Vattenfall AB

Jämtlandsgatan 99
162 87 Stockholm
Sweden
Telephone: +46-8-739-50-00
Fax: +46-8-37-01-70
Web site: http://www.vattenfall.com

Government-Owned Company
Incorporated: 1992
Employees: 33,900
Sales: SKr 101 billion ($12.9 billion) (2002)
NAIC: 221122 Electric Power Distribution

Sweden’s Vattenfall AB is vying for a leading role in Europe’s energy generation and transmission market. The government-owned company has grown rapidly since the dawn of the 21st century, claiming the number five spot in northern Europe. Vattenfall is also the leading energy producer in the Nordic region, with a 50 percent market share, and is Europe’s leading district heating company. Based in Stockholm, Vattenfall has especially targeted growth in Germany and Poland. In Germany, company subsidiary Vattenfall Europe is that country’s third largest energy producer, through its holdings of Berlin’s Bewag, Hamburg’s Hamburgische Electricitaets-Werke AG (HEW), and VEAG, the main East German energy producer. In Poland, Vattenfall’s holdings include majority control of that country’s leading producer, Elektrocieplownie Warzawskie. Elsewhere, the company has entered The Netherlands, and has holdings in the Baltic states. Vattenfall (literally “Waterfall”) generates much of its Nordic energy supply through hydroelectric installations along Sweden’s rivers; the company also operates a small number of nuclear power plants. In other markets, such as Germany, Vattenfall relies on fossil fuels for its energy production. In 2002, the company’s total electricity production topped 160 billion kilowatt hours (Twh), with additional heat production and sales of 34 Twh. These combined to produce revenues of SKr 101 billion ($12.9 billion) in 2002.

Sweden Power Producer at the Dawn of the 20th Century

The development of hydroelectric power generators in the 1880s presented a new opportunity to Sweden at the end of the 19th century. At the time, Sweden lagged behind its more industrialized European neighbors. Yet the country’s vast natural resources, and particularly the many rivers and waterfalls in its mostly uncharted northern regions, offered the country the possibility to tap into an unlimited and inexpensive power supply.

By 1885, Sweden boasted one of the first cities with electric illumination. The country’s industrial development took off, as the low cost of energy supplies enabled Swedish products to become highly price-competitive. The promise of an abundant supply of cheap electricity led the government to step up its hydroelectric development, in part through the leadership of its railroad system, which became the first in the world to operate electric trains.

The state-owned railroad system became the motor for Sweden’s hydroelectric development at the beginning of the century. In 1901, the Swedish government acquired all water rights for the waterfalls in Tröllhattan, at the southernmost tip of Lake Vänern, in south-central Sweden. Development began on a hydroelectric dam and power plant to provide electric fuel for the rapidly expanding railroad system.

The next step toward the creation of Vattenfall came in 1905 with the establishment of Tröllhatte Kanal-och-vattenwerk (Tröllhattan Canal and Waterworks Administration), which took over the development and transmission of electricity from the state’s river holdings. These were expanded with the purchase by the Swedish government of additional waterfalls along the Gota river, including the Vargön, Ström, and Lilla Edet Falls, in 1908. The following year, the state body changed its name, becoming Kungliga Vattenfallsstyrelsen.

By then Vattenfall, as it came to be known, had nearly completed construction of the country’s first major hydroelectric plant, at Olidan. Started in 1906, the first phase of the project was completed in 1910. Work continued at the site until 1921, when all 13 of the plant’s power generators were brought online. In the meantime, Vattenfall had added two new major projects at Alvkarleby and Porjus.

The Alvkarleby site came online in 1915, featuring five power generators. Meanwhile, Sweden’s vast and uncharted northern region also had become a focal point for Vattenfall’s hydroelectric generation. In 1910, construction began on the first plant in the region, at the Porjus Falls on the Luleälv River. Construction of the remote site required five years and a workforce of some 1,000. Inaugurated in 1915, the Porjus plant fed the fast-growing industrial development of Sweden’s northern region, and particularly the Kiruna and Gällivare iron mines.

Growth in the Late 20th Century

Vattenfall continued expanding its electricity production in order to meet the growing demand from the country’s fast-growing industrial sector, which had given birth to such stars as SAAB, Volvo, and Eriksson, as well as from the swelling consumer demand for electrical power. At the Alvkarleby plant alone, power output increased more than tenfold, with total output topping 440,000 kilowatt hours by the beginning of the 1950s.

