage variations in production capacity - resulting from an increased share of renewable energy sources - and to guarantee a reliable supply of

electricity, gas and heat.

Climate and environment

Security of

Supply

Competitive-ness



Competitiveness

Energy is a fundamental input to economic activity, and thus to human welfare and progress. Historically, energy costs have steadily declined, which means that tasks that were previously performed by people could be performed by machines and become increasingly auto-mated. Competitiveness is not only a matter of cost, but also of value for consumers and society. Today’s energy systems help create added value for consumers through their overall reliability and efficiency.

The management of energy costs is also a key competi-tive issue for businesses, particularly those exposed to international competition. The cost of electricity and heating is often also an essential part of the cost of living. It is therefore important to offer affordable energy prices to consumers. Neither should we underestimate the significance of energy costs for

many public services, such as health care facilities and public sports grounds. It is important that overall energy costs are as low as possible given the available resources.

Competitive energy markets benefit society by elimi-nating excess capacity and pushing down operating and maintenance costs. Much of the old generation production capacity in Europe needs to be replaced in coming decades. Market competition will ensure that investments in new capacity are cost-effective – to the benefit of society, consumers and, of course, the environment. Protecting the environment costs money and, since public resources are limited, measures should be as cost-effective as possible.



Security of supply

Access to energy is one of society’s fundamental pre-requisites. It is hard to imagine what our lives would be like if we had no electricity to power our appliances or heat to warm our homes in the winter. Infrastructure for electricity, gas and heat therefore needs to be reliable and capable of continuously delivering energy when and where it is needed. This – along with the ability to guarantee gas delivery and the availability of fuel used for electricity and heat production – is normally termed security of supply.

Security of supply thus entails guaranteeing both the availability of fuel and the reliable, virtually constant delivery of energy. This presents political and techno-logical challenges. Today, options for storing electricity are limited – this means that a balance must constantly be struck between production and consumption. At any given time, the amounts of electricity produced and consumed in the grid are identical. This imposes high demands for security of supply in electricity production. In both the short and long term, investments will be needed in infrastructure and power plants.

To meet society´s basic electricity demands, we need power plants that can produce even quanti-ties of baseload power as well as balancing power that can be adjusted to variations in short-term demand. Baseload power is essentially comprised of nuclear power, fossil-based power, biomass in combined heat and power plants and – to some extent – hydro power.Many renewable energy sources, such as wind and solar power, are intermittent. They contribute to the electricity production mix, but cannot function as baseload power.Solar cells and wind turbines, for example, produce energy only when the sun shines or the wind blows. To handle ups and downs in electricity demand, we there-fore need access to energy sources that can be quickly converted to produce more or less electricity. Natural gas and hydro power allow a high degree of flexibility in electricity generation, enabling them to function as balancing powers.

Ongoing research projects are studying ways to develop electricity grids and equip them with more extensive storage capacities and technologies to control and adjust electricity consumption to fluctua-tions in generation (smart grids). This will hopefully produce networks that are more reliable and will reduce dependence on balancing power to compensate for uneven generation from renewable energy sources, improving the electricity system’s security of supply as a whole.




Consideration of the climate and environment is some-thing the energy system must be equipped to deliver on. Two overall goals must be addressed – environmen-tal targets and sustainability targets. Emissions rights trading is one example of the way market-based instru-ments help stimulate investment in production methods that emit low levels of CO

2. Other methods include the

increased usage of coal power with Carbon Capture and Storage (CCS).1

Electricity certificates (used in Sweden and Norway) and feed-in tariffs are the two most common methods of creating incentives for increasing electricity produc-tion from new renewable energy sources. The electri-city certificate system is also market-based. The state allocates certificates to renewable electricity producers for every MWh produced. Electricity retail companies must in turn buy a certain number of certificates in pro-portion to how much electricity they sell (quota require-ment). Electricity producers receive extra income when they sell their electricity certificates to retailers, so it is more attractive for them to invest in new renewable

energy (e.g., wind power, certain types of hydro power and biomass, solar energy, geothermal energy, wave en-ergy and peat power generation), and the cost of these energy sources is decreasing. For ordinary consumers, the cost of electricity certificates is included in the to-tal price, making it easier to compare prices at different companies.

Feed-in tariffs, on the other hand, guarantee producers of renewable electricity a certain amount of compen-sation for each MWh of renewable electricity they feed into the grid. This is paid by the network company, who charges this cost to consumers.

To meet these two important targets we need well developed infrastructure. In terms of infrastructure for electricity, gas and heat, this involves impact on the lo-cal environment – such as constructing power lines and pipelines – and minimising transmission losses. Quite often, remote (e.g., offshore) locations are those best suited for renewable energy production. In the absence of an expanded grid, it will be impossible to transport electricity produced in these locations to consumers.



An energy system in balance

Achieving cost-competitiveness, securing supply and minimising the energy system’s impact on the climate and environment require some trade-offs. Improving one dimension of the energy system often entails making sacrifices along another dimension. For instance, sour-cing cost-competitive energy may increase a country’s dependence on unstable energy imports, and using fossil fuels to improve security of supply will have a negative climate impact. And managing environmental impact frequently entails increased costs. ”Win-win-win” solutions do exist, particularly in terms of improved energy efficiency. Technological developments and im-proved electricity network design will deliver even more. Finding the balance between these three dimensions is ultimately a societal and political decision.

Physical access to energy is one important aspect of the energy system – but without functioning energy markets, consumers and industries will be unable to utilise the energy they need in the required form.

Functioning energy markets also create conditions for competitive prices, especially in times of increasingly scarce resources. This document therefore places great emphasis on the ways the markets for electricity, gas and heating (particularly district heating) operate. Furthermore, electricity, gas and district heating overlap in certain areas. For example, electricity can be used for heating and, increasingly, to power vehicles; gas can be used to produce electricity and district heating, as ve-hicle fuel and as a direct energy source for households and industries for cooking and industrial processes.

The first section of the book briefly describes the infrastructure systems and markets for electricity, gas and heating. This is followed by a historical review and a more detailed review of the chain that starts at the energy source and ends in the consumer’s home. Finally, we take a closer look at the challenges facing infrastructure systems and energy markets.

Introduction | Summary


Summary

• Meeting society’s energy needs requires balancing three key dimensions: competitiveness, security of supply, and climate and environment.

• Energy is a fundamental to economic development, and thus to human welfare and progress.

• Infrastructure systems for different types of energy constitute one of the most crucial elements of a society’s infrastructure.

• Competitive energy markets benefit society by eliminating excess capacity and pushing down operating and maintenance costs.

• Infrastructure for electricity, gas and heat needs to be reliable and capable of continuously delivering energy when and where it is needed.

• Consideration of the climate and environment is something the energy system must be equipped to deliver on.

• Without functioning energy markets, consumers and industries will be unable to utilise the energy they need in the required form.

1 To read more about EU policies please visit http://ec.europa.eu/clima/policies/

Footnotes - The Energy Triangle


15THE COMMON EUROPEAN ENERGY MARKET 15THE COMMON EUROPEAN ENERGY MARKET

On Europe’s energy markets, three types of products are of primary interest to the end consumer: electricity, gas and heat.

The Energy System –Electricity, Gas and Heat



The Energy System


A modern energy system can be viewed as a value chain starting at the energy source – wind, water or coal, for instance – and ending with end use. In order to be able to utilise the energy stored in various types of energy sources, the energy must be converted into an energy carrier. An energy carrier is a substance or pro-cess used to store and/or transport energy. The most common energy carriers are electricity, gas and oil, and also hot water in the district heating networks.

Following the conversion process, the energy carrier is transported through a distribution system to the end user. The end use of energy is normally divided into three sectors: industry, transport and residential. All primary energy cannot be utilised. Much is lost during conversion and distribution, so final consumption in the energy system is lower than the amount of energy

supplied by energy sources at the beginning of the value chain. Approximately two-thirds of the total en-ergy input is utilised in final consumption. Much of the research within the energy sector focuses on increas-ing transmission and distribution efficiency to reduce energy losses.

In addition to physical power plants and the transmis-sion and distribution systems that transport energy to end users, the energy market also includes financial institutions. The various electricity retail companies and power exchanges are examples of financial actors on the electricity market. End users come in contact with electricity, gas and heating retail companies as well as local distribution companies that own the physical distribution system.

The Energy System – Electricity, Gas and Heat

Electricity

Industry (22%)

Energy sources

Renewables(10%)

Nuclear power(14%)

Fossil fuels(76%)

Energy carrier End user

Other sectors (50%)

Transport (28%)

Heating

19

,23

6.0

TW

h1

3,4

32

.7 T

Wh

Fuel

Conv

ersi

on lo

sses

er

si

From energy source to end user - EU’s energy system

Source: IEA, World Energy Outlook, 2009

The Nordics (TWh)

Germany (TWh)

The Netherlands (TWh)

23.9

104.0271.9 119.1

740.2 495.6

337.448.6

129.1

The Energy System


Electricity, gas and heat usage

HeatGasElectricity

The illustration shows final energy

usage of electricity, gas and heat

in the Nordics, Germany and the

Netherlands. Gas is used in both the

end-use stage and as fuel for elec-

tricity production; total gas usage is

therefore greater than that shown in

the illustration.

Data provided in TWh.Source: IEA Statistics, 2009

The Energy System | The Electricity Market


The Electricity Market The electricity market is comprised of different sec-tions, from producer to consumer. One important part is the wholesale market, which includes power exchanges – Nord Pool1 in the Nordic regional market, EPEX2 in Germany and APX-ENDEX3 in the Netherlands. In these exchanges, producers meet suppliers and consumers and the market prices of electricity are established. An electricity producer is responsible for generating electricity from the energy source – coal, hydro or nuclear power, for example. Network companies own a particular regional or local network and are responsible for trans-porting electricity from producer to end consumers. These companies are paid for the transport of electri-city, and are responsible for ensuring that this can be

done reliably and as efficiently as possible. Electricity retail companies buy electricity via the power exchanges or directly from the producer and sell it to end consum-ers. These companies may also be owners of production capacity, in which case they play a more prominent role in the chain.

People can choose their electricity supplier just as they choose the brand of car they drive. But just as they are unable to choose a road construction contractor, they are unable to choose their network company. The main reason for this is that, for practical and cost-related reasons, there is only one electricity grid – just as there is only one road system.

The Energy System | The Electricity Market


Electricity bill

Electricity price

Grid fees

Energy tax

& VAT

Elec

tric

ity c

onsu

mer

s

Electricity generation

Power exchange

Transmission grid

≤ 1 5 0 k V

≤ 1 5 0 k V

Electricity wholesale

Electricity retail

Transmission

Distribution

Electricity retail company

< 4 0 0 k V

< 5 0 k V

Commercialproperties

Industries≤

DSO

TSO

k V

Regional network

Local network

Households

Electricityproducer

Electricity producer – Produces electricity in power plant(s) – e.g., coal, hydro, nuclear and wind power plants – and then sells it to the electricity market. Power exchange – Producers meet suppliers and customers and the market price of electricity is established.Electricity retail company – Buys electricity from electricity producer on the power exchange for resale to end users. Transmission System Operators (TSOs) – A TSO is entrusted with transporting energy on a national or regional level. Large volumes of electricity are distributed through the high voltage transmission grid (220 - 400 kV) over long distances.Distribution System Operators (DSOs) – A DSO owns a specific local low or medium voltage network and is responsible for the distribution of electricity from producer to end user. Similar to a freight company. The transmission grid branches off into regional (70 - 150 kV) and local networks (less than 50 kV) which distribute electricity to end users. Voltage levels in the transmission grid vary between countries; the range cited above applies to Sweden, Germany and the Netherlands.Electricity bill – Includes electricity consumption and distribution costs, as well as fees related to renewable electricity production subsidies, VAT and taxes.

Overview of the electricity market

The upper arm of the illustration shows the contract chain of the electricity market - i.e., the sale of electri-city from producer to consumer. The lower arm shows the physical transmission and distribution of electricity, from producer to consumer.

The Energy System | The Gas Market


The Gas Market

Gas includes both natural gas and biogas, though natural gas is still predominant. Natural gas deposits are formed where gas is trapped in the earth´s crust. It is formed under the same conditions as oil and is therefore often found in the same places. Biogas, on the other hand, is a gas produced by the biologi-cal breakdown of organic matter in the absence of oxygen. Shale gas – a type of natural gas that is often referred to as “unconventional” gas – is natural gas extracted from shale. Reserves containing shale gas are usually found a few kilometres below the earth’s surface. The gas is extracted by “fracking” - a com-bination of small explosions, high-pressure water and chemicals that creates cracks in the ground through which the gas can be extracted. Since Europe has large shale gas resources, use of shale gas would allow Europe to decrease its import dependency from other parts of the world. To date, production remains on an experimental level in Europe.

Gas is produced by gas producers around the world. The gas is transported from extraction site to distri-bution networks via transmission lines. If natural gas deposits are too far away from end users, or if it is too difficult to build a piping system for other reasons, the gas is converted to liquid form, Liquefied Natural Gas (LNG), and is transported by tanker. Gas transported in pipelines is a fairly regional product while LNG is an international commodity.

The network owner is responsible for transporting the gas by pipeline from source to consumer. This is an important function – the network owner must ensure that the pipeline system is safe, reliable and efficient. The storage owner owns a facility that stores natural gas for market actors, and the system administrator has overall responsibility for maintaining a balance between gas feed-in and withdrawal. Gas consumers are everything from industries to private households.

The Energy System | The Gas Market


These consumers enter into contracts with suppliers and network owners. Since trade in gas is competitive, consumers are able to choose their gas supplier (gas trading company). The gas supplier is engaged in the gas trade, selling and delivering gas to consumers.

As on the electricity market, gas market network operations (the transmission or transport of gas) – are regulated as a natural monopoly. Network owners therefore have exclusive rights within their geographic areas, so they can achieve economies of scale.

Network companies are required to provide access to their network to all suppliers.

Electricity generation is one of the primary application fields for gas. Another significant application field is district heating production. Natural gas is used as a fuel by district heating plants to heat the water that is used in the district heating network. Combined Heat and Power (CHP) systems are finding applications in com-mercial, industrial, and even residential settings. CHP utilises more of the energy contained in natural gas than does a simple gas turbine for electricity genera-tion, thereby improving energy efficiency and requiring less energy to start with.

Gas exportGProcessingplant

Storage

Drilling rig

Commercialproperties

Industries

Storage

Households

Drilling rig

Drilling rig

Transport

Transport

Overview of the natural gas value chain

Natural gas is extracted from oil or gas deposits. Before the gas can be used as energy, it must pass through a processing plant where undesired substances are separated out. After processing, the gas is transpor-ted through pipelines – or converted to liquid form and transported by tanker – to the end user.

The Energy System | The Heating Market


The Heating Market

Options for heating homes and offices include gas, electricity, oil, heat pumps, pellet burners and geother-mal energy. Consumers are therefore able to choose between different types of heat sources. District heat-ing is one such alternative and is particularly suitable for areas with densely built housing. District heating is a system for distributing heat generated in a cen-tralised location for residential and commercial heat-ing requirements. One precondition for using district heating is connection to a district heating network. Traditionally, these networks mainly supplied heating to urban areas; as district heating has become an increasingly attractive heating alternative, the network has also been extended to smaller towns. Thanks to this

expansion, waste heat from industries and heat from Combined Heat and Power (CHP) plants can be used more efficiently. The simultaneous production of heat and power is the most efficient way of converting energy to heat. CHP requires approximately 30 per cent less primary energy than split power and heat generation.

District heating operations differ from other energy markets. The major difference is that the scope of district heating is nearly always well-defined within local boundaries. Due to its geographically limited area, district heating is operated as a local monopoly with integrated distribution, trade and, in many cases, production.



Households

Heated waterThe hot water is directed from the district heating plant to houses via a closed piping system

Cooled waterThe cooled water returns to the district heating plant to be reheated

Biomass transportedto district heating plant

Industries

CommercialpropertiesC

Ttp

Waste heat

District heating distribution – from energy source to consumer

There is only one supplier in a district heating network – so consumers are not able to switch suppliers. If a consumer wants to switch district heating supplier, the only option is to move and connect to another network or switch to another heat source. In recent years there has been much discussion about opening up access to the district heating network to actors other than district heating companies, with the aim of creating local com-

petition and allowing consumers to choose from among different suppliers. The introduction of such third-party access to the district heating network would, for instance, allow waste heat suppliers to access the actual distribution network and sell heat directly to consumers.

A variety of energy sources – including biomass, waste and natural gas – can be used as fuel in a district heat-ing plant. Biomass is used in the above illustration as an example.

The Energy System | Summary


Summary

• A modern energy system can be viewed as a value chain starting at the energy source and ending with end use.

• In order to be able to utilise the energy stored in various types of energy sources, it must be converted into an energy carrier, e.g., electricity, gas, oil or hot water.

• The electricity market is comprised of different sections, from producer to consumer. One important part is the wholesale market, which includes power exchanges. On the power exchange, producers meet suppliers and consumers, and the market price of electricity is established.

