Jumping into the Nord Pool

Nowhere in Western Europe are divisions in the nuclear power business deeper than in the Nordic region. In comparison, Germany may be on the path to withdrawal, but years or perhaps even decades will pass before a single reactor is shut down. In Spain, Britain and Switzerland reactors are hardly popular, but they might be left alone to complete longer operating lives than expected. Although France is slightly shaken, it is still faithful. Greens have penetrated the government in Belgium, yet the country will let its reactors run for forty years.

But in the Nordic countries, which prefer to act in concert wherever possible, we may soon see Sweden shutting nuclear capacity down, while its neighbour Finland builds again. Norway and Denmark, meanwhile, are officially no friends of nuclear power, but could not trade power across borders as they do today without it. To make matters more complicated, Denmark’s use of coal weighs on its conscience and aggravates its neighbours, who are subjected to severe fiscal punishment if they burn coal.

So what hope is there for determined nuclear proponents and opponents? And what will the consequences of their conflict be for Europe’s most advanced competitive power market?

STAKEHOLDER POWER

To understand the Nordic nuclear power business, one must start with its solid public and private foundations. Like so many other countries, Sweden and Finland embraced nuclear technology in the 1970s to reduce their dependence on costly oil. What makes the pair different is their broad stakeholder approach. Energy-intensive industrial groups have interests in eight of the region’s sixteen reactors, forcing them to take direct responsibility for nuclear decisions rather than cheering or carping from the sidelines. While US industry can protest in righteous horror at the stranded cost burdens it carries, Nordic industry has had no such luxury.

At the moment the principal industrial player is forestry giant StoraEnso, the result of a merger of Sweden’s Stora and Finland’s Enso in 1998. In Sweden, the group has a 10% stake in Oshkarshamn and a 2.3% stake in Forsmark. It also has its own conventional plants. Taken together, its Swedish interests make it Sweden’s fourth largest generator, with 1998 output of 7.6 TWh. In Finland, StoraEnso has 19.9% of industrial power group PVO. PVO in turn has a 56.8% stake in TVO, the operator of the 1680 MWe Olkiluoto nuclear plant, plus 2567 MWe in conventional capacity. StoraEnso’s Finnish output in 1998 was 8 TWh.

This August, the stakeholder system had important news to absorb: StoraEnso announced it will sell around half of its power assets, including the nuclear stakeholding. It will keep the conventional power plants at its mills, but overall its power self-sufficiency will drop from 90% today to 40% after the asset sale, for which it hopes to secure some $2 billion around the turn of the year. This is an early chance to tackle emerging nuclear competition issues, which are discussed below.

StoraEnso is not, however, likely to turn anti-nuclear after it sells its power assets. Nor is it the only important stakeholder. Another forestry group, UPM Kymmene of Finland, is PVO’s largest shareholder with a 46.3% stake. UPM Kymmene’s Finnish operations consumed 11.5 TWh in 1998, or 15.6% of total Finnish consumption. PVO’s nineteen shareholders also include chemicals group Kemira, forestry group Metsä-Serla, municipalities and pension funds.

In Sweden, top utilities share their nuclear assets with two smaller utility players – Skellefteå Kraft and Karlstads Energi. This broad community of interests obviously bodes well for nuclear power supporters.

THE BARSEBÄCK TEST

So why is the Swedish government challenging so many stakeholders with its demand that Sydkraft close its Barsebäck 1 reactor? It has a mandate. Swedes voted in a 1980 referendum to build no more nuclear plants and for full withdrawal by 2010, 25 years after the youngest reactor started operation. It is true that the referendum result (one year after Three Mile Island) has lost its political potency. Furthermore, all now acknowledge that the withdrawal target will simply not be met. But anti-nuclear forces in the coalition government have pressed their case relentlessly, finally winning one closure order at least in 1998.

Those forces are now close to final victory. This summer, they gained the backing of the Swedish Supreme Administrative Court, which reversed a temporary reprieve it had granted Sydkraft from the government order to close Barsebäck 1 by 30 June 1998.

