Here we have set up a Q&A format that can help us to understand and answer questions about Statkraft and electricity prices, management of reservoirs, export of electricity and so on.         

Q.  Why are the rates higher in the winter – when people actually need lots of electricity – than in the summer? 

A.  The price of electricity is based on supply and demand. When electricity prices typically rise in the winter, it’s because the demand for power increases when there is relatively little supply (power resources) not in use. In the summer, prices are lower as a rule since the available resources are greater and demand is less.

Q.  Why do we export electricity in the summer, only to get a power rate crisis a few months later?

A.  Norway is part of a Nordic and Northern European power market. We are not dealing with a purely Norwegian market, but one in which power is exchanged across borders as a result of supply, demand and price signals in the individual countries and the transmission capacity between the countries. This ensures a mutually efficient utilisation of power resources and involves the countries helping each other, even when the situation is strained in one’s own country. Norway depends on its participation in such a market, since our hydropower is so vulnerable in dry years. In a cooperative effort like this, we must also accept exporting electricity in the summer even though the power balance is tight in Norway if the power prices abroad are higher than at home. This is crucial to our getting sufficient imports during the winter in really critical situations. In a tight situation, the power prices in Norway must be higher than those of our neighbouring countries in order to ensure the necessary imports.

Q.  Wouldn’t it lower our electricity prices to ban exporting power?

A.  No, in fact probably the opposite. Almost all the electricity produced in Norway is hydropower. The big disadvantage of hydropower as an energy source is that its availability varies greatly. In years with lots of precipitation, we are self-sufficient in power. In years with normal precipitation, we don’t produce enough electricity to cover our own consumption. If we don’t sell power to neighbouring countries when we have more than enough, then we cannot expect, as mentioned above, to buy from abroad when we have too little. A ban on export would therefore result in higher electricity prices in most years and a lower security of supply if we pull out of the international power cooperation. 

Q.  How can you sit there as a power producer knowing that a winter of record-high electricity prices awaits us, when you have earned lots of money by selling power all summer?

A.  As a power producer we have two main functions. Firstly, we have to fulfil all the requirements put on us by the authorities and exercise sound business practices in all our activities. Secondly, we have to perform from a business standpoint. The latter involves, among other things, our trying to produce as much power as possible when prices are at their highest. This is sound management of resources, in the sense of company finances as well as society’s economics. 

We base our production decisions on thorough analyses and anticipated future power availability. In hindsight, of course, it is always easy to determine how the power resources should have been managed – once we know how much precipitation has actually fallen and what the temperatures actually were, and the actual availability is known in regard to production and the transmission system. But this is rather like filling in the winning lottery numbers after the drawing. 

At Statkraft we feel we have operated our power plants responsibly for Norwegian society for many years.

Q.  Do you feel a responsibility for the high price of electricity we are now experiencing in Norway?

A.  There are many unfortunate circumstances that have led to our being in this situation; we had little snow this past winter, summer precipitation was less than normal, and in Sweden there have been problems with several nuclear power plants. Furthermore, a damaged transformer knocked out half the transmission capacity between Norway and Denmark. All this has caused extraordinarily high prices; the producers cannot be blamed for this. Our responsibility is first and foremost to manage scarce power resources as best as possible at all times. We take this responsibility very seriously. 

In practice, producers and consumers are in the same boat with respect to how we should manage the water. All reservoir water will, after all, produce power at some point in time, and if the producers manage to store lots of water for periods with high prices, then they collect high revenues. But then prices will fall during these periods, so that the price-levelling of the market mechanism will make sure that consumers get the lowest possible price averaged over time.
 

Q.  The same thing happened three years ago. Haven’t you learned from that?

A.  Three years ago, the power market also functioned the way it is supposed to do. Prices climbed sharply in response to an extreme lack of inflow in the fall of 2002. This ensured sufficient imports and lower consumption, which together “restored the power balance”. Since 2002 we and other producers have initiated several measures that will increase production in Norway. One example is the construction of the gas-fired power plant at Kårstø. This will be ready next summer to boost Norway’s power production by 3 TWh. Another example is the careful utilisation of water from the Vefsnavassdraget in Nordland County. This project would have yielded 1.5 TWh but was halted by the “Soria Moria Declaration”. 

The factors leading to this year’s extra-high prices, such as the drop-off in nuclear power in Sweden and less than normal precipitation, are circumstances beyond our control. 

Q.  As our country’s largest power producer by far, isn’t is true that you can influence the electricity price level here in Norway?

A.  It is true that we are the largest power producer in Norway, but we sell most of our power production to the Nordic Power Exchange (Nord Pool). In this context, our production makes up too small a portion to allow us to “fix the exchange prices”. 

Furthermore, around 45 per cent of our power production is tied up in agreements with the power-intensive industries, which represent about 30 per cent of the total electricity consumption of Norway.