• Gas includes both natural gas and biogas, though natural gas is still predominant. As on the electricity market, gas market network operations (the distribution or transport of gas) – are regulated as a natural monopoly.

• Various options for heating homes and offices include gas, electricity, oil, heat pumps, pellet burners and geo-thermal energy. Consumers are able to choose between different types of heat sources. District heating is one such alternative, particularly suitable for areas with densely built housing.

• Due to its geographically limited area, district heating is operated as a local monopoly with integrated distribu-tion, trade and, in many cases, production.

1 To read more about the power exchanges please visit www.nordpoolspot.com2 To read more about the power exchanges please visit www.epexspot.com/en/3 To read more about the power exchanges please visit www.apxendex.com

Footnotes - The Energy System



Energy has been a scarce resource throughout human history. The quest for a secure supply of competitive and environmentally efficient energy sources and energy carriers has been in constant focus.




Historical Background | Development of Electricity


Development of Electricity

Many innovations have transformed society, but few as much as electricity. Over the past 200 years, techno-logical advances such as electricity and the internal combustion engine have altered and improved the way we use energy, laying the foundation for today’s societies, industries and transport methods. This trend gained momentum in the late 1800s as electricity began to be used in industrial processes for lighting and heating. Today, electricity is a basic requirement for modern society, and the vast majority of people regard electricity as matter of course.

Historically, electricity, economic development and tech-nological innovations have interacted to spur on a long chain of advances. In the early 1900s, electrification was dependent on major financial investments. Today, a competitively priced, reliable supply of electricity is a prerequisite for economic growth.

Electrification had an impact on industry and working conditions. When electric lights were introduced, people could rearrange work shifts and work round the clock, not only during daylight hours. Production could thus be significantly increased and there were more jobs for more people, albeit with tougher work hours.

Transporting energy also became easier and more efficient – industries that were previously powered mechanically by hydro power could move farther from the energy source. Heavy, slow work processes could be streamlined. Electrification was thus a major driving force in economic and technological development.

Electrical generation became more profitable with these advances. Meanwhile, as the distance between energy source and industries increased, there was a growing need for transmission capacity and high voltage lines.

The trend gradually moved towards increasingly large and increasingly integrated electric systems – from having a power station in each building, to having a few in each city, to connecting national electricity produc-tion to a large system. The next major step is the integration of the entire European electricity market and reorientation of the grids to small scale production in order to distribute renewable electric energy.

Milestones in the history of electricity

Early technological breakthroughs

A number of necessary technological breakthroughs preceded the advancement of the industrial use of electricity. With his 1752 kite experiment, Benjamin Franklin demonstrated the relationship between light-ning storms and electricity. Lightning strikes were a common cause of household fires at that time – Frank-lin solved this problem by inventing the lightning rod.

One of the most important inventions in the history of electricity was the first battery – the galvanic cell, also called the voltaic pile – invented in 1800 by Italian physicist Alessandro Volta. The unit indicating electricpotential energy per unit charge – volt – is named after




Volta. In 1820, H.C. Ørsted from Denmark established that electrical current generates a magnetic field.

Michael Faraday defined Faraday’s Law of Induction, stating that if an electric current can be the source of magnetism, the reverse should also be true. In 1821, Faraday invented one of history’s greatest technologi-cal breakthroughs: the electric motor. The first light bulb was presented by Thomas Edison in 1879, the same year that the first commercial power station was put into service in San Francisco, USA.

Once electricity’s development was well under way, several advances followed in quick succession. In the 1890s, electricity began to be used in private homes, in most cases by affluent people who had the means to invest in the latest technology. Electrification was primarily spurred on through economic development. But there was stiff resistance towards and scepticism of the new technology in many areas, and it took many years to build the planned power plants. The transport of electricity over distances exceeding a few kilometres was still a rare occurrence, and this also served to limit expansion.

By this time, lighting was the only true field of applica-tion for electricity. Electricity also faced fierce com-petition from gaslights and paraffin lamps. In Sweden, Germany and the Netherlands, electric lights began to be used on a limited scale. The first practical use of electric lighting in Sweden was in 1876. The carbon arc light was the first commercially successful form of electric lamp and was installed in sawmills to facilitate timber sorting in waning daylight hours. A few years later, in 1881, the installation of a lighting system in a Dutch factory attracted considerable attention from other companies that also wanted electric light – giving rise to the idea of a shared power plant. Amsterdam eventually became the first municipality in Holland with its own electricity supply.

The light bulb was first introduced in Sweden in the 1880s, and the new technology spread to the large cities and selected industries. Advances in Germany were more rapid in many areas. Outdoor lighting was in-stalled in Berlin along Leipziger Strasse and Potsdamer Platz in 1882. Two years later, in 1884, the first com-mercial energy company was founded by the German Edison Association.

Thomas Edison, inventor of the light bulb.

Key dates in the development of electricity

Benjamin Franklin invents the lightning rod

1752The first battery invented by Italian Alessandro Volta

1800Electromagnetism discovered by H.C. Ørsted

1820Invention of the electro- magnetic telegraph

1821



Development of electricity grids

There was no extensive network for transporting elec-tricity in the late 1800s. Those wanting to take advan-tage of the new technology obtained their own small power plant, often steam-driven. Some major industries used hydro or coal power. This type of plant could light a short stretch of road or an industrial building. Progress was also made in electricity transmission, and with time, power could be transported over longer dis-tances without excessive losses. The first transformers were installed and the three-phase system – a long-range electricity supply breakthrough that became the dominant system – was developed. This trend conti-nued through the early 1900s, and the electricity grid

Generators at Porjus hydro power plant in northern Sweden.

Faraday invents the electric motor

1821Light bulb invented by Thomas Edison

1879First factory lighting instal-led in the Netherlands

1881Outdoor lighting installed in Berlin

1882

branched out into increasingly larger systems as power plants became larger throughout Europe.

By 1921, a connected electricity grid extended from Nancy, France via Switzerland to Milan, Italy – a dis-tance of about 700 kilometres. Transmission technology had begun to develop in earnest, although it did face challenges. A supervisory body for transmission lines was needed, and the International Union of Producers and Distributors of Electrical Energy (UNIPEDE) was founded in 1925. The organisation was comprised of representatives from the Italian, French and Belgian power industries.



Establishment of first commer-cial energy company in Germany

1884Idea of a European network is born

1929First commercial HVDC pipeline is opened

1954Ågestaverket, Sweden’s first nuclear power plant, is opened

1963

Technological innovations were developed, such as cables for long distance power transmission and interconnection of power grids with different voltages. Vattenfall was first in the world to introduce 380 kV AC in the 1950s, along the Harsprånget-Hallsberg route in Sweden. The first commercial HVDC installation (High Voltage Direct Current, which produced fewer losses than traditional AC engineering) was constructed in Sweden in 1954. This technology had a major, global impact on the power transmission field and enabled increased, more efficient transmission capacity. A large number of transmissions with HVDC cables went into operation between the Nordic countries and later be-tween the Nordic region and Europe. The Baltic Cable between Sweden and Germany and the SwePol Link between Sweden and Poland are two such examples. Synchronised electricity grid

An integrated electricity market presented some technological challenges, primarily due to the need for synchronised grid frequency. Cross-border transmis-sions were initially built with AC links, meaning that the same frequency was used throughout the grid. Frequency is measured in fluctuations per second. The physical unit is hertz (Hz); the standard AC frequency is 50 Hz in Europe and 60 Hz in the US. Frequency in the electricity system is used as a control param-eter to regulate physical balance in order to achieve equilibrium between supply and demand on a common electricity market. Due to electricity’s distinctive physi-cal characteristics and the constant fluctuations in production and consumption patterns, it is difficult to accurately predict flows at a certain point in the grid. Grid operators manage this uncertainty by applying rules that ensure that the grid has sufficient amounts of free capacity and can thus function under various types of extreme conditions.

The electricity grids of Sweden, Norway, Finland and the Danish Själland region are synchronous – they use the same frequency at all times. This is also true for the Danish Jylland region, Germany, the Netherlands and all other continental European countries. Later cross-bor-der transmissions were built with DC links, which made it possible to connect two different synchronous grids.

Direct Current (DC) and Alternating Current (AC)

Electric currents are moving electric charges. The electric current either flows in the same direction, called Direct Current (DC), or changes direction con-stantly, called Alternating Current (AC). Batteries are powered by DC while regular sockets are powered by AC. The oscillations for AC currents occur so rapidly that we don’t notice them. We can’t see the oscilla-tions when we look at a light bulb, for instance, since they occur with such a high frequency, averaging 50 times per second (equivalent to 50 Hz). “Frequency” – measured in hertz – refers to how often these oscillations are repeated. One hertz is one oscillation per second. In a synchronous (connected) system, the frequency remains more or less the same throughout. Today, the electric currency that is transferred to end consumers is delivered using AC, while a growing share of appliances produced today use DC. Regular household sockets therefore require AC generators that can convert AC into DC when needed.



On the European level, politicians have for several years had the goal of improving the integration of the energy market. The idea of an integrated European energy market was first introduced back in 1929 by George Viel, director of ”Compagnie électrique de la Loire et du Centre”, at a trade fair in France. Viel’s idea was never implemented, but the idea had been born.

The link between economic development and the elec-trification of Europe grew stronger after World War II. Existing power and energy infrastructure had been seriously damaged during the war years, and maintenance had been neglected. Effective restructu-ring of the energy supply was needed to spur economic growth in all countries that had been impacted by the war. Existing capacity needed to be repaired, expanded and streamlined.

The Organisation for European Economic Co-operation (OEEC) was established as part of this process in 1951.An important OEEC subgroup was the Union for the Co-ordination of Production and Transmission of Electricity (UCPTE). This organisation’s primary purpose was to promote the efficient utilisation and expan-sion of energy and transmission capacity in the region, thereby encouraging economic development. Nordel was founded in 1963 to promote co-operation between transmission system operators active on the Nordic electricity market. The organisation’s objective was the further development of an efficient, harmonised Nordic electricity market. Nordel was discontinued following the formation of ENTSO-E (European Network of Trans-mission System Operators for Electricity), and Nordel’s responsibilities were transferred to ENTSO-E.

During the late 1960s, however, the positive trend began to slacken and Europe’s competitiveness fell, particularly in comparison with the US. The definitive

end to the European economy’s post-war prosperitywas ushered in with the 1973 oil crisis, and it became obvious to many countries that the energy issue was central to competitiveness.

The trend of free trade across borders gained momen-tum in Europe in 1985. The EU Commission identified 300 action proposals to increase European integration, which led European countries to initiate efforts to dis-mantle technical trade barriers and tariffs. At the same time, a number of industries were singled out as being overly protected and acting as brakes on economic development. These industries were telecommunica-tions, postal services, railroads, banking and financial markets, and electricity and gas.

The 1987 Single European Act provided that free move-ment of trade in electricity and gas would apply across national borders. This ambition was further streng-thened by the 1992 Maastricht Treaty.1

A few basic principles served as the basis for the EU’s efforts to develop a well-functioning liberalised elec-tricity market:

• Legislators and regulators responsible for legal frame-work and oversight of the electricity market.

•Transmission System Operators (TSOs) with a mo-nopoly for transmission grid operations in a geo-graphically limited area, responsible for ensuring a constant balance between supply and demand.

•Distribution System Operators (DSOs) responsible for operating and ensuring the maintenance of a distri-bution system in a given area.

•Wholesale market place for generators, suppliers and consumers, where pricing is transparent and based on supply and demand.

Free trade in electricity and gas within the EU is introduced

1987Liberalisation of Swedish electricity market

1996Establishment of Nordic power exchange, Nord Pool

1996EU’s Electricity Market Directive comes into effect

1997

Development of a European electricity market



An emissions trading scheme (ETS) for the EU (also referred to as the EU-ETS) was launched in 2005, in line with the European Council’s goal of reducing CO

2 emis-

sions.

The EU’s Electricity and Gas Market Directives, effective as of February 1997, regulated the gradual opening of European electricity and gas markets. These directives have subse-quently been revised several times.

The ”internal energy market package”, adopted by the Euro- pean Parliament and Council on 26 June 2003, was an expan-sion of the 1997 Electricity and Gas Market Directives and includes two directives and one regulation. The aim of the package is to establish a common energy market for EU countries and a level playing field and equal market con-ditions within the electricity and natural gas industries. To facilitate this, individual countries’ electricity markets must be structured to conform to each other. But even today, several obstacles to full market integration remain in place.

On 13 July 2009, the European Parliament and Council adopted the ”third internal market package for electricity and natural gas”.2 The package is a revision of the legislative pack-ages adopted in 2003 and 2005, and includes five directives for improved integration of Europe’s common energy market. The UK and Norway were the first European countries to libe-ralise the market for electricity. Liberalisation of the electricity market was – and is – a crucial part of the EU-wide ambition to facilitate the free flow of goods and services on the internal market. The integrated competitive European electricity market will benefit all consumers in the long term through improved resource utilisation and cost efficiency.

The EU’s energy policy is based on the energy and climate targets for the year 2020 adopted in March 2007 by the Euro-pean Council, the EU institution comprised of member states’ heads of government. The targets are sometimes referred to as 20-20-20 – greenhouse gas emissions are to be reduced 20 per cent over 1990 levels, the share of renewable energy increased to 20 per cent, and energy efficiency improved 20 per cent.3

The European Council has also endorsed an additional target of reducing carbon dioxide emissions by 80 to 95 per cent by 2050.4 The long-term plan is ambitious, but the European

Emissions trading – a way to reduce CO2 emissions

The EU’s Emissions Trading Scheme (ETS) is the world’s first large-scale trading system for greenhouse gas emis-sions. Under the scheme, each member state sets a cap on the total allowable amount of carbon dioxide emis-sions. The emissions cap is determined by mutual agree-ment between member states.

To prevent the cap from being exceeded, a limited number of emissions rights are distributed - at no charge or via auction - to the industries and energy companies responsible for emissions. If a company emits less CO

2 it

can save the rights for the next period or sell the surplus to other companies that need to emit more. The effect of the scheme is that companies that reduce their emissions do not have to purchase more emissions rights.

The next trading period under the trading scheme starts in 2013 and will incorporate a number of changes. The aviation sector will be included in the system and a com-mon, EU-wide cap on the total allowable amount of CO

2

emissions will be set. The long-term plan is to gradually increase the proportion of auctioned emissions rights, with all emissions rights sold via auction by the year 2030.

Liberalisation of the German and Dutch electricity markets

1998Germany’s first power exchange, LPX, opens

2000EU adopts expanded internal market package for electricity and gas

2003Emission rights scheme introduced in the EU

2005

Commission has indicated that much of the infrastructure be-ing constructed today is based on the assumption that it will be used through 2050 and that it is therefore important to adopt a long-term perspec-tive.

EU adopts 20-20-20 climate targets

2007

Third internal market package for electricity and natural gas is adopted

2009



The creation of a common Nordic electricity market (with the exception of Iceland) was followed by liberali-sation of each national market and entailed the break-ing up of several small geographic monopolies. All trade in electricity would now be conducted in a competitive market, in which any and all companies were entitled to operate. No company could be denied the right to utilise the electricity grid, and companies and private individuals were free to choose their electricity supplier and to switch supplier whenever it suited them.

Grid operations were separated from electricity produc-tion and would continue to be regulated by a state authority. Because of this, grid owners were obliged to make their grids available to all electricity suppliers at a reasonable rate. Nordic electricity consumers were thus free to choose their electricity supplier. As part of the same process, the electricity markets in Sweden, Norway, Finland and Denmark were co-ordinated and the Nordic power exchange, Nord Pool, was established in 1996. The power exchange had actually begun ope-rating in Norway in 1991 and was then extended to Sweden, Finland and Denmark.

The reforms were based on the goal of creating con-ditions for efficient price formation and thus improving competition and the market’s long-term efficiency.

In general, a common electricity market makes the electricity system more robust and cost-efficient. The Nordic countries have a common electricity market for both geographic and technological reasons. It would seem natural, for instance, for Norway and Sweden to exchange a large amount of electricity, since they share such a long border. They also have a large amount of hydro power that fits well with other Nordic power. In dry years, with limited precipitation, hydro power can be replaced by increasing the capacity of other power plants – this often involves fossil power.

Initially, new companies flocked to the electricity market following liberalisation, hoping for high profits. Most were short-lived, however, following intensified competi-tion. Many new operators started by offering aggressive pricing, dropping prices so low that they were unable to cover their costs. It took some time before the bene-fits of the newly competitive market began to be felt

The Swedish electricity market prior to liberalisation

Sweden joined the liberalisation trend in 1996, although preparations had been going on for quite some time, including the 1992 conversion of state-owned Vattenfall into a limited company. In conjunction with this, the transmission grid was separated from Vattenfall and transferred to a government agency, the Swedish National Grid.

