Norwegian state owned power company Statkraft has drawn up an expansion strategy based on overseas acquisitions and new developments. Norway has long been recognised as one of the world’s foremost hydroelectric powers but few large hydro schemes have been developed in the country in recent years and this situation is unlikely to change for the foreseeable future. However, Statkraft hopes that a combination of modernising domestic facilities and expanding outside Norway will enable it to continue to expand the generating capacity under its control.

In October 2005, the company took over 24 hydro plants in Sweden and Finland from E.ON Sverige, which was known as Sydkraft before its takeover by German firm E.ON, at a cost of US$586M. Twenty of the plants lie on the Ångerman, Skellefte and Gide rivers in Sweden, while the four Finnish facilities were previously owned by Graninge. The chief executive and president of Statkraft, Bård Mikkelsen, commented: ‘This acquisition is important to our strategy for Europe. We are already an important player in the Nordic market. With this agreement, we gain access to hydroelectric production in Sweden and Finland. This gives us a solid platform for further growth in the Nordic region and strengthens our position as one of Europe’s leading producers of environmental friendly energy.’

In mid-2005, Norway and Russia signed a wide ranging deal to cooperate on a number of energy sector issues, including oil and gas exploration in the Barents Sea but also encompassing hydro cooperation. This led to the conclusion of a memorandum of understanding between Statkraft, Hydro OGK of Russia and Rosnor Energo in December. The latter is a Russo-Norwegian joint venture that specialises in providing investment and advice to Norwegian interests hoping to invest in Russia. The three companies are to cooperate on developing Russia’s hydro potential, while Statkraft is to assist with upgrading technology at Hydro OGK’s plants and helping the Russian sector as a whole develop a more market orientated approach.

Mikkelsen commented: ‘This agreement in principle is an important signal of our interest in the Russian market. Both Statkraft and Hydro OGK are leading players in the fields of hydro power and power trading, and now our two companies will work together to explore mutual business opportunities.’ Viacheslav Sinyugin, the chief executive of Hydro OGK, responded: ‘The signed agreement is a very positive moment not only for Hydro OGK but also for the whole Russian electric power industry. It shows that interest from foreign investors in the sector is substantial.’

Hydro OGK was created at the end of 2004 as part of the major reconstruction of the Russian power sector. Although it is already up and running, new assets are still being added and by the end of 2006 it is expected that the new company will control about 50 hydro schemes in the country with combined generation capacity of 23GW. Ragnar Ottosen, CEO of Rosnor Energo, underlined the potential opportunities awaiting Statkraft and other Norwegian companies within the Russian power sector. He said: ‘The Russian Federation has probably the world’s largest potential for investments in renewable energy. This agreement between two leading electricity producers is a very important step in order to increase the global role of renewable energy.’

Statkraft also plans to embark on an expansion programme across Europe in an effort to position itself as ‘Europe’s largest renewable energy company’. It plans to target small scale hydro facilities across a number of Eastern European countries and also in France and Germany. A total of US$1.6B has been made available through a combination of loans and cash to develop new hydro facilities, wind and solar power projects and low emission gas fired plants. Mikkelsen said: ‘Our vision is to be the leading European player in green energy.’ He continued: ‘We recently scanned through Europe and are looking for more gas fired generation and more hydro…where we see access to projects or existing plants.’

Upgrade work

Statkraft could expand the generating capacity under its control through the construction of new facilities within Norway but it is unlikely that many large plants will be developed. In addition, many of the country’s existing hydro schemes are ageing and there is scope for increased capacity through modernisation. Some investment has actually been made in overhauling existing plants over the past year. Metal production specialist Elkem Saudefaldene is funding the development of two new hydro plants, Dalvatn and Sønnå, to replace ageing facilities near the west coast that have been in use for almost a century. Electricity produced at the plants will be used mainly at Elkem Saudefaldene’s own metal production facilities. Alstom was awarded contracts worth US$23.8M to provide equipment for the two plants.

A company spokesperson commented: ‘The upgrading and expansion of power plants represents a significant chance to improve the environment. Such projects allow for remedial measures to be taken against previous encroachments on nature and for the modernisation of old plants in line with new national and international environmental demands.’ In order to maximise hydroelectric capacity without building large new dams, the government and power sector companies are jointly funding a national research and development programme.

It is hoped that additional capacity can be added purely through refurbishment and the use of the latest technology. Where it is not economically viable for private operators to finance improvements, government help is expected to be made available. However, further investment in the Norwegian sector could be constrained by the relatively low electricity tariffs, despite the country’s high GDP per capita and high tax economy. The low prices have perhaps been one factor behind the lack of development of new generating capacity during the 1990s.