By then, Vattenfall had completed a fourth plant. Begun in 1945, the Harspranget hydroelectric plant was inaugurated in 1952 and was at the time the world’s largest hydroelectric plant. The Harspranget project also led to the development of a 1,000-kilometer power line, reaching from the plant to the city of Hallsberg in the south of Sweden. Built between 1946 and 1951, the power cable itself established a record, becoming the world’s first power transmission cable capable of rates up to 380 kilovolts.

Vattenfall began to look beyond Sweden for the first time in the 1960s. In 1963, the company was one of the initiators of the Nordel electricity alliance among Sweden, Denmark, Norway, and Finland. The alliance, which created a common pool of electrical power, was launched in 1965, marking Vattenfall’s first sales of electricity beyond Sweden.

During the 1960s, Vattenfall began preparations for the construction of a new hydroelectric plant in Vindelälven. That project, however, was abandoned at the end of the 1960s as the country became increasingly interested in adding nuclear power production. Preparations for the launch of the first Swedish reactor began in 1965; that reactor, at Oskarshamn, came online in 1972.

Through the 1970s and 1980s, Sweden added a number of new reactors, including two more at Oskarshamn in 1974 and 1985, four at Ringhals between 1976 and 1983, three at Forsmark between 1980 and 1985, and a sole plant at Bareseback in 1977. In the early 1980s, however, the Swedish population, through a national referendum, voted to end further nuclear plant development and dismantle the country’s nuclear power capacity by 2010. Instead, Vattenfall began research and development on alternative energy sources, including wind and solar power, as well as gas turbines and fuel cells.

In the meantime, Vattenfall also had begun to prepare for its restructuring from a state-controlled government body into a full-fledged corporation. This process, initially conceived as early as the 1950s, took on steam in the late 1980s with the proposed deregulation of a number of European energy markets, including those in the Scandinavian countries.

The Swedish government announced its intention to transform Vattenfall into a corporation in 1990. Two years later, the “new” Vattenfall AB opened for business. The company’s new corporate structure was expected to help it compete in the emerging deregulated and increasingly international energy market. Nonetheless, the Swedish government affirmed its commitment to maintain majority control of Vattenfall—in large part because of the government’s recognition that the country’s waterfalls and waterways belonged to its people and, therefore, could never become the property of a private company.

This restriction encouraged Vattenfall to begin eyeing international expansion. In 1992, the company began taking its first steps beyond its core Swedish base, with an entry into the Polish energy market. Its attention also naturally turned toward its Scandinavian neighbors, which were then in the process of deregulating their own energy sectors.

European Energy Leader in the New Century

Finland became the first of the Scandinavian countries to open its energy market to competition. Vattenfall became an early entrant, setting up a new subsidiary, Vattenfall Oy, in 1994. The following year, the company purchased two regional electricity producers in Finland. The company also began selling electricity directly to customers in Finland, including Enso-Gutzeit and mining group Outokumpu, in 1995. In that year, Vattenfall entered Norway and Denmark as well, setting up offices in those countries. The company prepared to begin direct sales of electricity to those countries upon their deregulation, which occurred in 1996. That year, the company faced competition at home as well, as the Swedish energy market joined the deregulated Scandinavian trade zone.

In the meantime, Vattenfall had begun looking farther afield for growth. The company targeted the fast-developing Asian and South American markets, setting up an investment vehicle, Nordic Power Investment (NPI). Through NPI, Vattenfall began acquiring shareholdings in a number of Asian and Latin American power plant projects, such as the 1995 purchase of a 25 percent share in Thailand’s Thuen Hin-Boun hydropower station.

Company Perspectives

Vision: Vattenfall —a leading European energy company.

Mission: Vattenfall’s mission is to enhance customers’ competitiveness, environment and quality of life through efficient energy solutions and world-class service.

