© Vattenfall AB

Managing the Business of Hydropower

2008-06-02

Nils Andersson, Vattenfall Group Function Communication

© Vattenfall AB

Challenges

Climate ChangeTechnology

Security of SupplyGlobalisation

The functioning of EIM

Hydropower fits well

© Vattenfall AB

Hydropower in the Nordic Region

Jan Feb Mar AprMaj Jun Jul Aug Sep Oct Nov Dec

Springtime flood-snow melting

Wet year

Dry yearrWinter persipitation as

snow and ice

GWh/ vecka

4000

3000

2000

1000

Normal year

Inflow

Winter-high electrisity demand

Summer-low Electrisity demand2000

1000

GWh/ vecka

Demand of electrisity

Inflow

Filling reservoirs Redusing reservoirs

Reservoir use

Normal hydroyear production2000

1000

GWh/ vecka

3000

Long term regulation

© Vattenfall AB

Pricing of Electricity

• Before DeregulationPrice = Cost + Profit

• After DeregulationProfit or Lost = Price – Cost

Security of Supply Calculations

Market Price

© Vattenfall AB

The Fundamentals of the Electricity Market

Price uncertainty

• Electricity is a very homogeneous product when using it, and is therefore easy to put under competitionWhen using it is not possible to differ from which source the electricity is comming. The costs and the environmental impact on the other hand are very heterogenous

• Transport costs are normaly paid via nettariffsInside different price areas the market price does not include any transport costs

• Marginal Cost Pricingis not a price model but the result of good competition

© Vattenfall AB

• Here producers and consumers meet

• The spotprice is set where supply and demand curves meet

• The spot price is set every hour

• The spot price reflects the marginal cost for the total system.

Price

Volume

Demand

Supply

Nord Pool sets the Spot Price on the Nordic Market

© Vattenfall AB

Hydropower Inflow - Norway & Sweden

100

120

140

160

180

200

220

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

TWh/year

Maximum variation in inflow Maximum variation in inflow (50 yaers) =(50 yaers) = 90 TWh 90 TWh Maximum production in Nordic nuclear = 90 TWhMaximum production in Nordic nuclear = 90 TWh

© Vattenfall AB

ETS 20€/t

Market Price – normal hydro conditions

0

60

40

20

80

€/MWh

TWh/år(capacity)100 200 300 400

run of river hydro

nuclearwind

CHP

Gasturbines and”peak

hydro”

Hydro & coalcondensing

oil

Supply and demand meet

demand

© Vattenfall AB

Hydrology and Price of Electricity

Hydrologisk balans och systempris 1996 - 2008

-50

-40

-30

-20

-10

0

10

20

30

40

0

100

200

300

400

500

600

700

800

900

1000

Systempris

Hydrologisk balans

SYSSEK/MWhTWh

1996 199919981997 2003200220012000 2004 2005 2006 2007 2008

© Vattenfall AB

Day before delivery Day of delivery Day after delivery

Hour of delivery

Balance regulationRegulation power - automatic - called bids

12.00

Balance settlementBalance powerSpot market

12.00

Commercial trading

Balance regulation & balance settlement

© Vattenfall AB

Quantity SellQuantity Buy

Bids on the spot marked

Price

© Vattenfall AB

Quantity

SellBuy

Systemprice

Turnover

Price

Prices/Turnover

© Vattenfall AB

VAB int brokerSupply & Trading

Spot market(Nordpool...)

Financial market(OTC, NordPool, ..)