Through 1996, the Swedish electricity market was governed primarily by the 1902 Electricity Act5, which stipulated that all fees charged by companies must be cost-based. A special permit – ”concession” – to operate on the electricity market was also required. The concession was valid within a specific geographic area, and each company was required to demonstrate financial stability and specific expertise in the area of electricity.

There have traditionally been many private and municipal electricity companies in Sweden. However, consumers were not able to switch electricity supplier but were obliged to use the supplier operating in their geographicarea. There was therefore no competition between suppliers. Rather, the market was characterised by co-operation and companies exchanged power between themselves in order to optimise electricity production on the national level in both the short and long term. Collaboration also took place in technological development and training.

Although cost-based fee structures and local monopolies fostered co-operation, they also continuously tilted the system towards overproduction. Prices were not determined by supply and demand, but by producers’ total costs.

Development of a Nordic electricity market



by households. In order to be able to switch supplier, households were first required to install an hourly meter at substantial cost, a requirement that was not lifted until 1999. Not until the winter of 2002-03 did households begin to switch suppliers – electricity prices were high that winter and, for the first time, consumers were able to save significant amounts of money by signing new agreements.6

The entire end user market for electricity will be a Nordic common market by 2015, meaning that consumers will be free to choose their suppliers across borders.

Manufacture of stators for Olidan’s hydro power plant in Trollhättan. Photo taken just prior to 1910.



The German electricity market was liberalised in 1998. Initially, changes occurred slowly, in part because the industry was allowed to regulate itself and transmis-sion systems were not separated from generation and sales. Several new operators have entered the market since then, many of which have foreign owners. Small and medium-sized electricity retail companies have also joined forces and formed strategic alliances aimed at strengthening their market position. Today, Germany is the most competitive electricity market in continental Europe and forms a single price area with Austria.

The price of electricity plummeted immediately following liberalisation, but has since recovered and is now higher than 1998 price levels. Taxes and energy costs have both risen. The first German power exchange, LPX,

opened in Leipzig in 2000. A second power exchange,EEX, opened in Frankfurt later that year. LPX and EEX merged in 2002 to form the new European Energy Exchange (EEX), located in Leipzig. Later on, the merger of spot activities on energy exchanges – Powernext SA in France and EEX in Germany – resulted in a new spot market called EPEX and further integration of European power markets.

Today, the German energy market is one of the largest in Europe and beginning to mature after ten years of free competition. Switch levels were initially low, but 690,000 households switched electricity retailer in 2006 and 1,300,000 did so in 2007. A total of around ten per cent of consumers have switched energy com-pany.

The German electricity market prior to liberalisation

In Germany, there has never been a state-owned or predomi-nantly state-owned electric monopoly, as there has been in Sweden. Rather, the market was characterised by a mixture of private, municipal and quasi-municipal companies. Local monopolies were common and a result of post-WW2 market sharing among energy companies. The definition of boundaries meant that companies were obliged to refrain from opera-ting on markets outside their individual zones. A 1935 energy reform reinforced the system of local monopolies, resulting in increased co-operation between municipalities and energy companies.

Before delineation came into effect, the market was frag-mented and consisted of a number of regional monopolies. Companies were responsible for all parts of the value chain–production, distribution and operation of high voltage grids. In 1997, prior to liberalisation, eight energy companies – active in several regions – produced 79 per cent of all electricity in Germany. At a regional level, there were around 80 energy companies that produced ten per cent of all electricity. An additional 900 or so local operators accounted for eleven per cent of total electricity production.7

Development of a German electricity market



The Dutch electricity market has been liberalised since 1998 in accordance with EU ambitions for a more integrated European electricity market. Following liber-alisation, the model is no longer cost-based. Liberalisa-tion was aimed at opening up the market to a greater number of operators, with the expectation of lower consumer prices and a more efficient market.

In many respects, the liberalisation of the Dutch elec-tricity market proceeded at a faster pace than that required by the EU. Ownership distinction was required rather than disclosure and there were more opportuni-ties for third-party access. The 350 largest electricity consumers, those with an annual consumption of at least 100 GWh, had the option of choosing their elec-tricity supplier immediately. The middle segment was offered the same option in January 2002, and ordinary households on 1 July 2004.8

Since 2011, grid operators may not be owned by a company that also produces electricity. Ownership must be transferred to the company’s public shareholders. The goal is to ensure that grid operators have an en-tirely independent role in the Dutch electricity market.

Prior to 2009, 15 to 20 per cent of all electricity con-sumed in the Netherlands was imported. This figure fell to 2.5 per cent by 2010. Trade in electricity has also increased on the Dutch market – 31 per cent of all electricity was traded on the power exchange in 2010. The remainder was directly traded via two-party agree-ments.

The Dutch electricity market prior to liberalisation

Historically, the Dutch electricity market was characterised by a few operators who were responsible for the entire value chain, from power plant to consumer. Between 1900 and 1920, many Dutch mu-nicipalities began to assume responsibility for electricity supply in their area. Until the 1980s, all electricity supply was monitored by municipal companies. A series of mergers between such companies created regional companies that, over time, also merged to become larger entities.

In 1949, the municipal energy companies merged to create the Association of Electricity Producing Companies (SEP). This organisation handled issues related to electricity production and trans-mission, eventually assuming responsibility for the national inter-connection of the grid and determining ways in which power plants should be economically optimised.

Development of a Dutch electricity market

Historical Background | Development of Gas


Development of Gas

When considering the development of gas as an energy source, a distinction must be made between the gas itself and its distribution. Distribution – which is often accomplished via large pipelines – can be viewed as natural monopolies, while gas itself can be traded on an open market. The most common type of gas is natural gas, a fossil fuel. A rapidly growing type of gas is biogas, which is generated through the anaerobic digestion of biomass. When biogas is converted into biomethane, it has the same chemical structure as natural gas and can thus be mixed in pipelines with natural gas.

Until the 1960s, natural gas was an unusual component in the European energy market. An enormous gas field was discovered in the Dutch Groningen province in 1959, prompting the expansion of the European natural gas network. Due to new discoveries in Great Britain and the North Sea, natural gas became a normal part of European countries’ energy mix. But demand for natural gas became so great that it began to be imported from ever greater distances. In the 1970s, Germany con-tracted to buy energy from Russia and a pipeline from Jamal, Siberia was built.

Interest in natural gas as an energy source increased during the 1970s oil crisis. Due to various factors, na-tural gas was well poised for a strong expansion phase. The oil crisis served to clearly demonstrate the extent of oil dependence and the economic consequences of a fourfold oil price increase. A higher degree of self sufficiency was sought – this was very compatible with natural gas and led, for example, to large-scale oil and gas production in the North Sea. The natural gas system was now able to develop into an interconnected regional market in Western Europe. The 1973-2000 rate of increase was 3.7 per cent per year for OECD countries in Western Europe.9

The European gas grid extends from the Baltic Sea to the Mediterranean and from the Atlantic to Eastern Europe. It is comprised of grids belonging to various European gas companies and is connected at some

points. The European grid consists of a total of 1.5 million kilometres of gas pipeline.

Prior to adoption of the European Gas Directive, com-mercial forces had begun to take action to promote more widespread competition. Two events were behind this development: the surge of natural gas as an energy source in Europe during the 1990s and the liberalisa-tion of Eastern European gas markets in the early 1990s, which provided a larger market for the major European natural gas operators.

Nowadays, trade in natural gas – unlike natural gas grid activities – allows the establishment of competi-tive markets. Trade has gradually moved from local monopolies to full competition. The final step in ope-ning the market was taken on 1 July 2007, when natural gas markets in most EU countries were fully opened to competition. With the market reforms, consumers are free to choose their natural gas dealer. However, due to limited harmonisation of market rules and few market actors, gas still lags behind electricity in market development. Development of gas in the Nordics

The market for natural gas is relatively young in the Nordic region, with the exception of Denmark which has its own natural gas deposits. Gas was introduced relatively late and the market is small from a European perspective. In Sweden, natural gas began to be used as an energy source in the 1980s, following an import agreement with Denmark. Denmark has the Nordic region’s most extensive natural gas system, and is self-sufficient in natural gas.10 Norway is one of the largest natural gas producers in Europe, although its domestic market is very small.



Development of gas in Germany

Until the late 1990s, the German gas market was characterised by municipal and regional monopolies and imports were dominated by Ruhrgas. A first attempt at market liberalisation followed the introduction of the 1998 EU Gas Directive, which permitted member states to choose between regulated or negotiable third-party access to the gas market. Germany chose the latter, al-lowing market actors to stipulate the terms for access to gas pipelines.

Following the negotiations, a first contract was agreed upon in 2000 and a second was signed in 2002. But the new system caused difficulties in terms of new opera-tors entering the market, and new energy legislation aimed at fully opening up the market was introduced in 2005. In October 2006, network operators and regula-tors agreed on a new distribution system and Germanywas divided into 19 market areas. The market areas were reduced to three in 2011 and will be further re-duced to two in 2013.

Development of gas in the Netherlands

Dutch natural gas consumption began with the 1959 discovery of the large Slochteren gas field near the town of Groningen, although a number of smaller gas fields had been discovered during the preceding two decades. The Slochteren field was so large that the decision could be taken to convert the town’s gas networks to natural gas. At the same time, construction was also started on the national gas grid which was linked to the regional network. Gas from Slochteren was exported to other continental European countries; the field has been very important to the Dutch state in economic terms.

Testing the Groningen discovery well, Slochteren 1, in 1959 .

Historical Background | Development of District Heating


Development of District Heating

District heating systems were tested in the US and Germany back in the late 1800s. New York’s district heating system – which currently supplies heat to Man-hattan – was put into service in the spring of 1882.

Development of district heating in Sweden

The history of district heating in Sweden began in ear-nest in the late 1940s, when municipal energy agencies began to invest in untested methods for heating buil-dings. Sweden’s first municipal district heating system was started in Karlstad in the late 1950s, with elec-tricity and heating being provided by the agency to a newly-built foundry. Before long, the benefits of district heating became more widely known and more people joined the network. The development of district heating was initially quite slow. It was not until the mid-1960s that several district heating power plants were put into service. Sales then doubled within five years, from five to ten TWh per year. Sweden soon became a leading district heating country – today, district heating heats approximately 50 per cent of all Swedish residences and buildings.11

District heating has had free pricing since 1996. Due to amendments to the Local Government Act in conjunc-tion with the liberalisation of the electricity market, district heating operations can now be run on a com-mercial basis. Many municipalities and municipal energy companies sold their district heating operations in con-nection with liberalisation. From 1990 to 2002, there was a large-scale concentration of district heating in Sweden as three companies bought municipal district heating plants and thus a significant share of district heating production. In 1990, for example, approximately 98 per cent of all district heating production was managed by municipalities, through administration or municipal companies. By 2007 that figure had fallen to around 60 per cent.12

Development of district heating in Germany

District heating has a long history in Germany. The first modern district heating system in Germany was constructed in Hamburg in 1893. Development was delayed by two World Wars, but accelerated during the second half of the 20th century. As in many other count-ries, development was hastened by the oil crisis in the 1970s. The 1998 liberalisation of the German electricity market resulted in plummeting electricity prices, which had a particularly adverse impact on the district heating market. The German district heating market remains relatively small, though future prospects are bright. A number of support measures have been introduced to stimulate expansion.

Development of district heating in the Netherlands

District heating has long been used as a heating source in the Netherlands. The first district heating plant was put into service in Utrecht in 1923, although expansion was delayed during the 1980s and 1990s due to falling natural gas prices. The late 1990s saw dramatic growth in district heating consumption due to factors such as the stabilisation of market conditions. New electricity legislation was enacted in 1998, stipulating that all prices must be set on a competitive market. It eventu-ally became clear that Dutch district heating compa-nies had a hard time competing, since electricity price was determined by lower cost electricity generated by coal-fired power plants and imported electricity. Thus, district heating operations had difficulty competing with electric heating on the Dutch heating market. A subsidy was introduced in 2001 aimed at energising the district heating industry.

Only about three per cent of Dutch households are heated with district heating. This share has increased, however – in 1982 only one per cent of households were connected to district heating. The differences are largely geographical: in The Hague, 45 per cent of office buildings (including the Dutch Parliament) are heated with district heating.


Historical Background | Summary


Summary

Electricity

• Electricity, economic development and technological innovations have interacted to spur on a long chain of advances over time. Important inventions in the history of electricity include the battery (1800), the electric motor (1821), the light bulb (1879) and the first commercial HVDC installation (1954).

• On the European level politicians have had the goal of increasing energy market integration since after World War II.

• In 1987 the Single European Act provided that free movement of trade in electricity and gas would apply across national borders.

• A few basic principles served as the basis for the EU’s efforts to develop a well functioning liberalised elec-tricity market:

- Legislators and regulators - TSOs - DSOs - Wholesale marketplace for generators, suppliers and consumers

Gas

• Until the 1960s, natural gas was an unusual component in the European energy market, but the 1959 disco-very of a large gas field in the Dutch Groningen province prompted the expansion of the European natural gas network.

• Interest in natural gas as an energy source increased during the 1970s oil crisis. Demand for natural gas then became so great that it began to be imported from ever greater distances.

• The final step in opening the natural gas markets to competition was taken on 1 July 2007. District heating

• District heating systems were tested in the US and Germany back in the late 1800s. New York’s district heat-ing system – which currently supplies heat to Manhattan – was put into service in the spring of 1882.

• Today, district heating heats approximately 50 per cent of all Swedish residences and buildings, but only three per cent in the Netherlands.



1 To read more please visit www.eurotreaties.com2 To read more please visit www.energy.eu3 Read more about the EU Climate Change Policy on www.energy.eu4 Ibid.5 You can read more about the 1902 Electricity Act on www.svk.se6 Näringsdepartementet (2002): Månadsvis avläsning av elmätare7 Pique (2006): Liberalisation, privatisation and regulation in the German electricity sector8 CentER and TILEC (2005): Liberalizing the Dutch Electricity Market: 1998-20049 Energimyndigheten (2006): Europas naturgasberoende10 Danish Energy Authority11 Svensk Fjärrvärme, you can read more about district heating in Sweden on www.svenskfjarrvarme.se12 Ibid.

Footnotes - Historical Background


A functioning energy system is comprised of a distribution system for the physical transmission of electricity, gas and district heating as well as energy markets that enable trade in energy.




From energy source to consumer | Energy Sources


Energy Sources

Access to energy plays a vital role in wealth crea-tion and economic development in all corners of the world. The modern energy system is central to much of what we take for granted today, and electricity is essential for our daily lives. Global demand for energy has soared in recent decades, propelling the energy supply’s role in society to a prominent position within political systems throughout the world.

The production mix used in EU countries’ electri-city production is dominated by fossil energy sour-ces. Oil, coal and natural gas together account for 53 per cent of the EU’s electricity production. Other energy sources utilised in the EU’s energy mix are nuclear power (28 per cent), hydro power (ten per cent), biomass and waste (four per cent) and wind power (four per cent).

The delivery of electricity, gas or heat to consumers represents the end of a long chain of events and is the result of involvement on the part of many different operators. This is a matter of infrastructure – electricity grids and gas and heating pipelines – as well as the financial aspects of the energy markets. Electricity is the main focus of this re-view, though gas and heating are also discussed.


The EU’s energy mix in electricity production (2009)

Coal 27%

Wind 4%

Hydro 10%

Nuclear 28%

Biomass and waste 4%

Natural gas 23%

Oil 3%

27%

4%

10%

28%

4%

23%

3%



Six Sources of Energy - One Energy System

Read more about energy sources in Vattenfall’s book,

”Six Sources of Energy - One Energy System”,

available at www.vattenfall.com.

Biomass – an opportunity to reduce carbon dioxide emissions

Bioenergy is a type of stored solar energy, collected by plants through photosynthesis. Biomass is an organic material that contains bioenergy, a renewable energy source used to produce electricity, heat and fuel. Biomass and waste are used to generate roughly four per cent of all electricity in the EU and have the potential to play a key role in reducing carbon dioxide emissions from existing coal-fired plants through pro-cesses such as co-firing. Carbon dioxide is emitted into the atmosphere when biomass is burned, but when biomass grows it binds carbon dioxide through photosynthesis. Properly managed biomass is there-fore carbon neutral over time. Biomass used for power and heat production comes primarily from forest products, waste and various residues from the agriculture and forestry industries. Today, using biomass for power production is more expensive than using energy sources such as coal, natural gas or nuclear power. The global supply chain for biomass is still under development; technologi-cal advances and improved logistics are expected to lower prices over time. The economic competitiveness of biomass will also improve as the cost of emitting CO

2 rises.

Coal power – a cornerstone of the global energy system

Due to its economic competitiveness and stable power production characteristics, coal is a corner-stone of the global energy system and will continue to be so for the foreseeable future. Many European countries depend on coal power to meet their energy requirements. Coal offers economic advantages and has characteristics that allow stable, large-scale power production. Coal power accounts for approxi-mately 27 per cent of all power production within the EU,1 while the combustion of coal accounts for a large proportion of global CO

2 emissions.