The economic crisis that swept through much of the Asian and Latin American markets in the mid-1990s cut short Vattenfall’s expansion plans in those regions. Instead, the company decided to return its focus closer to home, where pressure had been building toward the deregulation of the entire European Community energy market. Germany, the single largest European energy market, appeared a natural choice for Vattenfall’s expansion, with deregulation expected to come in 1997. In 1996, Vattenfall took its first steps into the German market, setting up a joint venture, Vesa Energy, based in Hamburg, in partnership with Kommunalfinanz. Vesa’s operation initially targeted East Germany, buying gas-fired plants in Neubrandenburg, Schwerin, and Cottbus. Vattenfall’s share in the joint venture stood at 75 percent.

With deregulation in Germany stalled, however, Vattenfall returned its focus to the Scandinavian market. In 1998, the company launched a joint venture with Denmark’s NES A, forming the company Stroem AS. Vattenfall also launched a $625 million acquisition offer for Stockholm Energi, the third largest electricity supplier in Sweden.

Germany’s deregulation came in 1998, and Vattenfall soon confirmed its intention to grow into a major player on the European energy scene. In 1999, the company paid EUR 869 million to acquire a 25 percent share of Hamburgische Elec-tricitaets-Werke AG, or HEW, owned by that city’s government. Under the purchase agreement, Vattenfall also had the option of increasing its stake in HEW to majority control.

Poland became the company’s next target, with the purchase of a 55 percent stake in that country’s Elektrocieplownie Warszawkskie in January 2000. The acquisition, which cost Vattenfall $235 million, gave the company control of Poland’s largest power generator—supplying 70 percent of the Warsaw market.

By the end of 2000, Vattenfall served more than two million customers. Yet Vattenfall’s higher ambitions were revealed when newly hired CEO Lars Josefsson announced Vattenfall’s plans to triple in size by 2005. The company expected to position itself as a large-scale producer in what many viewed as the coming consolidation of the European market. As Josefsson told European Report: “As liberalization moves across Europe, we will see a big industrial change, where I think you will be left with a handful of big players. Our vision means that we are going to be one of the survivors.”

Toward that end, Vattenfall exercised its option to acquire majority control of HEW in November 2000, boosting its stake to 37.2 percent. One month later, Vattenfall stepped up its position in Germany with the purchase of VEAG, based in East Germany, from the country’s top two producers RWE and E. On. The acquisition, made through HEW, was completed at a cost of some EUR 1.48 million, considered by many observers to be a hefty price. Nonetheless, the acquisition established Vattenfall as the number three electricity provider in Germany.

Vattenfall had not quite ended its march on Germany. By mid-2001, the company had added Laubag, active in lignite mining, and, especially, a 43 percent stake in Berlin’s Bewag energy generating utility. The company began negotiating with the other major shareholder in Bewag, the United States’ Mi-rant, and in December 2001 paid $1.63 billion to boost its stake in Bewag to 90 percent. In all, the company’s spending spree had cost it more than $5 billion.

Following the Bewag purchase, Vattenfall regrouped its German holdings into a new subsidiary, Vattenfall Europe, in January 2002. That move was also a clear indication of the group’s European intentions. Back at home, however, the company faced criticism, in part because of the seeming double-standard of its energy policies: while in Sweden, the company relied on “clean” energy sources; in its German and Polish expansion, Vattenfall had become involved in the use of high-pollution fuel sources.

Key Dates

1901:

The Swedish government acquires water rights for the waterfalls in Tröllhattan and begins development on a hydroelectric dam and power plant to provide electric fuel for the rapidly expanding railroad system.

1905:

Tröllhatte Kanal-och-vattenwerk (Trollhattan Canal and Waterworks Administration) is created.

1906:

Construction begins on the first phase of Olidan, Sweden’s first hydroelectric plant.

1909:

Trollhattan Canal and Waterworks Administration becomes Kuglige Vattenfallsstyrelsen.

1910:

Construction begins on the Alvkarleby and Pojus hydroelectric plants, completed in 1915.

1945:

Construction begins on the Harspanget hydroelectric plant, completed in 1952.

1965:

The company forms Nodel electricity sharing pool with Norway, Denmark, and Finland; the decision is made to begin construction of nuclear power plants.

1972:

The company inaugurates its first nuclear power plant.

1992:

The company incorporates as Vattenfall AB, but remains controlled by the Swedish government; the company makes its first entry into Poland.

1994:

A Finnish subsidiary is established.

1995:

The company begins supplying power to Finland after that market’s deregulation, and acquires two regional Finnish power companies.