End

cus

tom

er

VABSales

GenerationVAB shares

37 TWh 33 TWh +/- 6 TWh

Competitors –Sales

PD

Value chain – internal interface

© Vattenfall AB

SEK/MWh

Price forecast

© Vattenfall AB

Market Price on Nord Pool, pricearea Sweden

Nord Pool spot- och terminspris 1996 - 2010

0

100

200

300

400

500

600

700

800

900

1 000

1 100

Spotpris - Sverige

Årsmedelvärde

Terminspris - Systempris

1996 2003200220012000199919981997 2004 200720062005

SEK/MWh

2008 2009 2010

Årsmedelpris 1996 - 26,0 öre/kWh 1997 - 14,4 öre/kWh 1998 - 12,1 öre/kWh 1999 - 11,9 öre/kWh 2000 - 12,0 öre/kWh 2001 - 21,1 öre/kWh 2002 - 25,2 öre/kWh 2003 - 33,3 öre/kWh 2004 - 25,6 öre/kWh 2005 - 27,6 öre/kWh 2006 - 44,5 öre/kWh 2007 - 28,0 öre/kWh

© Vattenfall AB

Future trading

• To limit the risk with Vattenfall Generation portfolio

• Futures and forwards• All handled via Vattenfall internal “Electricity Bank” where Electricity Sales can also trade

• NordPool, brokers and bilateral • In real time all future contracts are “cleared” against NordPool physical spot prices

© Vattenfall AB

Physical responsibility

Svenska Kraftnät is responsible for the system• Primary control, frequency, instantaneous reserves

• Secondary control, interchange area error• Disturbance reserve• Voltage control• Other ancillary services• Basically through agreements for utilization• Owns gas turbines for fast disturbance reserve

© Vattenfall AB

Secondary control

• Handled by Svenska Kraftnät Balance Service• Bids for UP- and DOWN-regulation during the hour• Full regulation within 10 minutes (fast regulation = 5

minutes)• Requested regulation results in Requested regulation

power, which is included in the settlement procedure• Necessary regulation gives the price for Balance power

© Vattenfall AB

Bids

for r

egula

tion

Balance regulation - physical balance

Volume (+ MW)(– MW)

Regulation price (down)If down-regulation called

same for all called

Regulation price (up)If down-regulation called

same for all called

Price (SEK/MWh)

Market price

© Vattenfall AB

Prices - regulating & balance power

Market price

+ MW – MW

Price (SEK/MWh)

+ MW– MW

Price (SEK/MWh)

Regulation price up or down

Balance settlementBalance regulation

© Vattenfall AB

Primary control

• Handled by Svenska Kraftnät Balance Service• Demand in Sweden 2500 MW/Hz and

approximately 600 MW momentary reserve• Bids for frequency control capacity + reserve

capacity are given by producers– weekly bids (for all hours next week)– hourly bids for the following 24 hours

• Automatic regulation power is calculated in the settlement procedure

© Vattenfall AB

Measurement

• Network companies are responsible• Measurement of physical components:

– Generation– Consumption– Interchange toward neighboring network areas

• All measured values are used in the settlement procedure

• November 1999: Small consumers can switch suppliers using profiles and not hourly measurements

© Vattenfall AB

Changes in Base Power 2007 – 2015

Denmark -5,6 TWh

Wind 2,7

Decommissioning ofcoal condensing units -11,9

CHP, condensing 3,6

Sweden 23,3 TWh

Wind 5,5Hydro 1,7Nuclear power upgrading 9,0Natural gas CHP* 2,0Biofuel CHP* 5,1Decommissioning of nuclear units 0

Finland 11,4 TWh

Wind 0,3

Hydro 0,3CHP* 3,7Nuclear 12,0

Decommissioning of

coal condensing units -4,9

Norway 18,0 TWh

Wind 3,5Natural gas 8,7Hydro 5,8

47,1 TWh

* CHP and back-pressure generation Increased electricity use 19,7 TWh

© Vattenfall AB

Generation capacity and consumption in the Nordic countries

340

350

360

370

380

390

400

410

420

430

440

450

460

470

1995 2000 2005 2010 2015

Base generation Consumption Consumption incl. el. boilers

TWh

The generation capacity does not include the contracted import from Russia and Estonia, about 11-15 TWh/year, and export to other countries.

© Vattenfall AB

Managing the Business of Hydropower

2008-06-02

Nils Andersson, Vattenfall Group Function Communication

Thank you!