Two types of coal are used in electricity generation: lignite and hard coal. Lignite is peat that was conver-ted under high pressure 15 to 20 million years ago.



Hard coal is lignite that is exposed to additional pres-sure deep within the earth. Lignite has lower energy content and is only used in power plants located adja-cent to lignite quarries. A hard coal-fired plant is slightly more efficient, although – in terms of heat value – lig-nite is less expensive than hard coal per gigajoule (GJ). Coal-fired power plants emit high levels of carbon dioxide into the atmosphere during the combustion process, and this has a negative impact on the environ-ment. Coal mining also entails a substantial degree of interference with the environment, and opencast mines must be re-cultivated and restored after mining is completed.

Hydro power – a renewable and competi-tive energy source

Hydro power is a renewable energy source that is eco-nomically attractive, offers security of supply and emits low levels of CO

2. However, power plants are a signifi-

cant encroachment on the landscape and impact river ecosystems. A power plant may also affect animal and plant life in the vicinity. Hydro power is one of our oldest energy sources and has been utilised for thousands of years. It is by far the leading renewable energy source in the European energy mix – according to the IEA, hydro power accounted for approximately ten per cent of the EU’s electricity production and more than half of total renewable electricity production in 2009.2

Utilising water’s natural cycle by harnessing the energy of rivers and streams is the most common form of hydro power. In general terms, hydro power works by conver-ting the kinetic energy of water falling from one level to another into electricity. Dams create reservoirs that al-low for greater heights of fall and also serve to regulate electricity production, a key requirement for increasing production of other types of renewable energy such as wind power.

Hydro power is, however, sensitive to year-to-year rainfall variations. In a dry year, for instance, Nordic hydro power production may be 90 TWh lower than during a wet year – representing nearly one-quarter of total Nordic electricity production. But the expansion of hydro power is limited in many regions due to the conservation of rivers and streams.

Natural gas – a transition technology towards a sustainable energy system

Natural gas is a fossil energy source formed through the slow decomposition of biological matter over mil-lions of years. It is currently a growing energy source in Europe and is considered by some to be a transi-tion technology towards a sustainable energy system. Natural gas emits lower levels of carbon dioxide when combusted than other fossil fuels, and is also economi-cally advantageous and offers higher levels of flexi-bility in electricity and heat production. Supplies can be somewhat uncertain, and some regions that export natural gas face political instability.

Natural gas is a growing energy source within Europe. In 2009, natural gas accounted for approximately 23 per cent of the EU’s electricity production.3 The EU is a net importer of natural gas. Around 40 per cent is produced within the EU and the rest is imported, prima-rily from Norway, Russia and Algeria. Due to the large natural gas reserves found in Great Britain and the Netherlands, these countries are EU’s largest natural gas producers. Natural gas consumption varies widely between EU countries. The largest markets are Ger-many, Great Britain and Italy, which together account for approximately 50 per cent of the EU’s gas consu-mption.4 Natural gas is also a significant part of the energy mix in the Netherlands, Spain and France.

Fuel is one field of application for natural gas that has become more prevalent in recent years. As demand for alternative fuels has risen, compressed natural gas and biogas has become an increasingly common vehicle fuel. Biogas and natural gas have the same chemical composition, and the gases can be mixed and trans-ported in the same pipelines.



Nuclear power – an energy source that is important for many countries

Due to the economic competitiveness of nuclear power and its high degree of security of supply, it is currently an important part of the energy mix in several Euro-pean countries. Nuclear power also emits low levels of CO

2 over the entire life cycle and none at all during

production. The management of spent, highly radioac-tive nuclear fuel requires storage in secure facilities for up to 100,000 years. Uranium mining does affect the landscape, but the environment is repaired when mining is completed. There are currently 143 nuclear reactors in operation within the EU, with another four under construction.5 These power plants have a combined installed capacity of 130 GW and account for around 30 per cent of the EU’s total power production.6

Wind power – an energy source with growth potential

Wind power has no fuel costs, and emits very low amounts of carbon dioxide from a life-cycle perspective and none at all under operation. Due to large invest-ment costs, total cost per produced kilowatt hour (kWh)

is relatively high. Wind turbines have a visual impact on the landscape, which some people may find disturbing. Due to the EU´s target for renewable alternatives and to high subsidies, wind power is the fastest growing form of energy in the EU. In 2009, installed capacity increased 23 per cent and accounted for 39 per cent of total newly-installed electricity production capacity in the EU.7 In 2011, wind power accounted for 6.3 per cent of the EU’s total electricity production. The largest share of new installations was land-based turbines.8

In general, wind turbines produce electricity when wind speed is between 3 and 25 m/s. When there is light or no wind, turbines rest in standby mode; when there is too much wind, turbines must be shut off to prevent turbine damage. Wind turbines are often situated in groups, or wind farms, either on- or offshore. Large wind farms may consist of hundreds of turbines that are interconnected through an internal electricity grid. A particular challenge with offshore wind farms is to con-nect them to the grid. Adding electrical cables on the seabed is technically complicated and expensive.

From energy source to consumer | Electricity


European high

voltage grid:

300,000 km

7.5 timesaround the Earth

Electricity

Electricity is an efficient energy carrier for transpor-ting energy over long distances. Various energy sources (e.g., rushing water) are used to drive mechanisms that generate the electricity we use in our everyday lives. A bicycle dynamo generator is another example: the rubber head of a dynamo is placed against the bicycle wheel, creating a mechanical motion that generates electrical energy that is conducted to a light bulb in the headlamp, creating light.

How is electricity transported and distributed?

The electricity grid connects electricity-producing power plants with electricity-consuming end users. The power plants produce electricity by converting the energy found in various energy sources, while the end users consume the electricity by running industrial machinery, for instance, or by turning on the lights at home.

The core of the electricity grid is divided into transmis-sion grids and (regional and local) distribution networks.The spine of this grid – the transmission grid – is like a highway that transports electricity with high voltage over great distances. Not infrequently, a country’s geographi-cal characteristics are such that electricity is generated far away from densely populated areas, so electricity needs to be transported from source to end user in an energy-efficient manner.

Electricity is distributed from the transmission grid to large metro areas and energy-intensive industries via re-gional networks. Before the electricity arrives at ordinary residential properties and offices, the network branches off once again into local networks. At each branch point, the electricity passes transformer stations that reduce the voltage. The transmission grid has the maximum voltage, approximately 400 kV. In Sweden, Germany and the Netherlands, regional network voltage levels vary between 70 and 150 kV. The final, local network portion has a voltage less than 50 kV. When the electricity finally reaches residences it is transformed down to 230 V.

Electricity transmission

Electricity is transported through transmission grids. Transmission grids in Europe are of fundamental im-portance – modern society is dependent on a secure and safe supply of energy. The transmission grids are designed to transport electricity from surplus to defi-cit areas, e.g. from geographical areas rich in natural resources to more densely populated areas. Transmission grids also enable the levelling out of occasional over- and undersupply between regions. Transmission grids may also play an important role in achieving EU targets for re-newable energy and reduced greenhouse gas emissions. Each country has one or more system administrators – also referred to as Transmission System Operators (TSOs) – which operate, maintain and develop the trans-mission grid. TSOs also work together to develop a common European transmission grid. In essence, system administration entails the operator guaranteeing that there is a continuous balance between electricity production and consumption. Monitoring of the electricity system´s various facilities is done via control rooms, where it is also possible to steer the facilities to co-operate and ensure that there are sufficient reserves to be used when needed.

Electricity distribution

Electricity is conducted from the transmission grids to regional and local networks, which provide energy for daily consumption to households, companies, transport systems and heavy industries. Ownership of regional and local networks is divided between private and public operators. Each owner has the exclusive right and duty to make the grid available to consumers within a geo-graphic area, and is thus responsible for connecting everyone within this area to the network. All distribution companies are subject to the same regulations and are required to distribute electricity on equal terms to all. This is monitored by the national authorities.



European high

voltage grid:

300,000 km

7.5 timesaround the Earth

The German electricity grid

The German electricity grid is comprised of nearly 1,700,000 kilometres of power lines of varying voltage levels – from high voltage transmission grids with 220 kV or 380 kV, via regional networks with 110 kV, to local grids with varying voltage of up to 30 kV. Due to Germany’s central location, its grid can be viewed as the hub of the entire network on which the EU’s internal electricity market is based. This has meant that Germany has become an important transit country for European cross-border electricity trade.

Unlike Sweden and the Netherlands, the German transmission grid is owned by individual energy companies: Amprion, TenneT, 50 Hertz and EnBW. These four TSOs are responsible for different German geographic areas. There are around 1,000 different network companies on the regional and local levels.

The Swedish electricity grid

The total extension of the Swed-ish electricity grid is 482,000 kilometres of power lines and approximately 150 transformer and switching stations that connect the grid. It also includes connections with foreign countries. The state-owned public service company, Swedish National Grid, is both TSO and owner of the Swedish transmis-sion grid, with a maximum volt-age of 400 kV.

Voltage levels for regional networks vary between 70 kV, 110 kV and 130 kV, while local networks have voltage levels up to 50 kV. The regional and local networks are owned mainly by private or public network com-panies. Although networks are owned by major power companies, municipalities or other operators, grids must be oper-ated by independent legal entities.

The Dutch electricity grid

The Dutch electricity grid is comprised of over 390,000 kilometres of power lines of varying voltage levels – from the national transmission grid with volt-age levels of 220 kV or 380 kV, to regional networks with voltage levels rang-ing between 110 kV and 150 kV. Normal voltage levels for local networks reaches a maximum level of 50 kV.9 The transmission grid is state-owned. As in the Nordic countries, regional networks branch off from the transmission grid to smaller local networks before the electricity reaches house-holds. Ownership of distribution networks is separated from production and delivery operations, due to the liberalisation of the electricity market.


Wind farmTransformer station

Deep sea cable placedat depth of approx.1 m below seabed

Control centre

Deep seaat depth o1 m below

Voltage 300 kV

Da1a

Land cableburied

Exterior

Copper or aluminiumconductor

Insulation

Wire reinforcement Land cableconnect



Power cables connecting offshore wind farms

Submarine power cables are used for electricity tran-sportation to connect islands and offshore wind farms with the mainland. As some cables are several hundred kilometres long, good insulation and loss minimisation are crucial. The cross-section of the copper conductor is usu-ally between 1400 - 2100 mm2 for high voltage and long distance cables.

Overhead or underground power lines

Lower-voltage electricity grids have traditionally been comprised of overhead lines. Initially, these lines were entirely uninsulated and presented a high degree of risk for short circuits in the event of storms, fallen trees or heavy snowfall. As we became more dependent on electricity, the ability of the grid to deliver reliable access to electricity became more important and old lines were gradually replaced with buried cables or insulated aerial cables.



Due to low consumer tolerance for power failures, extreme weather conditions are now a factor for distribution companies to deal with. Following hurricane Gudrun in Sweden in 2005, for instance, distribution companies made more investments in underground cables – even in rural areas. Underground cables are exposed to less stress and strain and are generally more reliable than aerial cables in terms of extreme weather conditions such as storms, hurricanes or slush – although they are more difficult to access. Another aspect is that the cost of underground cable construc-tion is often much higher than for overhead lines, and this has also slowed the rate of investments. Costs also vary quite a lot depending on local soil conditions; in some areas, it is not economically justifiable to lay underground cable.

Deep sea or submarine cables represent a third alterna-tive to overhead or underground power lines. As a rule, cable can be laid directly on the sea bed, without any covering. In shallow areas – depths of less than 12 metres – the cable must be buried or covered. Environmental disturbances from submarine cables occur mainly during construction. Once the cable is in place it has a marginal impact on the environment. This alternative is of increasing interest as the grid becomes more integrated and electricity is transported over large distances. Submarine cables are also of interest in connection with the extension of offshore wind power and research into various types of marine hydropower (e.g., sea-wave power and tidal power).



How does the electricity market work?

A market in balance

In order for the electricity system to function, there must always be a balance between electricity genera-tion and electricity consumption. This feature is unique to the electricity market. Different energy sources have different characteristics, and not all energy sources can swiftly switch production to deal with temporary peaks or troughs in electricity demand. New renewable energy sources – such as wind and solar power – produce electricity irregularly and only under the right conditions (“intermittent power”). On the other hand, baseload power – such as nuclear, fossil-based and hydro power plants – can produce large, regular quantities of elec-tricity over time. We therefore need access to energy sources that can quickly switch over to produce greater or lesser amounts of electricity (“regulating power”). Hydro power works well as regulating power, since dam flow can be increased or decreased in a very short time, thereby regulating electricity production and adapting it to demand at a certain time. Gas power plants can also be adapted relatively quickly to meet fluctuations in demand.

How is the price of electricity determined?

The price of electricity is essentially comprised of three parts: the price of the actual electricity (electricity retail price), the price of connection to the grid (the “freight rate”) and tax and fees (energy tax and VAT).

•Electricityretailprice•Gridprice•Taxesandfees

The power exchange is the hub of the electricity market, and the market price for electricity is de-termined on the power exchange’s spot market. The actors on the spot market are producers, retailers and traders who choose to trade on the electricity exchange. Large end users also trade on the electricity exchange.

The majority of producers sell their electricity on the spot market, where short-term trade in electrical power is done via day-ahead auctions. During the trading process, electricity producers who want to sell power to the spot market must send their sale offers (for the amount of electricity they are prepared to deliver at various prices during the 24 hours of the following day) to the power exchange by 12:00 noon on the day before the power is delivered to the grid. Electricity re-tailers must send their purchase orders (corresponding to the amount of electricity they believe customers will consume during the 24 hours of the following day), and the amount they are willing to pay. The market price is then used by electricity retail companies to set the price of electricity for end consumers (the “electricity retail price”).

Sale offers (“sell bids”) are aggregated to a supply curve, just as purchase orders (“buy bids”) are aggre-gated to a demand curve. The intersection of the two curves produces the spot price for one specific hour. The actual market price may vary somewhat between different market regions, depending on physical trans-mission limitations that sometimes occur.

Thanks to competition, the market price is pressed down to the marginal cost (“market price”) of the electricity required to meet demand each hour, which is often on par with the cost of producing electricity with coal or natural gas, especially on the European conti-nent. This means that the price of electricity is often dependent on the price of fossil fuel or emissions rights. Coal and natural gas are the dominant energy sources



Overview – how the price of electricity is determined

Several factors affect the price of electricity.

The variable electricity price is set on the power exchange based on the supply of and demand for electri-city. The price is also affected by the amount of available electricity and the level of demand. An electricity consumer can choose a variable or fixed electricity price. The fixed price is determined by electricity retail companies based on estimated price development on the local power exchange during the contract period.

The way in which electricity is produced has an impact on its price. The electricity offered on the power exchange is generated, for instance, by hydro, nuclear, wind, coal and gas-fired power.

The availability of hydroelectric power varies with the amount of water stored at the power plant; prices are lower if the water supply is abundant. The production and cost of nuclear electricity are dependent on power plant capacity. Coal-fired and particularly gas-fired electricity are often the most expensive to produce, and are therefore used when there is insufficient availability of other power. The high cost of coal power is due to various factors, including the cost of emissions rights charged to all CO

2-emitting electri-

city production.

The spot price on the power exchange is determined by the last connected production source. Due to market integration, the national electricity price is affected by international price. Electricity markets are increasingly interconnected, and trade between countries is on the rise. Nordic prices are thus impacted by Central European prices, and vice versa. For end consumers, it is important to be active on the electricity market, but also to explore ways to increase energy efficiency.

Principle diagram – in reality, the buy bid curve (demand) is more vertical.

in continental Europe and will affect electricity prices for many years to come – not only on the continent, but also in the Nordic region during cer-tain hours of the year. Market price is the prevailing pricing method on all competitive markets.

There must always be a balance between supply and demand. One important method for creating balance is to utilise the regulated portion of hydro power that is very flexible and has high opportunity cost (the cost of using the water today rather than waiting for a time when the electricity price is higher). Water



can be stored for production when the market has the greatest need for electricity (i.e., when electricity prices are high). Regulated hydro power thus has a modera-ting effect on the market price of electricity in both the short and long term. In terms of making the European electricity production system more renewable, Nordic hydro power may be more highly valued precisely be-cause of its flexible production.

Hydro power is also a valuable resource in terms of keeping the cost of electricity system operation as low as possible: it can be used for frequency and balance

control during the operational phase. At selected (mainly hydro) power stations, production is automati-cally increased when frequency drops and reduced when frequency rises. If frequency falls to the lowest allowable level, this is a sign that balance can only be maintained through maximum utilisation of primary regulation (rapid regulation, performed within seconds). When the frequency approaches the upper or lower limits, it is therefore necessary to reallocate produc-tion to relieve pressure on the primary regulation. The TSO does this by activating major regulation measures, chiefly by starting or stopping the hydro power instal-lation.

The Nordic electricity market debate

The Nordic electricity market attracted criticism following high – sometimes extremely high – electricity prices during past winters.

