Electricity market liberalisation Challenge and opportunity

Transcription

1 Electricity market liberalisation Challenge and opportunity Check against delivery BKW FMB Energy Ltd General Shareholders' Meeting, 30 April 2009 Address by Dr Fritz Kilchenmann, Chairman of the Board Ladies and gentlemen The 2008 Financial Year In 2008 BKW recorded a growth in revenue by a significant 24% to approx. CHF 3.5 billion, reflecting the company s strong market position as well as the increasing value of energy. The positive effects of the good operating results recorded in the energy business were partly outweighed by the large number of projects undertaken in preparation for market liberalisation and production capacity expansion. As a result, operating profit (EBITDA) rose by 14.2% to CHF 471 million. However, 2008 was also impacted by negative developments on financial markets, with the result of the state funds for the decommissioning and disposal of nuclear power facilities at CHF -126 million having a particularly negative effect on the financial result. At CHF 139 million, net profit was for 2008 was CHF 88 million lower than the previous year. The balance sheet total rose by CHF 121 million to CHF 5,989 million, while equity ratio dropped from 52.9% to 51.3% due to the slightly lower equity level on the balance sheet date.

2 2 Shareholder base and share performance Since BKW shares were first listed on the main segment of the SIX Swiss Exchange in early 2003, the BKW shareholder base has developed favourably, growing from some 1,100 shareholders in early 2003 to in the region of 7,000 at the end of February Today, BKW shares are the most widely held electricity shares in Switzerland. In 2008 BKW shares fell sharply in the wake of the global financial and economic crisis and are currently at the level of early 2006, giving the company a stock exchange value of approx. CHF 4.4 billion. It should be noted that the performance of BKW shares is comparable with the performance of other electricity suppliers as well as of the SPI Swiss performance index. What does electricity market liberalisation mean? On January 1 of this year the Electricity Supply Act came into force, a piece of legislation with a long history. Discussions on electricity market liberalisation began in 1995, with an initial draft of the Act being rejected in the referendum held in Here are just a few of the main points contained in the new legislation: The aims are to ensure security of supply and a competitive electricity market. Since the beginning of the year customers consuming more than 100,000 kwh per year are entitled to select any electricity supplier they wish. In 2014 all consumers will have this right. However, the transition to full market liberalisation will only take place if the referendum allows a security measure provided for by the Swiss Parliament. The transmission grid is operated by the national network company, swissgrid. The current owners of the grid among them BKW are required to transfer their ownership to swissgrid by The new organisation will ensure non-discriminatory grid usage at fair tariffs. The electricity market will be monitored by a federal regulator, the electricity commission ElCom.

3 3 The political and business communities are expecting market liberalisation to deliver greater competition and lower energy prices. These effects are quite possible, but an open market can also create rising prices, and that applies to petrol, domestic fuel, gas and of course electricity. The open market isn t a one-way street. When BKW announced its 9% price increases before the summer break in 2008 the first increases for 14 years the move attracted a few comments, but there was no major outcry. After all, petrol and domestic fuel prices reached their highest levels in summer last year, but things only started to become heated when a large number of other electricity suppliers announced increases of up to 20% in autumn, and as a result the electricity open market got off to a bad start. In the heat of political discussion, the Federal Council changed the rules of the game, amending the regulations just before they were due to come into force an action which was contradictory to constitutional principles. We need to be able to rely on the legislative body, especially when it alters regulations on matters which are as important for our economy as electricity supply, triggering a massive need for preparation in the sectors concerned. Now the government wants to lower grid usage charges by several hundred million francs in an effort to take the strain off consumers. This action will only succeed in postponing the problem; it is not a solution. Those most affected are the transmission grids their costs won t simply disappear. The main concern is the threat to grid security if insufficient capital is generated to cover the costs of maintenance and grid expansion. The course for future investment in the power supply system needs to be set now, which is why a number of electricity suppliers, including BKW, have lodged an appeal against ElCom s ruling. After all, reliable, long-term supply is a central plank of the new Act. Despite these problems, BKW has for a number of years adopted a positive, critical and open attitude towards electricity market liberalisation and is well equipped for the open market. The legal, technical and communication requirements for successful operation in the liberalised market, such as the separation of various business areas and the