1996:

Sweden deregulates the energy industry; the company acquires 75 percent of the VESA Energy joint venture operating in East Germany.

1999:

The company buys 25 percent of Hamburgische Electricitaets-Werke AG.

2000:

The company acquires a 55 percent stake in Elektrocieplownie Warszawkskie in Poland; the company boosts its HEW holding to 37 percent, gaining majority control.

2001:

The company acquires Bewag, based in Germany.

2002:

The German holdings are restructured into the single Vattenfall Europe.

2003:

With more than 60 percent of sales coming from beyond the Nordic Region, Vattenfall becomes one of the top five European energy groups.

Meanwhile, Vattenfall’s further expansion appeared to be limited because its government-owned status restricted its access to all-important investment capital. A number of observers began calling for the company to make a public listing; however, the Swedish government maintained its commitment to ownership of the company.

Nonetheless, by 2003, Vattenfall had ceased to be a Swedish company—instead, it had become decidedly European, with the largest share of its annual sales, which topped SKr 101 billion ($13 billion) in 2002, coming from outside of its core Nordic region. Germany had become its main market, accounting for 60 percent of sales. Meanwhile, the company continued its expansion in Poland, with the purchase of GZE, an electrical distribution and sales specialist in the Upper Silesia region and the first electricity company offered for sale by the Polish government. This acquisition helped place Vattenfall in pole position for the coming race after the expected full deregulation of the Polish market in 2005.

Vattenfall expansion into Poland also was seen as a spearhead for expansion into the Baltic region. The company already held subsidiaries in Estonia and Latvia, and operated a district heating business in Estonia as well. Yet Vattenfall’s major expansion focus remained in Germany, and in nearby markets, such as The Netherlands, where Vattenfall had established a presence in 1999. In 2001, Vattenfall became one of the first to sign an energy supply contract with a Dutch company, in this case, Bovag. Vattenfall’s expertise in clean energy production also gave it a head start in the environmentally conscious Dutch market. After more than 100 years, Vattenfall’s future appeared powerful indeed.

Principal Subsidiaries

Abonnera i Sverige AB; Arrowhead AB; Arrowhead Services AB; Elektrocieplownie Warszawskie S.A. (Poland; 38%); Energibolaget Botkyrka-Salem Försäljn. AB; Forsaströms Kraft AB; Försäkrings AB Vattenfall Insurance; Gestrikekraft AB; Gotlands Energi AB (75%); Kraftbyggarna Entreprenad AB; Kraftbyggarna Invest; Nordic Power Invest AB; Produktionsbalans AB; Ringhals AB (74%); Säffle Arjäng Energi AB; Vattenfall Bränsle AB; Vattenfall Brâviken AB; Vattenfall Danmark A/S; Vattenfall Data AB; Vattenfall Deutschland GmbH; Vattenfall Engineering AB; Vattenfall Estonia Oü; Vattenfall Fastigheter AB; Vattenfall Norrnät AB; Vattenfall östnät AB; Vattenfall Oy; Vattenfall Power Management AB; Vattenfall Regionnät AB; Vattenfall Reinsurance S.A.; Vattenfall Service Syd AB; Vattenfall Support AB; Vattenfall Sveanät AB; Vattenfall Treasury AB; Vattenfall Utveckling AB; Vattenfall Värme Uppsala AB; Vattenfall Västnät AB; VGS AB; VGS Hydro International AB.

Principal Competitors

Electricite de France; RWE AG, E. ON AG; Tractebel S.A.; Enel Distribuzione SpA; Endesa SA.

Further Reading

Brown-Humes, “Tough Decisions for Vattenfall As It Lifts German Power Stake,” Financial Times, May 4, 2001, p. 28.

George, Nicholas, “With Every Gain Comes Some Pain,” Financial Times, December 14, 2000, p. 30.

Hawkins, Nigel, “The Spitfire Approach,” Utility Week, June 6, 2003, p. 24.

Newton, Paul, “Northern Light,” Utility Week, September 13, 2002, p. 26.

Sains, Ariane, “Vattenfall: The Swedish Energy Firm’s Expansion into Europe’s Deregulated Market Is Raising Questions,” Europe, April 2002, p. 22.

Shepherd, Nick, “Bewag Gives Vattenfall Clout in Germany,” Utility Week, February 7, 2003, p. 14.

—M.L. Cohen