Through numerous surveys and research reports, electricity market researchers and experts have determined that the electricity market works, that the market price is determined by supply and demand (just as on all other competitive markets) and that there is no evidence of inappropriate market manipulation.

When a competitive market delivers a market price that is consistent with the overall system’s marginal cost, competi-tion is functioning. The electricity market is a good example of a competitive market in which the market price equals the overall system’s marginal cost. The effect of competition is that overcapacity disappears and operation and maintenance costs are driven down. In coming decades – as large parts of old European production capacity is replaced – competition on the market will guarantee cost efficiency. Even so, confidence in the electricity market is gravely uncertain.

Why do consumers pay a higher electricity price now as compared to before liberalisation? Three main factors have caused an increase in electricity prices:

1. Electricity tax. Prior to electricity market liberalisation, small electricity consumers paid electricity tax of 0.009 EUR10/kWh. This figure rose to 0.030 EUR/kWh in 2011.11

2. Electricity certificates. A special subsidy for renewable energy production was introduced in 2004. All electricity consumers pay an electricity certificate fee (currently 0.003-0.004 EUR/kWh) which is included in the electricity price paid to the electricity supplier.12

3. Emissions rights. As of 2005, all fossil fuel consumers receive emissions rights. The electricity price often corresponds to the marginal cost of producing electricity at fossil-fired power plants, and is therefore dependent on the price of fossil fuel and emissions rights. Today, the increase in electricity price due to emissions trading totals 0.010 EUR/kWh.13

An electricity consumer with electric heating who consumes 20,000 kWh per year and who purchased electricity from Vattenfall in 2011 through a fixed three-year contract paid 0.057 EUR/kWh plus electricity tax and VAT – a total of 0.110 EUR/kWh. Around half of that amount is made up of electricity tax, electricity certificate fee and additional costs arising from emissions trading.14





Handling bottlenecks in the grid

Constructing a grid capable of handling all flows under all conditions (e.g., natural variations in hydro power inflow) is simply not possible without incurring great costs for society. Desired transportation levels will therefore sometimes exceed physical capability – a bottleneck in the grid. Grid bottlenecks are managed by two primary methods: market splitting and counter-trading. A third method, decreasing cross-border trade, contravenes EU legislation. Market split-ting results in different market prices in different areas, and in this way balances the market’s demand for transportation. With counter-trading, the TSO pays to reduce electricity production in one side of the bottleneck and to increase production in the other side. The electricity price remains the same throughout the entire region.

Both methods are market-based and can theoretically produce the same efficiency levels. Market splitting creates a local price signal that reaches all market participants. With counter-trading, the retail market only needs to use one price. This means that the end users are not stimulated to either decrease or increase their electricity consumption, relative to the electricity retail price. Instead, congestion costs are transferred to the grid tariffs. A TSO must therefore consider the price signals that it wants the market to have in the long run, as well as the section of the electricity value chain that should assume the costs of the bottleneck.

If bottlenecks are frequent and large, the long-term solution is to invest in new lines in the transmission grids. In Sweden, the TSO has introduced four bidding areas to manage bottle-necks. It has also presented plans to reduce bottlenecks in the long term by investing in more transmission capacity, which is important for the fulfilment of climate and renewable energy targets.

ELECTRICITY SURPLUS

Bidding area Luleå (SE1)

Bidding area Sundsvall (SE2)

Bidding area Stockholm (SE3)

ELECTRICITY DEFICIT

ELECTRICITY DEFICIT

Bidding area Malmö (SE4)

ELECTRICITY SURPLUS

GRID CONSTRAINT

Division of bidding areas in Sweden

Source: Svenska Kraftnät



Swedish bidding areas

As of 1 November 2011, the Swedish TSO (Svenska Kraftnät) has divided the Swedish electricity market into four bid-ding areas. The purpose of the division is to clarify where there is a need to expand the transmission grid while optimally utilising existing grid capacity and clearly demonstrating where electricity production should be increased to meet needs in that area.

The Nordic countries are sparsely populated, and electricity is often transported over long distances and rough ter-rain on its way to the end user. In northern Sweden there is a surplus of electricity production in relation to demand for electricity. In southern Sweden, the circumstances are the opposite. Due to bottlenecks in the transmission grid, trans-mission capacity during certain hours is not always sufficient. These bottlenecks are targeted through the division into bidding areas. Bottlenecks between areas also cause price differences – prices are higher in areas with more demand and less supply, and vice versa. The bidding areas thus introduce economic incentives for investments in the grid and new production capacity.

Cost of electricity grids

Today, consumers can choose the company from which they buy their electricity. Network companies, on the other hand, are monopolies – consumers are unable to switch companies – and are therefore regulated. The Energy Markets Inspectorate (EI) is the supervisory authority in Sweden responsible for monitoring network companies. Similar authority is held by Bundesnetz-agentur (BNetzA) in Germany and Nederlandse Mede-dingingsautoriteit (NMa) in the Netherlands.

One task of the state authorities is to ensure that network companies do not set consumer prices that are too high or excessive. It is also important to create conditions for network companies to maintain a grid that is robust in the long-term. This means that grid quality should be maintained at a high level to prevent interruptions and that network companies should adapt their grids to demands for an increased share of rene-wable electricity (from e.g., wind power).

All network companies operate their business under different conditions. Distances between grid consu-mers may be large or small. Various types of terrain also present different types of costs for grid companies. Fees therefore vary depending on where consumers are actually located. In recent years, increased demands have been placed on network companies in terms of power failures. Companies have accordingly made

major investments to reduce interruptions and thereby improve the quality of electricity deliveries.



The regulation of grid companies is aimed at creating stable long-term fees while enabling grid renovation, expansion and adaptation to the goal of increased renewable energy production.

Grids across Europe are undergoing extensive moderni-sation, both to improve delivery quality (fewer interrup-tions through fallout-protected buried cables) and to facilitate connection to additional power plants – par-ticularly geographically dispersed wind turbines. The grid also needs to be expanded and reconstructed to meet the demand for increased flexibility in both with-drawal and input and to enable decentralised electricity production. Grid expansion is also a prerequisite for future smart grid functionality.

Network companies are required to connect everyone who wants to be connected to their grid. The cost of a new connection is charged to the consumer, and reflects the additional cost incurred by the network company for supplying the new connection.

For end users, grid tariffs are comprised of fixed and variable components. Each person can control the variable component by varying electricity consumption; tariffs also vary between different network companies. The grid tariff paid by electricity subscribers to the lo-cal network company covers costs of the transmission grid, regional network and local network. This includes transmission of electricity, administration, operation, grid maintenance, measuring and reporting.

Investment requirements• To ensure delivery quality

• To feed in more electricity (often wind

power) to the grid

Application for revenue cap• Network company submits proposal

to authority based on investment

requirements

Decision on revenue cap• Authority reviews application and

makes decision

Improved grid• Grid protected from storms

• Improved options for feeding in wind

power to the grid

Customer needs and public requirements

• High quality electricity deliveries

• Option of feeding in renewable

energy to the grid

Consumer and public welfare determine framework for network companies




Vattenfall and electricity

Vattenfall’s electricity generation

Vattenfall is Europe’s sixth largest electricity producer. In 2011, Vattenfall produced 166.7 TWh of electricity with six energy sources: biomass, coal, hydro, natural gas, nuclear and wind.

Vattenfall’s electricity grid

Vattenfall has a total of nearly 4.5 million grid custo-mers. Vattenfall is the largest electricity distributor in Sweden, the third largest in Germany and the third largest in the Netherlands. Uninterrupted energy supply is the key requirement of grid customers, and Vatten-fall invests large sums on an annual basis to improve security of supply. The growth of wind power produc-tion and use of electric cars creates a growing need for intelligent, flexible and reliable grids. Coupled with a number of general societal trends, particularly within energy consumption and energy policy, this has led to the development of smart grids. Vattenfall is involved in a smart grid pilot project on the Swedish island of Got-land. Read more about this in the final chapter; Electri-city Grids and Markets of the Future.

In 2011, Vattenfall invested a total of EUR 0.53 billion in grid electricity operations to improve security of supply and meet heightened regulatory requirements. One result of these investments is the marked decrease in the number of power outages due to storms and snowfall.

Vattenfall’s electricity production mix

Biomass and waste

Wind

Natural gas

Hydro

Nuclear

Coal 21%

8%

25%

43%

1%

2%

Total:166.7 TWh

Source: Vattenfall, 2011



Energy Watch: www.vattenfall.se/energywatch

Vattenfall’s electricity sales

Vattenfall has many customers in several countries and strong market positions primarly in Sweden and the Netherlands. In addition to selling electricity, Vat-tenfall supplies a multitude of energy solutions to help customers effectively manage their specific energy needs. Vattenfall has a total of nearly 7.7 million private electricity customers. In 2011, Vattenfall sold a total of 34 TWh of electricity to its private customers, 28.7 TWh to other electricity retailers and 74.8 TWh to its corporate customers.

Energy efficiency has become an increasingly signifi-cant portion of energy companies’ product offerings, and this also holds true for Vattenfall. In Sweden, Finland and the Netherlands, Vattenfall offers online energy guides where consumers can calculate their en-ergy consumption, receive personalised energy advice and find general information on household energy use. In the Netherlands, Vattenfall offers add-on services including energy consulting, home insulation and installation of double-paned windows, efficient heating systems and solar panels.

E-manager: www.nuon.nl/energie-besparen/

From energy source to consumer | Gas


Gas

How is gas distributed?

The efficient movement of gas from producer to con-sumers requires an extensive transportation system, consisting of a complex network of pipelines. Transpor-tation of natural gas is also closely linked to its storage: should the natural gas being transported not be im-mediately required, it can be put into storage facilities until it is needed.

The gas is transported from extraction site to distribu-tion network via transmission lines. These pipelines are usually around one metre in diameter and are placed along the ocean floor or on land, in which case they are most often buried. Pipeline overpressure, between 40 and 100 bar, transports the gas. Finally, the gas is transported through a distribution network of smaller pipelines to control centres where pressure is lowered once again before being transported to consumers. Pressure at this stage is approximately four bar, roughly the same amount of pressure as in an inflated bicycle tyre. If the gas is to be used by smaller consumers, such as private households, the gas pressure is further lowered.

If the gas deposit is too far away from the users, or if it is difficult to build a piping system for other reasons, the gas is converted to liquid form, LNG (Liquefied Natural Gas), and is then transported by tanker. Tankers sail to harbours that are connected to transmission and distribution networks.

The EU centrally regulates the market for natural gas trade and distribution. Just as with the electricity mar-ket, central regulation aims to create a European gas market and favourable conditions for trade between countries. And just as with the electricity grid, there is free competition on the gas market between gas supp-liers.

For practical reasons, however, the actual transport of gas is owned by individual companies within each geo-graphic region. This is a more cost-efficient alternative than requiring each company to build its own pipelines, and provides better conditions for maintenance and development. The network owner within a geographic region is responsible for ensuring that the gas reaches the end user and that the network is safe, reliable and efficient. The network company is also responsible for measuring and reporting the levels of gas fed into and withdrawn from the network and providing this infor-mation to gas suppliers, balance suppliers and system administrators. This data is important to these groups in calculating deliveries and regulating the balance within the natural gas system.

How does the gas market work?

Natural gas was initially viewed as a by-product of oil extraction. Due to its value for energy production, however, extensive distribution pipeline networks have been constructed in major markets including the USA, Western European OECD countries, Russia and the former Soviet Union and Asia.

The European gas market is likely to change due to factors impacting both supply and demand, including a reduced domestic gas supply and the effects of inter-national environmental commitments. The development of regional gas markets is an important step in achie-ving the goal of an integrated European gas market. Focus issues include market barriers, so called secon-dary markets and investments. Transparency in terms of pipeline infrastructure is also being reviewed on the European level.



Natural gas is the dominant energy gas in Europe. The biogas market has great potential, although efforts are needed to better match biogas production with de-mand.

Improved efficiency in biogas production would allow the Nordic transport sector – which has a great need for biogas – to better meet its needs. Due to a lack of resources among independent biogas market actors, the main challenges lie in creating incentives for con-structing infrastructure and filling stations.

In Germany, legislative changes have been made to simplify biogas access to the natural gas grid. The objective is to replace ten per cent of natural gas with biogas by 2030.15 The law places great responsibility on grid owners to connect biogas plants to the grid. This is costly for grid owners and may serve to lower the traditionally high entry barriers to the gas grid, which have stifled competition. Similar problems are evident in the Netherlands, a major gas producer and exporter to much of Europe. Although the market has been libera-lised since 2004, competition has not developed as well on the gas market as on the electricity market.



The global natural gas market(billion cubic metres)

North America

h AmericaCenCentral and South Antr

OECD Europe

Eurasia

A aAfricaAAfric

e aste EasMMiddle

aIndia

Pacific c region

Other Asianancountries

Japan

18

44666616

833

1111

11

6006

uthouuthSouKoreaoreorKK

China

9 99

154154

414

USA114.4

10.0 92.1 87.1 1.6 12.636.7 28.710.9 5.3 36.632.3 1.035.4 2.518.375.3114.4

JAPAN92.1

GERMANY87.1

ITALY76.9

FRANCE49.3

SPAIN39.6

TURKEY37.6

SOUTHKOREA

36.6

GREATBRITAIN

36.4

BELGIUM20.8

PipelineLNG


Ten largest importing countries(billion cubic metres)



How is the price of gas determined?

The price of gas is determined in much the same way as the price of electricity: by the supply and demand of gas as a commodity. Added to this price are costs for processing, distribution and regulation. Companies pur-chase the gas as it flows from the well and pay a “well-head price.” At this stage, the gas has not been pro-cessed or transported. Consumers, on the other hand, pay for processed gas delivered directly to their homes through an extensive distribution system. The consumer price is determined by the cost of processing and de-livery, metering, billing, distribution system maintenance and other factors. As with electricity, different opera-tors own different parts of the chain. While extraction companies are responsible for the raw material, trading companies are responsible for delivery to end users. The price of gas is determined with free competition and,

under the Natural Gas Act, grid and network fees mustbe fair, non-discriminatory and cost reflective. Network companies are monitored by authorities to ensure com-pliance.

Although the consumer price of gas is set with free competition on a spot market, many gas suppliers often have long-term contracts with major gas producers which index the price of gas to oil prices. When the spot price of gas plummeted during the 2008-09 financial crisis, many gas suppliers were forced to buy gas at prices sometimes 50 per cent higher than the price at which they could sell the gas on the spot market. This situation resulted from the fact that there were only a few major gas producers, including Norway’s Statoil and Russia’s Gazprom.

The Swedish gas distribution network

The natural gas used in Sweden is transported to the country from Den-mark via pipeline. The pipeline runs from Dragör, just south of Copenha-gen, to Malmö and has been in use since 1985. The Swedish National Grid is the system administrator for the Swedish gas grid and thus monitors the balance between gas input and withdrawal and guarantees that there is such a balance. The Energy Markets Inspectorate supervises the Swe-dish natural gas market and is responsible for ensuring that natural gas is transmitted efficiently.

The German gas distribution network

Germany has Europe’s most extensive gas distribution network, totalling 380,000 kilometres in length. The German gas grid is divided into two networks for natural gas distribution, depending on degree of heating value.

The Dutch gas distribution network In the Netherlands, GTS (Gas Transport Service B.V.) is responsible for operating the gas grid. The main supplier of natural gas to the grid is the state-owned NAM (Nederlandse Aardolie Maatschappij), which operates a cluster of gas wells in the Groningen gas field. The Dutch gas grid is 11,000 kilometres in length.

Pipelineexisting

Transportof LNG

LNG terminalimport

EU countries

Nord

Stre

am

Nord

Nord

LNG-terminalexport

SSSt. Petersburg

Minsk

ParisFrankfurt

ViennaV

MilaMilanMilaMM

ttIstanbul

MoscowMoscow

From Trinidad

and Nigeria

North Africa

Norway

Russia

Source: The European Natural Gas Network, 2009http://ec.europa.eu/energy/


Pipelineexisting

Transportof LNG

LNG terminalimport

EU countries

Nord

Stre

am

Nord

Nord

LNG-terminalexport

SSSt. Petersburg

Minsk

ParisFrankfurt

ViennaV

MilaMilanMilaMM

ttIstanbul

MoscowMoscow

From Trinidad

and Nigeria

North Africa

Norway

Russia

Source: The European Natural Gas Network, 2009http://ec.europa.eu/energy/

Import routes for natural gas to the EU

The illustration gives an overview of the import routes for natural gas to the EU. One-quarter of all energy consumed within the EU is generated by gas, 60 per cent of which is imported from locations such as Russia, Norway and Algeria.16



The gas grid’s political dimension

Natural gas sources are found at locations within and outside Europe. Gas pipelines transport the gas from source to end users. One such pipeline – Nord Stream – has been the subject of extensive debate in the Nordic region in recent years. Nord Stream will run through the Baltic Sea and link Russian natural gas sources with the European market, with the objective of stabilising European energy supply and helping the EU achieve its goal of reducing greenhouse gas emissions by replacing coal. The project is actually comprised of two pipelines, the first of which was completed in the autumn of 2011. Both pipelines are expected to be operational by late 2012, and will then be capable of transporting 55 billion cubic metres of gas per year for at least 50 years.17

But international pipelines are the subject of political discussions. Russia, for instance, cut off gas supply to Ukraine following the breakdown of price negotiations. Since the discontinuation of gas supply through Ukraine has consequences for large areas of the rest of Europe, the gas issue is a priority within the EU.