Sydkraft is still arguing its case in Brussels. It paints the decision as anti-competitive, since its loss as a private company will strengthen the dominant position of Vattenfall, a state company which accounts for around half of Swedish power generation today. But now Sydkraft has exhausted its Swedish options, and if Brussels does not intervene it will have to close Barsebäck 1 by December 1999. Ample compensation offers, probably in the form of a share of Vattenfall’s Ringhals plant, could make its case all the harder to argue.

So what happens next? Some may bet on no change at all. Closure decisions have been pushed back so many times in Sweden that another Barsebäck 1 reprieve would not be surprising. Officially, though, the order stands. Moreover, Barsebäck 2 should follow the first unit into retirement by July 2001, ending nuclear operations at a site that is visible from Denmark.

Barsebäck 2 is already a line in the sand between Green hopes and mundane reality. It will close only if adequate renewables capacity is ready to replace it and/or if sufficient energy savings have been secured by July 2001. Neither outcome is considered likely by power industry sources. If Barsebäck 2 escapes closure, Green hopes must fade, since current policy is to allow other reactors to complete their operating lives. Prudent Swedish nuclear planners estimate a life expectancy of 25 years, but licences do not stipulate closure dates and ambitious operators are surely aiming for 40 years or more.

A LOT TO LOSE

The nuclear sector does have the massed ranks of Swedish business behind it, not just directly exposed stakeholders. The Swedish Industry Association is wary even of being too supportive of natural gas business development for fear of endangering nuclear power’s central position. It recognises that gas will be the fuel of choice in the future, but does not want its members to have to pay high prices for gas-fired power when cheap hydro and nuclear output is available.

It is easy to understand why Swedish business is so pro-nuclear. It has full access to a deregulated Nordic power market designed for competition, not policy distortion. Prices at Nord Pool, the region’s power exchange, have plumbed new depths for three years in a row. Customer and utility participation is strictly voluntary, but exchange volumes have soared. Nord Pool currently accounts for around 25% of regional power consumption. Where else in the world can dozens of industrial users gain regular, transparent, simple and direct access to power costing less than $20/MWh?

Except at the very highest demand levels, the answer to that question in almost all cases is not in the UK, not in the US, and certainly not in the newly deregulated markets of Europe. Most gas-fired project developers will simply walk away if they cannot secure around $30/MWh or more. Moreover, infrastructure for a regional gas market worth the name is lacking. A “Nordic gas grid” linking Russia, Finland, Norway, Sweden and Denmark could cost $3.5 billion, according to a study commissioned by Vattenfall and other players. Can Nordic gas demand really rise high enough (and quickly enough) to pay back that investment?

Nuclear power also plays a crucial balancing role. Power exchange prices have been low in recent years thanks to good hydro conditions as well as competition. In 1996, by contrast, some Swedish industrial users jumped at the chance to drop long term supply contracts and use their new freedoms, only to be hit by the market as reservoirs emptied and power prices soared. Swedish hydro production was just 51 TWh in 1996, compared to 64 TWh in a normal year and 73.6 TWh in 1998. If nuclear power is taken away, hydro volatility might make life unbearable for all but the hardiest market players.

In Finland, security is another reason to support nuclear power. Having lived in unnerving diplomatic limbo for most of the Cold War, the country is determined to anchor itself in the West and reduce reliance on Russia. Over the past year, nuclear power has found a prominent place in this campaign.

Why should Finland let its power industry’s dash for gas gather any more momentum when every cubic metre (plus 4.8 TWh of net power imports in 1998) comes from unstable Russia? Why should it choose coal for security, when that fuel is environmentally unsound? Why can Finnish nuclear successes not be repeated?

Officially, a fifth reactor is only a vague idea, to be developed with calm deliberation and much consultation. The right is supportive, while the left is not. But Fortum and TVO are already at work on environmental impact assessments and reviews of options. Finland is now a promising target for the European nuclear industry, while a year or so ago any idea of European new building seemed absurd. ABB Atom (1998 sales SEK1.64 billion, or $193 million) will almost certainly be the name to beat if Finland does build.