Q.  How can Statkraft contribute to reducing the electricity prices?

A.  The liberalised power market is still a relatively young and inexperienced market, and there is most certainly room for improvement to make it function even better. Statkraft will discuss with the rest of the industry how to improve the security of supply, at the same time as trying to explain how the power market functions. In recent years, the significant price rise for coal, oil and natural gas has combined with the implementation of CO2 trading caused a steep price increase for power, including in Norway. We cannot directly affect the short-term or long-term price of electricity, but we will contribute to making the market work better still. In the long term, Statkraft has plans for further expansion that will improve the power balance in the market somewhat, but this will never be able to prevent large fluctuations in spot prices. The power prices in Norway are greatly affected by what happens in our neighbouring countries, on the Continent and in the rest of the world. We have to live with this fact. As consumers we should consider fixed-rate agreements if we cannot live with the large price fluctuations for electricity. 

Q.  The power producers are restricted to lower and upper water levels in regulated reservoirs, and in some places by local requirements regarding such things as spring flood and fish. Is it true that Statkraft and the other hydropower producers can otherwise regulate their water reservoirs as they like?

A.  That is in general very true. The power producers are under no coverage obligations, which means that we must make sure to have enough water in the reservoirs to cover the need for power through the winter. Before the Energy Act of 1991 was enacted, the power plants were under obligation. But when customers became free to choose their energy supplier, the obligation was dropped when the new energy act took effect. 

In connection with the power crisis of 2002-2003, the Norwegian Storting (parliament) and the government conducted a review (Report No. 18 to the Storting) of, among other things, the security of supply for electricity. A number of recommendations were considered at that time, among them that the requirements should be stricter on power producers’ reservoirs. Independent calculations, however, indicated that this would be a very costly and impractical measure in strengthening the Norwegian power system. 

Q.  Statkraft made a profit of NOK 6.1 billion in the first half of this year. Is it Statkraft’s objective to produce in order to make the largest possible revenues?

A.  Statkraft has clear business goals for its operations. We are measured by our financial returns in the form of long-term value creation for our owners, who are primarily the Norwegian people. At the same time, we recognise our responsibility to society at the local, regional and national level. We will not seek short-term profits at the expense of long-term, responsible management of Norway’s hydropower resources. 

Q.  What is Statkraft’s position on further construction of power facilities in Norway?

A.  We operate within the structure set for us. Statkraft has concrete plans for further expansion of hydropower as well as other renewable energy sources, but within today’s framework there are not enough hydropower projects of a size that will enable us to avoid future undersupply of power in Norway. 

Q.  How great a portion of Nord Pool’s turnover does Statkraft account for?

A.  In 2005 Statkraft represented about 12 per cent of the physical power sold on Nord Pool.

Q.  Can you explain Statkraft’s role in today’s market?

A.  Statkraft is a power producer. We do not sell electricity directly to private persons. Indirectly we do this via our ownership in companies such as Fjordkraft and Trondheim Energi. The power we produce is sold mainly to two categories of customer. Firstly, we sell directly to large industrial companies, energy plants and local authorities. Secondly, we sell power on the Nordic Power Exchange (Nord Pool). In this market we do not meet directly with the buyers of our power, since Nord Pool is an organised marketplace where the price is set so that supply and demand are balanced hour by hour. The buyers there are, among others, industrial companies and energy plants. It is the energy plants and other transfer companies which in turn sell the power to you and me. It is their name and logo that appears on our electricity bills. 

Q.  Don’t you feel we deserve cheap electricity way up here in cold Norway?

A.  It is not up to Statkraft to determine electricity prices in Norway. We operate in a free market within the prescribed conditions, and deal professionally with them. 

Q.  Some accuse the power producers of practicing cynical speculation. The producers have tapped the reservoirs with the safe assurance that the bill can be passed on to the consumer. How do you respond to such accusations?

A.  This is unreasonable by virtue of what we said above about producers and consumers sharing a common interest in how water should be managed. 
When it comes to power prices, the consumption of power has increased by one per cent every year for the past decade, while power production has remained about the same. Clearly this will have consequences for the relationship between supply and demand, and thereby the price of power. At the same time, record-high prices for coal, oil and natural gas and the introduction of CO2 emissions restrictions have led to steep price increases on thermal power throughout the entire European power market, and thus in the Nordic countries as well. As if this weren’t enough, factor in the inflow shortage in both Norway and Sweden this summer – so we in Norway cannot avoid higher power prices either.

Q.  With its size, does Statkraft have a de facto monopoly on information?

A.  We are a large player in Norway, but as mentioned above we operate in an international market. We are not a large and dominating player against the scale of the Nordic market, and we have nothing that resembles an information monopoly. 

Q.  Since 2000, salaries in the power industry have risen by 40 per cent. This is 10 percentage points above the rest of the workforce. How do you explain this? 

A.  We are dependent on well qualified and motivated workers to ensure the long-term and responsible management of Norway’s hydropower resources. In addition, there is great demand for the employees we seek, and few are trained in the fields we need. In order to compete for this critical workforce, we must pay competitive salaries. 

Q.  Statkraft has arrangements for company bonuses for its employees, which means they get better paid when the company does well. Can you defend this when electricity prices are so high?

A.  We have a collective, variable salary structure intended to motivate the employees to perform their best for the company. This structure is meant to contribute to an increasingly goal-oriented focus on critical activities across all business areas. The bonus basis is not tied to the price of power.