The use of energy resources as a political instrument is a growing threat to the world economy, at the same time as energy requirements are growing, energy resources are thinning out and demands for climate-neutral solutions are on the rise.

Natural gas in Sweden

Natural gas has been used as an energy source in Sweden since 1985. Even so, natural gas represents a limited share of Swedish energy consumption and accounted for a mere two per cent of the country’s total energy consumption in 2009. The EU average is approximately 23 per cent of total energy consump-tion.18 In 2010 the consumption of natural gas in Sweden totalled 1.63 billion cubic metres. The natural gas network is not nationwide, extending only from Trelleborg to Stenungsund and branching off in the east towards Gnosjö in Småland. Consumption therefore varies widely between regions.

Natural gas in Germany

Germany’s natural gas consumption was approximately 26 per cent of all energy consumption in 2009.19 Natural gas consumption totalled 99.5 billion cubic metres in 2010.20 Germany can only meet about 20 per cent of its gas needs and imports a large amount of natural gas, chiefly from Russia, Norway and the Netherlands. The German gas market is currently dominated by one major actor which sells approximately 50 per cent of German gas and owns around 30 per cent of the shares in regional operators.

Natural gas in the Netherlands

Natural gas is a significant part of the Netherlands’ energy supply – representing a full 45 per cent of the country’s total energy consumption.21

One key reason for this is the fact that the Netherlands has significant deposits of natural gas. In 2010, 24.4 trillion cubic metres of gas was extracted,22 and the Netherlands annually exports more gas than it im-ports. Close to 96 per cent of Dutch households are currently heated through connection to the natural gas network. In other words, the market share of natural gas as a heating method is exceptionally high.



Vattenfall and gas

Vattenfall’s involvement in the gas market grew sub-stantially through the acquisition of the Dutch energy group N.V. Nuon Energy in 2009. Natural gas gives Vattenfall a more balanced portfolio that better reflects the European energy mix. Natural gas accounted for eight per cent of Vattenfall’s electricity production in 2011.

Vattenfall is active primarily in gas trading. Vattenfall had 2.2 million gas customers and delivered 53.8 TWh of gas in 2011. Gas operations are concentrated in the Netherlands, where Vattenfall has a market leading position.

Natural gas is a prioritised investment area for Vat-tenfall in the years ahead, partly because natural gas emits less CO

2 than other fossil fuels and is therefore a

transition fuel towards an environmentally sustainable energy system. Close to 15 per cent of Vattenfall’s total investment programme for 2012-2016 will be invested in natural gas. The investments deal primarily with operations in the Netherlands, and will increase genera-tion capacity and strengthen security of supply. Natural gas is also a flexible fuel, suitable for use as a balancing power to balance irregular electricity production from renewable energy sources such as wind and solar.

A gas turbine is lifted into position at the Magnum power plant in the Netherlands.



Underground gas storage facilities

Through its Dutch operation, Nuon, Vattenfall is expan-ding the gas storage facilities in the German town of Epe. The expansion provides greater flexibility in terms of managing daily supply and demand fluctuations on the gas market. The expansion was commissioned in late 2011 and is expected to increase storage capacity to 280 m3. The natural gas is stored in underground salt caverns, which allows only small amounts of injected

natural gas to escape from the formation unless speci-fically extracted. Once a suitable salt dome or salt bed deposit is discovered and deemed suitable for natural gas storage, a salt cavern is developed within the formation. Essentially, this consists of using water to dissolve and extract a certain amount of salt from the deposit, leaving a large empty space in the formation.

0

200

400

600

800

1 000

1 200

1 400

Gas pipelines are used to transport the gas in and out of the

caves

400–600 m SA

LT LAY

ER

CompressedCO2

SALT

LAY

ER

CompressedCO2

Compare with:Big Ben(96 m)

Gas volume: approx.

140,000,000 m

Depth: approx. 1,200 m

10

0–

20

0 m

50–100 m

3

Underground gas storage

From energy source to consumer | District Heating


1. Boiler can be fired with e.g. biomassor natural gas

Condenser

District heating network

Turbine

Heated water

ser

Cooled water

District heating centre

Turbine generateselectric power

2. Steam conveyed toand drives the turbine

3. Steam from the turbine iscondensed and conveyed to district heating network

District Heating

What is district heating?

District heating is a large-scale method for producing and distributing heat. Heat is produced in one or several central production facilities and distributed to various buildings through underground pipelines. The tempera-ture of district heating water varies between 65 and 120 degrees, depending on time of year and weather conditions. It is called “district heating” because the heat source is located at a distance rather than in each individual building. A well-constructed district heating network may have a life span of 100 years.

This is how district heating works

Combined Heat and Power plants – source of both electricity and heat

An additional development of the district heating plant is the Combined Heat and Power (CHP) plant, used to generate both electricity and heat. There are several types of CHP plants, which can be powered by most types of fuel, including natural gas, coal, oil, biomass and waste. In the most common type of CHP plant, electricity is produced by heated steam that passes a turbine. The remaining steam then heats cold district heating water and, rather than being wasted, the heat is transferred to the district heating network.

Water is transported in well-insulated underground pipes to a district heating centre in the building that is to be heated. A heat exchanger conveys the heat (but not the water) to the building’s own heating system of radiators and hot tap water. The cooled district heating water is returned to the district heating plant to be reheated and pumped back into the district heating system.



The most modern, power efficient CHP plants use natural gas as fuel. When generation is based on natural gas, the steam turbine can be combined with a gas turbine – which further improves efficiency. Another common type of CHP plant is smaller plants located near landfills, where noxious methane gases are combusted and converted into heat instead of being diffused into the atmosphere and contributing to the greenhouse effect.

CHP plants have very high efficiency levels; regard-less of type of fuel used, approximately 90 per cent of the energy is utilised.23 This has clear advantages over condensing power plants, which use only the electricity generated and thus utilise only around 35-50 per cent of the energy content.24

How does district heating work?

District heating operations

According to the CHP Directive, European countries shall work to increase the efficiency of the energy mar-ket by utilising CHP plants that generate both electri-city and heat to the greatest extent possible.

As a rule, a district heating consumer may buy district heat only from one supplier – district heating is viewed as a natural monopoly in most countries. Local district heating markets are often state-regulated and district heating companies are not allowed to make a profit. Therefore, irrespective of actual price level, district heat producers and suppliers are not suspected of ear- ning an unreasonable amount of money. District heat-ing companies in some countries are allowed to earn a profit, although the amount of profit and the prices charged must often be approved by a government authority.



Third-party access (TPA)

In countries such as Sweden, Finland, Germany and Austria, district heating is not regulated other than through national competition law. But possibilities of allowing third-party access are being investigated as another way to create com-petition. Whether or not TPA will succeed in strengthening competition and encouraging innovation in heating markets depends on local conditions. In some countries, such as Sweden, district heating is clearly the dominant method of mee-ting heat demand, with large heat grids connecting multiple heat sources and competition occurring primarily between different suppliers using the same infrastructure. In other markets, such as Germany and the Netherlands, the heating infrastructure is not so clearly dominant – in these markets, collective heat solutions compete mostly as an alternative to other technologies and infrastructures, such as gas pipelines. Third-party access may be useful in terms of enhancing competition in markets where competition occurs primarily within the same heating infrastructure. But in markets where a particular infrastructure is not dominant in terms of competition, TPA actually discourages investment and therefore hinders the further development of a competitive heating market.

The connection of third-party production to local district heating markets can be designed according to two fundamen-tally different approaches. The third-party producer is either provided access to deliver into the network but not given access to end users (a “single buyer” model), or given access to both the network and the end users (sometimes referred to as the “full opening” of the district heating network). The model discussed in the most recent Swedish government inquiry deals with the full opening of the district heating network.

Free pricing has been used in Sweden since the electricity market was liberalised in 1996. A government inquiry was conducted a few years ago (2003-05) on the role of district heating in the heating market. This resulted in a new district heating law, effective as of 1 July 2008, to enhance the rights and improve the position of customers.

In parts of Northern and Eastern Europe, approximately 50 per cent of all households are currently heated by district heating. District heating is the dominant heating method in all Nordic countries (with the exception of Norway). Where district heating is available on a local heating market, it often has a market share of over 90 per cent.25

The position of district heating on the heating market varies between countries, based on traditional diffe-rences and control instrument design. There are strong municipal and government traditions in the Nordic countries and Eastern Europe in favour of constructing district heating networks. Consequently, district heating has faced basically no competition in metro areas. The Nordic countries are also the only European countries to impose high taxes on small-scale CO

2 emissions

(household gas and oil heating). Western continental Europe lacks strong political management to promote district heating expansion, while large-scale heat production companies pay large-scale heat production carbon fees via the EU’s emissions trading scheme (EU-ETS) and generally receive significantly lower subsidies

levels for new investments as compared to small-scale alternatives. Consequently, the competitiveness of district heating in the heating market remains relatively weak. Competition from natural gas has also made it difficult for district heating to expand.

District heating pricing

The price of district heating can vary depending on a number of factors. One important aspect is the net-work’s scope – the greater the delivery volume to many consumers who live in close proximity to each other, the more advantageous the cost structure. In an interna-tional perspective, Sweden stands out in this regard due to its extensive network. Company-specific condi-tions also play an important role, particularly in relation to the fuel primarily used in district heating production, planned investments and the degree of maintenance required for the network and facilities. Companies’ own views on pricing also have an effect on the actual price paid by consumers.



External factors also impact price. Fuel price trends, taxes and economic control instruments – such as electricity certificates, emissions rights, feed-in tar-iffs and the regulatory burden on businesses – are all significant factors impacting the final price. District heating producers are therefore largely dependent on policy initiatives.

There are two primary pricing models for operators on local district heating markets: alternative pricing and cost based pricing. Alternative pricing is focused on consumers’ alternative options with the aim of set-ting the price lower than competitors’ prices, while still yielding a profit. Cost based pricing is intended to match the district heating price with the costs involved. Because district heating is local in nature, prices are significantly affected by local conditions and thus vary from place to place. This location-specific adaptation is a major advantage of district heating, but also makes it difficult to make a fair price comparison between regions.

District heating production requires major fixed assets, chiefly in the form of production facilities and district heating networks. Plant and network maintenance also call for large investments, particularly to keep pace with technological advances, demands for renewable fuel and the stepped up expansion of co-generation and district heating. These investments have produced clear results. From 1996-2008, for instance, the Swedish district heating industry reduced its carbon emissions by 4.5 million tonnes.26

In light of these regularly recurring major investments, the district heating industry is very capital intensive. The price per kilowatt hour is kept relatively low by distributing the cost of these investments over a large group of end users. District heating companies with large delivery volumes (greater than 0.5 TWh/year) therefore offer the lowest average prices.



Vattenfall and district heating

Vattenfall is the largest supplier of heat in Europe, and sold a total of 41.6 TWh of heat in 2011. Heat sales totalled 3.9 TWh in Sweden, 15.2 TWh in Germany, 4.5 TWh in the Netherlands and 5.8 TWh in Denmark.

With respect to heat, Vattenfall is mainly active in district heating and, to a lesser extent, contract heat-ing. Heat is delivered primarily to apartment buildings, office buildings and small companies. An increased focus on energy efficiency is expected to lead to a slow decline in total heat demand in the future. In addi-tion to district heating, Vattenfall has started to deliver district cooling in Sweden. District cooling allows the maintenance of a comfortable indoor climate without excessive energy consumption during the summer months and in environments where manufacturing or similar processes cause high levels of heat generation.

To produce heat, Vattenfall uses natural gas, coal (lignite and hard coal), biomass and waste and – to a very limited extent – oil. Distribution varies between different markets and is therefore a reflection of

varying conditions. In Sweden, 95 per cent of heat production is based on biomass and waste; in the Net-herlands this figure is 100 per cent natural gas, while Germany uses 62 per cent coal, 33 per cent natural gas and five per cent biomass and waste.

The use of biomass is growing steadily. Sixty per cent of the biomass used by Vattenfall is comprised of household and industrial waste that would not other-wise be made use of. By-products and residue from the forest industry account for 30 per cent, while the remainder is made up primarily of agricultural by-pro-ducts.

Vattenfall has also started to co-combust biomass in coal-fired power plants to reduce CO

2 emissions. In

Germany, plans have been drawn up for biomass-fired power plants in Berlin and Hamburg. In the Netherlands, projects are planned to increase the amount of bio-mass co-fired with coal in power plants in Amsterdam and Buggenum. Vattenfall uses over one million tonnes of biomass each year.

Part of the district heating network in Berlin: connection between Mitte and Treptow heating plants .



Sweden

Germany

The Netherlands

Vattenfall invests in the entire value chain to ensure biomass supply. Vattenfall and Swedfund, a Swedish state-owned devel opment finance institution focused on in vestment in developing countries, together ac-quired a 30 per cent stake in Buchanan Renewables Fuel in Liberia. The company produces biomass from waste rubber trees from rubber tree plantations.

Liberia is a country with a large resource of rubber trees, with rubber export a key component in plans to

revitalize the economy. These cultivated trees typi-cally produce latex between the ages of seven and 30 years, after which they are harvested and replaced by newly planted trees. The practice has been to let these harvested trees rot or to burn them on site, with some of the wood used for charcoal production. By mak-ing wood chips out of the depleted trees, the farmers receive payment and the waste trees are put to use. Vattenfall’s goal is to secure a long-term supply of biomass.

Sourcing sustainable biomass – rubber trees from Liberia

The diagram shows Vattenfall’s heat sales in Sweden, Germany and the Netherlands in 2011 and type of fuel used. Source: Vattenfall, 2011

OilHard coalLigniteNatural gasBiomass and waste

Germany

The Netherlands

Sweden

15.2 TWh

4.5 TWh

3.9 TWh

5%

33%

26%

36%

100%

95%

2% 3%

Vattenfall’s heat sales

From energy source to consumer | Summary


Summary

Electricity

• Global demand for energy has soared in recent decades, which also has made energy supply an important political priority.

• The production mix used in EU countries’ electricity production is dominated by fossil energy sources. Oil, coal and natural gas together account for 53 per cent of the EU’s electricity production.

• The core of the electricity grid is divided into transmission grids and (regional and local) distribution networks. The transmission grid is like a highway that transports electricity with high voltage over great distances.

• Electricity is distributed from the transmission grid to large metro areas and energy-intensive industries via re-gional networks. Before the electricity arrives at ordinary residential properties and offices, the grid branches off once again into local networks.

• Each country has one or more system administrators – also referred to as Transmission System Operators (TSOs) – which operate, maintain and develop the transmission grid in a geographically limited area.

• In order for the electricity system to function, there must always be a balance between electricity production and electricity consumption. Grids across Europe are undergoing extensive modernisation, both to improve delivery quality and to facilitate connection to additional power plants.

Gas

• Natural gas is a growing energy source within Europe and accounts for approximately 23 per cent of EU’s electricity generation.

• The most economically advantageous way to transport natural gas from extraction site to distribution network is via transmission lines. These pipelines are usually around one metre in diameter and are placed along the ocean floor or on land, in which case they are most often buried.

• An increasing share of natural gas is distributed in chilled form as Liquefied Natural Gas (LNG), conveyed via tankers from gas fields that lack pipeline connections to major consumers.

• The biogas market has great potential, although efforts are needed to better match biogas production with demand.



District heating

• District heating is a large-scale method for producing and distributing heat. A well-constructed district heat-ing network may have a life span of 100 years.

• Water is centrally heated in a district heating plant and transported through well-insulated pipes to the buil-dings that need to be heated. When the water arrives, it enters a heat exchanger that uses the water for radiators and hot tap water.

• As a rule, a district heating consumer can only buy district heat from one supplier – district heating is viewed as a natural monopoly in many countries.

• In parts of Northern and Eastern Europe, approximately 50 per cent of all households are currently heated by district heating. District heating is the dominant heating method in all Nordic countries (with the exception of Norway).

1 IEA World Energy Outlook 20112 Ibid.3 Ibid.4 IEA, 2009. op.cit.5 SETIS European Commission, to read more please visit setis.ec.europa.eu6 World Nucelar Industry Status Report 2010-2011, World Watch Institute, 20117 IEA, 2010. op.cit.8 EWEA, 20129 http://www.tennet.org/english/transmission_system_services/technical_publications/netkaart.aspx10 Exchange rate used is 1 EUR = 9.554 SEK 11 Swedenergy, www.svenskenergi.se12 Ibid.13 Ibid.14 Ibid. 15 DENA (2010): Biogaspartner - a joint initiative16 Eurostat17 Nord Stream, to read more please visit www.nord-stream.com18 IEA, 2011. op.cit.19 www.cfr.org20 World CIA Factbook, 201021 www.iea.org22 World CIA Factbook, 201023 Svensk Energigas, 201024 www.iea.org25 Svensk Fjärrvärme26 The Swedish District Association

Footnotes - From Energy Source to Consumer


What will future solutions for the transmission and storage of electricity look like? What problems can we solve by investing in higher transmission capacity? And what exactly are smart grids?