The company expects to have increased its production capacity by 3.2TWh a year by 2010, with a further 0.8TWh a year by 2015. Moreover, additional production capacity is likely to be added by the upgrade of a hydro plant within the Røssåga river system in Nordland. It also holds a stake in Småkraft AS, which has agreed to build 27 new small scale hydro schemes in conjunction with private land owners. The new plants should provide an additional 425GWh a year by 2012.

Statkraft is the second biggest producer of electricity from renewable and hydro sources in Europe. The company operates 62 hydro power plants in Norway in its own right, while a total of 132 are under its control when the assets of subsidiaries such as Skagerak Energi and Trondheim Energiverk are taken into account. Despite power sector deregulation, the company still controls about a third of national generating capacity. Moreover, unlike in other deregulated EU markets, the national state owned firm is likely to increase its share of the market over the next few years through the selective acquisition of some of the regional power companies that control much of the remaining capacity.

The low tariffs and the fact that Norwegians are among the highest electricity consumers per capita in the world must largely be put down to the success of the hydro sector. Norway is about as reliant on hydroelectric generation as it is possible to be. Around 99% of national generating capacity is provided by hydro schemes and the country is the fifth biggest producer of hydroelectric power in the world, with total generating capacity of 29,932MW. Most hydro facilities in the country are relatively small. The largest plant in the country is the 1240MW Kvilldal scheme, which accounts for 4% of national capacity.

However, while total hydro generating capacity is likely to rise slightly over the next decade, the proportion of hydro in the national generation mix is likely to fall. The country’s first substantial thermal plant is already under development. The Karsto gas fired plant is being developed by Naturkraft, which is a joint venture between Statkraft and Norsk Hydro, and has generating capacity of 400MW. Further gas fired plants could follow but environmental regulations mean that a large scale switch to gas is unlikely, in the short term at least.

Even if government regulations prevent the construction of a string of new gas fired plants, most new capacity is likely to be provided by wind power rather than hydro. A consortium of Norwegian firms hopes to develop a 1795MW wind farm in Møre and Romsdal, but there has been substantial local opposition to the plan.

Norwegian firm Norsk Hydro is investigating a range of options. The company’s executive vice president Tore Torvund commented: ‘We’re presently undertaking a small scale research project on a small Norwegian island where we take the wind, transform it into electricity and then transform that electricity into hydrogen. When there is no wind, we can produce electricity based on hydrogen.’

However, the company does not expect to make a profit from such ventures for at least 20 to 30 years.

As in the offshore acreage of other North Sea countries, Norway’s oil reserves are being depleted and the government is beginning to consider the question of the country’s long term energy policy. Oil exploration in the Arctic and Barents Sea is underway and Norway remains a major gas exporter, while gas production is projected to increase over the next decade. These changes have triggered a reconsideration of the country’s energy resources. Oil and energy minister, Einar Stensnaes, said: ‘Not only is it essential to look for other energy sources. It is also important to look for other industrial activities to develop alongside the petroleum activity.’

The lack of new capacity has caused some problems in recent years. Although Norway receives plentiful rainfall across the country throughout the year and so is not vulnerable to the kind of droughts that can hit other major hydroelectric producers, the lack of spare generating capacity has occasionally caused problems.

At the end of 2002, for instance, the Norwegian government appealed to
consumers to minimise their electricity use because lower than usual rainfall during 2002 had reduced water levels at the country’s main dams.

Reservoir levels were 20% lower on average than normal and the government feared that rising electricity consumption during the cold Norwegian winter could create some problems. Wholesale electricity tariffs similarly rose by 20% on news of the problems. The ministry of energy banked on higher prices to rein in consumption and in the event winter rainfall was able to boost water levels.

The export market

In the longer term, increased exports could help encourage the development of new generating capacity. Although there is environmental opposition to the construction of new hydro schemes, it is possible that new dams could be constructed with the export market in mind. Although Norway is not part of the European Union, it voluntarily adopts many EU directives and greater integration with European power markets is certainly feasible. Government regulations on dam construction could limit the construction of large new dams but there is plenty of scope for small hydroelectric schemes to complement wind farms and renewed interest in thermal power plants.

At present, Norway has transmission interconnectors with Denmark, Sweden, Finland and Russia, although the link with Russia has only been developed to import electricity. The Norwegian-Swedish transmission line is the most important link with other countries and has capacity of 2800MW.

Additional interconnectors could tie the country more broadly to the European Union. Norwegian power company Statnett signed a deal with its Dutch
counterpart, TenneT to develop a 600MW transmission line between the two countries, while a link across the North Sea with Norway has also been mooted.

Although the country exports some electricity, there is certainly the potential for greater exports, even from existing facilities and particularly during periods of prolonged high rainfall. While Statkraft’s core consumer base and the lion’s share of its generating capacity are expected to remain in Norway there is certainly the potential for it to expand across Europe. There is relatively little cross-border ownership of hydro facilities within the EU, so it would be interesting to observe the impact of an aggressive acquisition strategy on the sector as a whole.


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