Across the Baltic in Lithuania, another test of European nuclear power’s prospects is looming. As do most Finns, Lithuainians loath having to rely on gas from Russia, seeing the country’s 1380 MWe Ignalina installation as a guarantee of independence. Since the 800 MW Elektrenai multi-fuel cogeneration plant and a handful of smaller conventional plants can meet Lithuania’s own requirements, Ignalina is also a valuable source of export earnings. Payment disputes with Belarus are an issue, but Lithuania hopes new connections with Poland and the European Union (EU) will open new revenue sources.

Yet EU member states like Austria will do everything in their power to make closure of Ignalina’s twin light water cooled, graphite moderated reactors (completed in the mid-1980s) a condition of Lithuania’s accession to the Union. How much is energy security worth, especially when weighed against EU membership? Westerners point to financial aid offers and insist this is an easy question. Lithuanians, for equally easily understandable historical reasons, have different views.

NUCLEAR COMPETITION

With so much happening in the Nordic nuclear business, it is not surprising one issue has not received much attention. But perhaps competition deserves more thought. Shared reactor ownership is a legacy of policy-driven co-operation, not an adaptation to competition. Now that joint owners are rivals in all other power business, should the conflict of interest that joint ownership implies be eliminated by the authorities?

There are good answers to that question:

First, plants delivering power to consortium owners at cost should be a neutral competition factor if those owners pursue independent trading and supply strategies with the power they receive. This is the practice in both Finland and Sweden.

Second, even players acting in concert would face rivalry across the Nordic market, including challenges from large Norwegian hydro groups. The Nordic market is plainly nothing if not highly competitive, as demonstrated by Nord Pool’s important role and the battle for domestic customers as well as industrial customers. StoraEnso’s decision to sell power assets is itself an endorsement of enduring market forces – the group is confident competition and its scale as a customer will keep power supplies economical.

Third, regulators are rightly concerned these days about acquisitions of suppliers, not generators. Vertical integration is the central goal of all leading players, and the most likely source of any abuse of dominant positions.

Fourth, nuclear plants run at baseload have less strategic value than plants that can be used flexibly for peak trading.

These arguments for complacency are losing value. Nordic consolidation is still irresistible, even though it has already created power groups of a size regulators should keep a close eye on. What happens if Birka and Sydkraft merge? What if a top Norwegian player or two join forces with top Finnish or Swedish players? Can generation competition really be as fierce as it is today if, say, just two Nordic groupings emerge that account for a third or so each of the Nordic market? Forcing sole major player ownership of nuclear plants might be one useful way to prevent any risk of abuse.

Consolidation is not the only factor increasing pressure on the regulators. Today, cross-border trading in the region is vibrant. According to Nordel statistics, Sweden achieved a record trade surplus of 10.8 TWh last year. Finland was able to import a record 9.3 TWh net, or 13% of its consumption, at low wholesale prices.

How long can this last? Demand is gradually increasing, conventional thermal capacity is underused or being mothballed everywhere for economic and environmental reasons, and drains on the region’s cheap power are multiplying. Nordel puts current Nordic interconnection capacity with other markets at 2710 MW. New interconnection projects with the Netherlands, Germany, Poland and Russia should add another 2700 MW to Nordel export capacity by 2003.

An 800 MW Norway-UK link is possible by 2006. Faced with static or declining supply, will this rising demand lead inevitably to higher power prices?

Competition questions also deserve more attention because nuclear power should be an interesting financial front in the years ahead. The Swedish National Energy Administration estimates nuclear plant average variable costs at just 7 öre/kWh (0.8 cents), including waste disposal provisions and taxes. Once depreciated, in other words, typical nuclear plants should be profitable at the operating level even in today’s low price conditions.

Furthermore, waste funding provisions decline in the later years of a reactor’s life. The Swedish Nuclear Fuel and Waste Management Company (SKB) estimates future shutdown, decommissioning and dismantling costs for the industry at SEK48 billion ($5.7 billion). In present value terms, this works out to SEK25.1 billion, and Swedish generators have already set SEK23.7 billion aside with SKB. In Finland, TVO had set aside 93.6% of its waste management liability by 1998.

So if there is a financial prize to secure, who will secure it? Utilities? Consumers? Or Greens, who will throw it away with scorn?

The Nordic region may enjoy a shining reputation as a model of fair and effective power industry reform, but it will have to work very hard to maintain it. Just getting along with each other may be difficult enough.