Electricity Grids and Markets of the Future



Electricity grids and markets of the future | Future Challenges for the Energy Market


The energy supply´s central role in society has pro-pelled energy issues to a prominent political position throughout the world. Global demand for energy has exploded in recent decades, and this trend will persist with the current population growth rate of 80 million people per year. There is a clear positive correlation between economic development and energy consump-tion. And demand for electricity can be expected to increase more rapidly than any other form of energy – one-quarter of the world’s population still lacks access to electricity. Although the current financial turmoil is slowing growth in the short term, economic develop-ment in combination with continued population growth will be the dominant trend. Electricity consumption is expected to increase by more than 63 per cent over current levels by the year 2035.1 Fossil energy sources will continue to play a key role in the EU’s energy mix, and one-half of the EU’s electricity production is ex-pected to be based on fossil energy sources by the year 2030, with current policies.2

Nuclear power will most likely also play a significant role in electricity production. Renewable electricity pro-duction will grow at a fast pace, albeit from low initial levels.

The EU’s 20-20-20 target is to reduce CO2 emissions

by 20 per cent over 1990 levels, increase the share of renewable energy sources in the energy mix to 20 per cent, and improve energy efficiency by 20 per cent. The 2050 target is to reduce CO

2 emissions by 80 to 90

per cent. Several steps must be taken to achieve these targets.

At the same time, many European power plants are relatively old. A power deficit of 300,000 MW is there-fore anticipated by around the year 2020 if no new investments are made. The largest nuclear power plants being built today have a capacity of 1,600 MW, meaning that the capacity requirement is approximately 190 nu-clear power plants of the largest size. Installed capacity

Electricity Grids and Markets of the Future In this section we focus on a variety of short- and long-term challenges facing energy market actors. In the short term, problems are often a matter of security of supply. Can electricity consumers count on receiving the electricity they need? In the longer term, the issue is identifying new solutions that meet society’s expectations for the different dimensions of the energy triangle.

Future Challenges for the Energy Market



The European energy market is facing con-crete challenges in terms of reducing green-house gas emissions and ensuring energy supply with reduced import dependence, as well as the competitiveness and implemen-tation of a common energy market.

The EU’s common energy policy is therefore oriented towards Europe’s long-term energy security, stemming climate change and crea-ting the foundation of a competitive energy sector. This is accomplished through, among other things, harmonising the European electricity market to facilitate trade between countries – trade that is currently compli-cated by different technical standards and different market rules. A common European electricity market is also a prerequisite for the efficient utilisation of common production resources. Energy security is particularly important considering that Europe cur-rently imports over half of its energy needs.


Security of

Supply

Competitive-ness

Oil

Natural gas

Hard coal

1.3%

Lignite and peat Nuclear

Hydro

Wind

Biomass and waste, other renewables

32.7%

0.2 %

15%

2.7 %

16.3%

4.5%

27.3%

Total:277,884 MW

European electricity companies’ planned invest-ments in new electricity production capacity, 2007-2020

Source: VGB POWERTECH, 2011

The Energy Trianglein EU countries is currently about 750,000 MW. Based on the need for new capacity, many European market actors have planned major construction projects.

A review by VGB PowerTech of European electricity companies’ investment plans shows that investment in new capacity is planned at 278,000 MW during 2007-2020, divided between renewable (33 per cent), nuclear (16 per cent) and fossil fuels (51 per cent).3

The energy market faces major challenges going forward. How do we convert to a more sustainable energy supply? How do we safeguard and strengthen energy security? How do we integrate and connect different energy markets? And how do we strengthen transmission grids and improve connections between countries?



Current European and national policy goals signify that the production mix of Europe’s electricity market is gradually changing. A significant increase in renewable energy sources in electricity production gives rise to greater price fluctuations and the need for reserve power and a general expansion of transmission connections to manage a larger proportion of rene-wable electricity production.

Reduced climate impact affects design

Reducing the climate impact of the energy system will lead to major changes throughout the system, from producer to consumer. Alternatives such as efficient energy consumption, renewable energy, nuclear power and CCS (Carbon Capture and Storage) are at the cen-tre of discussions on a climate-neutral energy system. The energy system of the future may include a greater degree of locally produced renewable energy, but also new global flows of, for instance, bioenergy, solar-based electricity and hydrogen gas. The conversion will trans-form existing energy dependence patterns on fossil fuel and thus impact the foundation of a secure supply of energy.

Increased import dependency

Meanwhile, the long-term trend within the EU is to-wards a lower degree of energy self-sufficiency. For example, the EU’s import dependency on oil is expected to exceed 90 per cent by 2030.4 Natural gas will play a key role in Europe’s future energy mix as balancing power in electricity production, as the share of inter-mittent (irregular) energy sources increases. Western Europe’s import dependency on gas is predicted to rise to about 70 per cent by 2030.5 Clear-cut strategies are required in order to ensure a stable energy supply. Tools for achieving this include diversification of imports, stock-keeping and the use of forward contracts to

hedge deliveries on commodity exchanges. Energy ef-ficiency measures and an increased use of renewable energy sources are two other methods of strengthening energy security. Efficient resource utilisation

One part of the efforts to achieve a climate-neutral future and a secure energy supply is the efficient use of energy and resources. Electricity itself is an efficient energy carrier. Electricity generation also has fewer emission sources than many other industries and is thus easier to supervise. Provided that electricity is pro-duced in a climate-neutral manner, the increased use of electricity – relative to other energy carriers – is one way to utilise resources more efficiently. Electricity may, for instance, be used to reduce CO

2 emissions from the

transport sector. Prerequisites for reducing carbon dioxide emissions

Europe already has powerful market-based incentives for transitioning society towards reduced CO

2 emis-

sions. In the long term, there should be some form of global CO

2 price in order to ensure competitive neu-

trality between the world’s countries and markets. All technological alternatives for electricity production should also be allowed to compete on market terms. Infrastructure needs to be improved – grid connections need to be expanded in pace with the growth of new production in Europe and other countries, and existing bottlenecks must be eliminated. Licensing process reform is therefore a crucial issue in many parts of Europe. It is equally vital to promote research, develop-ment and demonstration of, e.g., electric vehicle infra-structure, CCS, and the development of new types of power such as wave and solar energy.

Conversion towards a sustainable energy system



Development of new types of power such as wave and solar energy is needed.

Guaranteed energy security

The transition of the European energy system towards increased utilisation of renewable sources is not merely a climate issue. An important EU goal is to maintain a safe and secure energy supply. Heightened import requirements include an increased dependency on natural gas. This increase stems from growing demand combined with reduced production capacity. The lar-gest sources of natural gas to the EU are Russia and Norway, and the import proportion of these two coun-tries will rise dramatically.6 Competition for raw mate-rial sources from the east will increase as high-growth countries like China increase their energy consumption.Natural gas imports must thus be complemented with new energy sources.

Other dimensions of energy security are also important from a European perspective and in view of the objec-tive of a common market. As member states’ energy markets develop and as transmission connections are extended, countries that are “energy islands” today will gain access to the internal energy market and thereby reduce their dependency on imported fossil energy.

The expansion of renewable electricity production also enhances energy security, as these energy sources are not dependent on imported fuel.

Existing Under construction Planned

Baltic States Continental Europe Great BritainIrelandThe Nordics

Norway the NetherlandsOpened: 2008Capacity: 700 MWLength: 580 km (world’s longest HVDC cable)

Sweden GermanyOpened: 1994Capacity: 600 MWLength: 250 km

ental Europe Ireland

The Nordics

Baltic States

Ireland

Great Britain

Continental EuropeGreat Britain the NetherlandsOpened: 2011Capacity: 1,000 MW(capacity equivalent to onenuclear power plant)Length: 260 km



The development of electricity grids in Europe

The illustration shows offshore transmission connections between various countries in Europe. Countries are grouped by synchronous frequency areas - e.g., the Nordic region (excl. Ice-land and Jylland, part of Denmark) makes up one such area.



Existing Under construction Planned

Baltic States Continental Europe Great BritainIrelandThe Nordics

Norway the NetherlandsOpened: 2008Capacity: 700 MWLength: 580 km (world’s longest HVDC cable)

Sweden GermanyOpened: 1994Capacity: 600 MWLength: 250 km

ental Europe Ireland

The Nordics

Baltic States

Ireland

Great Britain

Continental EuropeGreat Britain the NetherlandsOpened: 2011Capacity: 1,000 MW(capacity equivalent to onenuclear power plant)Length: 260 km

An integrated and interconnected market

The internal energy market is basically dependent on cross-border energy trade within the EU. But trade is often complicated, since countries have different market rules.

Common wholesale power market

The development of a common European wholesale power market is a requirement for achieving the vision of a common end user market (a market that enables electricity consumers to select their electricity sup-pliers from within the entire EU). Electricity producers sell electricity to the market, and electricity retailers and consumers buy at the price where supply meets demand. Linking spot markets and integrating intraday and balance markets are two measures to integrate na-tional markets to larger regional markets, and in 2014 to a European market, in line with determined Europe-wide targets.

One basic requirement for creating a common Eu-ropean electricity market is the construction of new transmission capacity. Market integration calls for the rapid expansion of transmission infrastructure. It also calls for effective co-operation between grid operators, clear and stable regulations and good co-ordination to increase link-up capacity. This will require substan-tial investments in transmission grids and extended transmission capacity between, e.g., the Nordic region and continental Europe and within Germany from north to south.

Furthermore, the greatest growth in electricity produc-tion is taking place in areas far from consumption. A large volume will be comprised of wind power, Southern European solar power and Central and Eastern Euro-pean biomass facilities. It is estimated that 12 per cent of Europe´s renewable energy production by the year 2020 will come from offshore North Sea wind farms.7

Vattenfall is involved in the development of new trans-mission capacity through membership in Friends of the Supergrid8 (to connect North Sea wind farms) and through the NorthConnect initiative. An application for an electricity interconnector between Great Britain and Norway was submitted in spring 2011 by NorthCon-nect, an interconnector development company partly owned by Vattenfall. If built, the interconnector will be the first to connect Scotland’s electricity network directly to that of a mainland European country. North-Connect – which was established in February 2011 by its five shareholders – submitted an application to National Grid Transmission for the onshore connection to the mainland network of a 570 kilometres, 1,400 MW electricity interconnector between Great Britain and Norway.

Clear rules needed

Complicated laws and regulations present other problems that raise obstacles for a common energy market. In order for more projects to be implemented, building transmission capacity must be simpler. The EU has recently proposed methods to shorten licensing procedures and harmonise procedures for new energy infrastructure.



A more integrated grid

In the future, the electricity grid must be equipped to handle great flows of renewable energy – both within and between countries – due to the EU goal of increa-sing the share of renewable energy and the develop-ment of a common European electricity market. This requires the strengthening of grids within countries and expanded connections between countries.

On the continent, the new power will replace coal power and other fossil energy sources. In the Nordic re-gion, renewable energy will to a greater extent serve as a complement to existing nuclear and hydro power. The Nordic region already produces a surplus of electri-city, and this is likely to increase with new investments. Calculations show that demand for electricity in Nordic countries is unlikely to match the increased production. The surplus can be distributed to other parts of Europe, primarily the UK and Eastern Europe. This will reduce the cost of carbon abatement, provided that there is sufficient transmission capacity in place.

Renewable electricity from, e.g., wind power is produced less regularly than traditional electricity from hydro or nuclear power. This also places demands on the grid. Wind- or solar-based electricity will be produced by many small, widely-dispersed facilities at varying times. Transmission capacity needs to be increased and inte-gration improved to manage this. The grid will also need to be monitored in more detail to distribute electricity from producer to consumer (see section on smart grids). An expanded, more integrated grid can improve the efficiency of the energy system.

Larger grids with greater transmission capacity – grids that can balance supply and demand over large geographic regions – are needed in order to create a stable system that also offers opportunities for wide-spread expansion of renewable energy sources. It is not a matter of transmitting electricity from, e.g., northern

Sweden to southern Germany, but rather of linking the entire grid in between to allow different areas located closer to each other to co-operate on several levels to smooth out supply and demand.

Investments in this type of extension of capacity are not problem-free, however. Investment costs are high and the licensing processes are complicated. It is also common that new lines threaten or are viewed as threatening to the environmental values prevalent in the areas where they are to be laid. Local protests from environmental or conservation organisations and the general public in the area are often one of the greatest challenges faced by transmission capacity expansion.

How can we reduce transmission losses?

Losses occur during the transmission of electricity – five per cent of produced electric power disappears in the grid. Factors that influence amount of loss include:

• Thickness - the thicker the line, the less the loss • Material - certain materials have better conduc-

tivity than others• Temperature - the lower the temperature, the less

the loss • Voltage level - higher voltage levels lead to lower

currents and loss• Direct current - direct current lines have lower

loss

Of course, one way of reducing losses is to lessen the distance between generation and consumption, through distributed generation. Economic programming during the grid design phase includes the consideration of grid losses. One example is grid transformers, developed in recent years to prevent losses.



Net export of electricity

464

.7 M

W

1361

.6 M

W

The Nordics

GermanyThe Netherlands

1413.0 MW

2

0

4

6

Germany The Netherlands The Nordics

TWh

5.4

-2

-4

-6

5.4

NL

1.5NL

2.0NOR

1.5NOR

DE

2.0DE

Modern transformers generate less heat and are less sensitive to no-load losses. Since the transformers are always in operation, losses occur when they are not fully utilised.

Another method for reducing loss is to shorten the distance between electricity production and consump-tion – e.g., by having a small wind turbine or solar panel near the house. This is, however, quite an expen-sive method of reducing grid losses as compared to grid reinforcements and upgrades.

Yet another way to reduce losses is to use HVDC (high voltage direct current) links. This technology transmits electric power over long distances via submarine ca-bles or aerial lines. Direct current produces less trans-mission loss than the traditional alternating current.

Map shows electricity flow between the Nordic region, Germany and the Netherlands and total 2009 electri-city imports and exports in these areas.

Source: ENTSO-E, 2009

Graph shows total net electricity exports between Germany, the Netherlands and the Nordics. The amount shown for each country is the actual amount of electricity exchanged between the countries in 2009. If exports exceed imports, net exports will be positive. If imports exceed exports, net exports will be negative.

Source: ENTSO-E, 2009

Electricity grids and markets of the future | Smart Grids


Communication network

Smart grids - the distribution network of the future

Changed electricity productionAs electricity production from e.g. wind power increases, it is balanced by reductions in other production, increased consumption or storage

Windpower

Hydropower

Otherenergysources

Reserve power stationProduces electricitywhen needed

Transformer stationsAble to communicatewith each other

Communicationnetwork

Micro-generationAny remaining self-produced electricity can be sold

Smart electric meterRefuel electric car

Solar cells

Smart appliancesElectronic equipment thatcan switch off in responseto frequency fluctuations

StorageEnergy generated at off-peaktimes can be stored for later use

Renewable energy sourcesMain energy source

Grid managerOversees the grid to ensure stability and efficiency

Disturbance in the gridThe Grid Manager can isolate areas if a disturbance in the grid isdetected. The grid uses advanced technology to execute special protection schemes in microseconds



Smart Grids

As a greater proportion of electricity comes from renewable and other small-scale energy sources, the number of electricity-producing units will grow sig-nificantly. The future energy system will be based to a greater extent on the principle of “many drops make an ocean”. In order to be equipped to gather up all this production and transfer it to consumers, the grid needs to have a different structure.

Developments within the energy area are actually com-parable with IT development. In the 1960s, many people believed that the future would be dominated by a limi-ted number of mainframe computers. Instead, it turned out that millions of small units linked by a large network – the internet – came to characterise the future of IT. As we all know today, this development was driven by the falling cost of microchips and the improved power of small computers. This same type of development is now gaining momentum in the energy area.

What are smart grids?

There is currently no clear, universally accepted defini-tion of smart grids, and different people and organisa-tions use different definitions. In general, though, we can identify two types of smart grids.

The first type of definition describes the technology that is considered to be a Smart Grid – power elec-tronics (including FACTS – Flexible AC Transmission System – and HVDC), energy storage, advanced grid automation and protective systems and the ability to place operating reserves on the consumption side and with smaller production units, to name just a few. The other type of definition is based on problems in need of solutions – facilitating the increased introduction of renewable electricity production, reducing peak loads, improving incentives for efficient energy consumption, creating favourable conditions for more active electri-city consumers. By incorporating IT-based control and

communication systems into the electricity system and then linking these together, we can manage and make decisions about production and consumption based on real-time supply and demand data. This information may also be used to make forecasts and improve plan-ning. In this way, we can improve on current methods of dealing with electricity supply and demand, and this will result in more efficient electricity consumption. The “smart” element refers to the improved use of technolo-gies and solutions to better plan and operate existing electricity grids. This allows for the intelligent control of production, enabling new energy services and energy efficiency.

The realisation of a more advanced power transmis-sion and distribution system in the form of smart grids is a prioritised topic on both the European and national levels. But the electricity grid is complex and affects a multitude of operators. Smart grids present many knotty problems – including legal, technological and economic challenges. There is great need for a systems view and a shared alignment.

The EU Commission has developed a policy in this area and has proposed activities for taking smart grids from innovative demonstration phases to commercial app-lication. First, the Commission proposes the develop-ment of a common EU-wide technical standard to allow different systems to work with each other. Everyone who is connected to the grid should be able to ex-change and interpret data to optimise consumption and production. Secondly, the Commission proposes the adjustment of existing EU regulations to create incen-tives for grid investors and increase the pace of energy efficiency and quality improvements to their services.

Technical options for storing electricity would also help bridge the gap between electricity consumption and production, for producers and consumers alike.



Energy storage – future possibilities

The supply of energy is virtually unlimited. The chal-lenge is that it must be available in the right place and at the right time. One of electricity’s typical characte-ristics is that the amount of electricity produced at a certain time must be consumed at basically the same time, while demand for electricity varies during the day and over the course of the year.

Climate change concerns and the consequent demand for renewable but intermittent electricity production have generated increased interest in large-scale energy storage, as well as short-term storage in the grid itself. The latter includes batteries connected to wind farms that help level out wind peaks. If the share of rene-wable electricity production continues to increase, the improvement of energy storage options is more or less essential. According to Boston Consulting Group estimates, Europe requires 150 TWh of extra storage capacity by the year 2025 to counter grid imbalances caused by a larger share of solar- and wind-generated

electricity.9 Electrical energy storage is defined as the conversion of electrical energy from a grid into a form in which it can be stored until it is reconverted into electrical energy. One initial problem is that grids ope-rate with alternating current, while batteries require di-rect current. This problem can be bridged with modern technology. The industry is working on making batteries lighter and less expensive, but there is much to suggest that weight and cost will continue to be disadvantages for battery technology for many years to come.

The problem is that each technology has inherent limi-tations and drawbacks, and this makes it a practically and economically advantageous to use individual storage only under special circumstances. Currently, only hydro pumped storage power offers fully-developed technology in this area. Battery technology has been developing over many years, but further research is needed to improve efficiency and lower costs. Fly-wheels and super capacitors are other short-term

Some storage options

Pumped storage power – Water is pumped up from a dam to a higher-situated water reservoir. This is done when the electricity price is low. When the price is high, the water flows back and passes a turbine. This technology is well-esta-blished and used in many places throughout Europe.

Batteries – Several different types are available. Types of flow batteries include polysulphide bromide, vanadium redox and zinc bromide batteries. More conventional types of batteries include sodium sulphide, lithium-ion, lead-acid and metal-air batteries. Storage technology is a hot topic in the automotive industry, where there is great demand for al-ternative fuels. This is mainly a matter of lithium-ion batteries, the same type as is currently used in mobile phones and laptop computers.

Hydrogen gas – Manufactured by wind turbines through electrolysis. Hydrogen gas can be converted to kinetic energy in an internal combustion engine.

Compressed air energy storage – Electric current from, e.g., wind or coal power plant powers pumps that compress air in layers underground. This air can then be pressed upward as it passes a turbine.

Flywheel energy storage – Surplus energy in the grid is used with an electric motor to rotate small cylinders in a friction-free vacuum. This rotation can then be converted into electrical energy by powering a generator.

End user energy storage – Many attempts are being made to store electricity with the end user, since it is currently dif-ficult for producers to efficiently store energy. One variant is to store electricity in the form of heating or cooling. When the electricity price is low, more energy is stored – e.g., by allowing the temperature to fall below the level of that required for a cold-storage room – and is used later on when the electricity price rises.



storage technologies, but the amount of energy that can be stored is and will continue to be rather small. Compressed air energy storage technology also needs to be developed – due to high losses and is currently expensive and requires specific geographic conditions.

How are consumers affected?

One of the features of smart grids is that electricity consumers are expected to be more active and involved in their real-time energy consumption. In the same way that people can plan their car trips around traffic condi-tions, electricity consumers should be able to control their consumption to avoid congestion – and higher costs – in the grid.

”Smart meters” will provide end users with clear incen-tives to conserve energy and thereby save money. “Active houses” with solutions for controlling heating, ventilation and lighting can reduce electricity costs up to 50 per cent – electricity consumption is managed based on times of the day when the price is lower. Dish-washers and washing machines, for instance, can be run at night, when wind power normally generates more electricity. Another example is electric cars which, for the same reason, can be charged at night. Smart grids also allow traditional electricity consumers to transition into full or partial net producers of electricity by instal-ling solar panels on their roofs, for instance.

• The development of the European energy market on the European Commission’s website www.ec.europa.eu/news

• Energy sources in Vattenfall’s book ”Six Sources of Energy – One Energy System”, available at www.vattenfall.com.

• The One Tonne Life project and what it takes to reduce CO2 emissions in daily life at www.onetonnelife.com

Read more about:


.

Energy efficiency is a key facet in the achievement of climate neutrality. Currently, every person contributes between six and eight tonnes of CO

2 (carbon dioxide)

to the greenhouse gas effect each year. According to experts, this figure needs to be cut to one tonne per person per year - otherwise, the greenhouse gas effect will increase the world’s average temperature by over two degrees Celsius. But what does a person actually have to do to reduce his or her CO

2 emissions and live a

climate-smart life?

With the One Tonne Life project, Vattenfall teamed up with A-hus, Volvo Car Corporation, ICA and Siemens to create a climate-smart home. The aim of the project

was to test whether or not it is possible for a family to live in such a way that emissions per person come into line with long-term climate stability – roughly one tonne of carbon dioxide equivalent per person per year.

The companies contributed the latest innovations in their respective fields with the goal of reducing normal household CO

2 emissions. Much of the technology and

many of the solutions used by the family are now available or will be in the near future.

During the project, the household was divided into the areas Transport, Food, Housing and Other. To ensure reliable measurement of the family’s CO

2 emissions,

Everyday Energy Efficiency – One Tonne Life

What does a person really need to do to reduce CO2 emissions and live a climateneutral life?

2. Solar cells and solar panels - Solar panels on the roof and the southern façade of the house. Solar cells included in the house design generate the energy needed for supplemental heating, ventilation, electricity for refrigeration, etc. Surplus power is used to charge the family’s electric-powered Volvo. Solar panels on the carport roof provide hot water and the small amount of heat needed there.

7. Entry porch - Serves the same function as the classic small vestibules built onto Swedish cottages in earlier times. The double doors prevent household heat from escaping and cold air from entering.

1. Volvo C30 Electric - Family car is as safe, comfor-table and roomy as a standard car. The difference is that the Volvo C30 Electric is powered entirely by electricity. The car gets its power from a lithium-ion battery which is charged via an ordinary household wall socket. It takes around 8 hours to fully charge the battery. The car can drive approximately 150 kilometres on a fully-charged battery.

Read more at

www.onetonnelife.com

Electricity grids and markets of the future | One Tonne Life

71

2

3

4

5

6


experts from the Chalmers University of Technology in Gothenburg were involved in the project. Over a six-month period in the One Tonne Life house, a Swedish family - the Lindells - success-fully reduced its CO

2 emissions to a

low of 1.5 tonnes. Although the target of one tonne was not met, this was an amazing achievement and demon-strates that it is possible for normal families to have a major impact on the climate.

The family’s emissions from private consumption prior to the project were estimated at approximately seven tonnes of CO

2 per person

per year. To this was added nearly two additional tonnes from public consumption that the family was unable to influence. By category, the family reduced its transport emissions by 90 per cent, food emissions by 80 per cent, housing emissions by 60 per cent and other emis-sions by 50 per cent.

In total, the Lindell family reduced its emissions by 75 per cent in just six months. Even when public emissions (emissions over which the family has no control) are included in the calculation, the family’s emissions were reduced to 3.3 tonnes of CO

2 per person per year – a

total reduction of 60 per cent.

3. Climate shell - Thanks to the well-insulated, leak-tight climate shell, the house wastes very little energy. The climate shell is comprised of the house’s windows, doors, walls, floor and roof. Energy consumption can be minimised with improved insulation in walls, roof and foundation and by installing energy-efficient windows and doors.

4. Windows - U value (i.e., insulation capacity) of as low as 0.7 for fixed windows and 0.8 for openable windows, as compared to value of 1.2 for conventional windows.

Indoors - To ensure that the well-insulated house gets enough fresh air indoors, a ventilation system draws air out from the bathrooms, closets and kitchen and blows in fresh, heated air to bedrooms, living room and other common areas. Heat in the drawn-out air is recycled. The house’s heating needs are met by the heated incoming air, body heat and kitchen appliances. Under-floor heating is installed downstairs.

2.5

2

1.5

1

0.5

0

■ Before project ■ Comfort level (week 12) ■ Minimum level (week 20)

Food Housing & Energy Transport Other

Tonnes CO2equivalent/person and year

Electricity grids and markets of the future | One Tonne Life

5. Solar boxes - The characteristic cubes framing the windows give the house an interes-ting appearance, but also serve an important function. They shut out high-standing summer sun and let in low-lying winter sun.

6. Walls - The house walls are built in three layers with unique insulation capacity and minimum air leakage. Plastic sheeting keeps the climate shell intact and is carefully positioned to further reduce air leakage.

Electricity grids and markets of the future | Summary


Summary

• There is a clear positive correlation between economic development and energy consumption.

• Global demand for energy has exploded in recent decades, and this trend will persist with the current population growth rate of 80 million people per year.

• Demand for electricity can be expected to increase more rapidly than any other form of energy – one-quarter of the world’s population still lacks access to electricity. Electricity consumption is expected to increase more than 63 per cent over current levels by the year 2035.

• Fossil energy sources will continue to play a key role in the EU’s energy mix, and one-half of the EU’s electri-city production is expected to be based on fossil energy sources by the year 2035, with current policies.

• The EU’s 20-20-20 target is to reduce CO2 emissions by 20 per cent over 1990 levels, increase the share of

renewable energy sources in the energy mix to 20 per cent, and improve energy efficiency by 20 per cent.

• Many European power plants are relatively old. A power deficit of 300,000 MW is therefore anticipated by around the year 2020 if no new investments are made.

• A review of European electricity companies’ investment plans shows that investment in new capacity is planned at 278,000 MW during 2007 and 2020, divided between renewable (33 per cent), nuclear (16 per cent) and fossil fuels (51 per cent).

• Alternatives such as efficient energy consumption, renewable energy, nuclear power and carbon capture and storage (CCS) are at the centre of discussions on a climate-neutral energy system.

• The energy system of the future may include a greater degree of locally produced renewable energy, but also new global flows of, for instance, bioenergy, solar-based electricity and hydrogen gas.



1 IEA World Energy Outlook 20112 Ibid.3 VGB Powertecch (2011), Electricity Generation 2011/20124 www.euractiv.com5 Ibid. 6 Belkin, P. (2008), The European Union s Energy Security Challenges, CRS7 www.ewea.org8 To read more please visit www.friendsofthesupergrid.eu/9 BCG. (2003), Keeping the Lights On – Navigating Choices in European Power Generation

Footnotes - Electricity Grids and Markets for the Future


Glossary


Word Definition

AC Alternating Current - an electric charge that constantly oscillates in direction

APX Anglo-Dutch Energy Exchange

Baseload energy Energy sources (e.g., nuclear energy) used to secure the supply of energy from intermittent energy sources

Bioenergy Renewable energy made from organic material

Biomass Products, waste and residues from agriculture, forestry and related industries, and the biogenic fraction of industrial and municipal waste

Bottleneck Occurs when a system's capacity is limited by having too few resources

Capacity Maximum capability of, e.g., a power plant to generate electricity or a distribution grid to transmit electricity

Carbon dioxide (CO2) A colourless, non-flammable gaseous substance. A greenhouse gas; taken up by plants during photosynthesis

CCSCarbon Capture and Storage - emissions-reducing technology for capturing CO

2 from coal-fired power plants, compressing it to a liquid and perma-

nently storing it deep underground

CHP Combined Heat and Power (co-generation) - a power plant that simultaneously produces heat and electricty

DC Direct Current - an electric charge that flows in one direction

DHDistrict Heating - a method for distributing heat energy for heating a number of buildings from a central location. Hot water is circulated through a

system of pipes, usually underground

DSO Distribution System Operators - responsible for operating, ensuring the maintenance of and developing the distribution system in a given area

EEX European Energy Exchange

Efficiency The efficiency of a power plant denotes the percentage of the input energy that is converted into electricity and/or heat

Electricity certificate Special subsidy for renewable energy production. A certificate fee is paid by consumers to electricity supplier

Electricity retail company Buys electricity on the power exchange from electricity producer for resale to end users

Emissions trading Market-based policy mechanism that promotes the reduction of CO2 emissions by providing economic incentives

Energy carrier System or substance used to transfer energy from one place to another

Energy mix The range of energy sources of a region, either renewable or non-renewable

EPEX European Power Exchange - The exchange for the power spot markets in France, Germany, Austria and Switzerland.

EREC European Renewable Energy Council

FACTS Flexible AC Transmission System - increases the controllability, quality and efficiency of AC power transmission

Feed-in tariff Policy mechanism aimed at promoting renewable energy technologies by reducing price per kilowatt hour (kWh) or offering a higher retail price

Fossil fuels Oil, hard coal, lignite, natural gas and peat

Fracking Method used for extracting shale gas

Frequency Measurement of electric current fluctuations per second. Measured in hertz (Hz); standard European AC frequency is 50 Hz

Generation Generation of electricity. (Usage: generation of electricity; production of heat)

Greenhouse gas Gas in an atmosphere that absorbs and emits radiation within the thermal infrared range

Grid manager TSO or network company. Can isolate areas if a disturbance in the grid is detected

Glossary


Word Definition

HVDCHigh Voltage Direct Current - transmission system that uses direct current to transmit electrical power. For long-distance transmissions, is less

expensive and entails fewer losses than AC systems

Hydro power Hydro power plants use the gravitational force of running water to generate electricity

IEAInternational Energy Agency - an organisation that works to reduce dependency on oil via energy conservation and the development of renewable

energy systems

Intermittent energy sources Energy sources that are generated irregularly, such as wind power

kWh Kilowatt hours - measurement of the number of kilowatts consumed per hour

Liberalisation Abolishment of monopolies in order to open up for competition.

LNG Liquified Natural Gas - natural gas that has been cooled to - 162° C and transformed into a liquid form

Micro-generation Surplus self-produced electricity that can be sold

MW Megawatt - unit for measuring power, equivalent to one million watts

MWh Megawatt hours - measurement of the number of megawatts consumed per hour

Network company Owns a specific local low and medium voltage network and is responsible for the distribution of electricity from producer to end user

Nord Pool Nordic Power Exchange

Nuclear power In nuclear reactors, uranium is used to heat water to generate electricity. Used as a baseload power in many energy systems

OECD Organisation for Economic Co-operation and Development

Power Same as energy per time unit; i.e, the power needed to perform something during a certain amount of time. Measured in watts

Power exchange Electricity market where retail companies trade electricity, buying from electricity producers and selling to end users

Regional and local networksThe transmission grid branches off into regional (70 - 150 kV) in Sweden, Germany and the Netherlands and local (less than 50 kV) networks which

distribute electricity to end users

Renewable energy source Non–finite energy sources such as wind, solar, geothermal, wave, tidal and hydropower, biofuels

Retail electricity market Power exchange market where retail companies buy electricity from electricity producers and sell to end users

Shale gas A type of natural gas, extracted from shale; often referred to as “unconventional” gas

Smart gridsTerm for future electricity networks which will be capable of storing more energy and will include technology to control and adjust electricity con-

sumption to fluctuations in electricity generation

Spot market Short–term physical trading in electricity on an exchange

Synchronised grids Electricity grids that use the same frequency at all times

Transmission grid Large volumes of electricity are distributed through the high voltage transmission grid (220 – 400kV) over long distances

TSO Transmission System Operator -responsible for transporting energy on a national or regional level

TWh Terawatt hour - measures the number of terawatts consumed per hour. One terawatt is equivalent to 1,000 watts

V Volt - the unit for electric potential

W Watt - measures the rate of energy conversion. 1 watt = 1 joule per second

Wholesale marketplace A marketplace for generators, suppliers and consumers, where pricing is transparent and based on supply and demand

Wind power Electricity generated by wind turbines

Vattenfall AB (publ)162 87 Stockholm, SwedenVisiting address: Sturegatan 10

Telephone +46 8 739 50 00

[email protected]

Documents

Common European Energy Market 2011