4 4 regulation of grid usage, have been successfully introduced although admittedly at considerable cost. It remains to be seen if, and when, electricity market liberalisation will create greater competition for customers and structural rationalisation within the industry. This can be expected when electricity supplies in Europe become more fluid again, as was the case when discussions began in the 1990s. At the moment, most customers are choosing to stay with their present supplier because they cannot find a cheaper and equally reliable alternative. Strategy and challenges facing BKW BKW s purpose of business is the secure, environmentally compatible and cost-effective supply of electricity to its customers while creating an appropriate rate of return for the company. It aims to pursue its proven strategy of vertical integration, of fair cooperation and of maintaining a solid regional presence, and to expand its independent position in domestic and foreign markets. Vertical integration means BKW supplies customers with electricity it produces itself. To achieve these ends, a clearly defined, long-term overall strategy which is systematically pursued is absolutely essential. For many years, BKW has been adopting precisely this type of strategy. Much has already been implemented or is currently in the process of implementation, but making plans become reality involves discussion and modification. Every major power plant project has its opponents, a state of affairs which simply cannot be avoided in today s Europe. Sensible compromises are required, and this calls for a spirit of goodwill on both sides. The Board of Directors examines overall strategy at regular intervals, paying particular attention to business aspects as well as energy and environmental matters. The last review was conducted only recently.

5 5 BKW intends to maintain and significantly increase its carbon-free production capacities for electrical energy supplies. To achieve this aim, BKW is concentrating on expanding its involvement in renewable energy in domestic and foreign markets, on optimising hydroelectric power plants, on replacing Mühleberg nuclear power facility and on increasing energy efficiency. As part of its production strategy BKW is not seeking new fossil-fired power plant projects, preferring instead to implement re-sized existing projects. The development of framework conditions for nuclear energy in Switzerland remains uncertain; BKW is therefore keeping open the option of limited expansion of production capacity through gas-fired facilities, possibly in Switzerland. The company s strategy is based on the cost-effectiveness and funding viability of projects, with capital expenditure of more than CHF 2 billion earmarked for production projects during the next five years alone. Specific schemes and projects planned by BKW A large number of projects are currently being worked on and implemented for electricity production from renewable energy. BKW subsidiary sol-e Suisse leads the market in Switzerland in wind turbines and photovoltaic plants, as well as playing a major role in biomass and small hydroelectric power plants. It is active in some 200 projects in the whole of Switzerland. The Jura region provides good conditions for new wind farms, while in the Aargau region a solar power plant is planned on ABB s extensive factory complex in Birr. Small hydroelectric power plants are being constructed by BKW and local partners in Kander valley and Simmen valley, and in Grisons and Valais cantons. Hagneck hydroelectric power plant located on Lake Biel is undergoing comprehensive renovation work. However, obtaining licences and permits can often present major hurdles, and drawn-out procedures and appeals can immobilise projects for significant lengths of time.

6 6 Large-scale power plants are ultimately essential to security of supply. Despite our satisfaction with the large number of decentralised projects and facilities, we must not forget that nuclear power plants in Switzerland and France will one day come to the end of their service life. It is essential we take appropriate precautionary measures in good time. It can take anything up to 20 years in Switzerland to plan and implement new facilities, and that is why BKW and Axpo both submitted a general licence application to the Swiss government at the beginning of December 2008 for the sites at Mühleberg and Beznau. Atel (now Alpiq) had already submitted an application for a new development in the Gösgen area. There is however general agreement that two replacement power plants will be sufficient to start with. We are of the opinion that facilities should be constructed at the same sites as the existing plants, in other words at Mühleberg and Beznau. The procedure to obtain an indefinite operating licence for the present facility at Mühleberg after 2013 has been ongoing for more than four years now. Official procedural steps that are difficult to follow keep on delaying the decision regarding BKW s application. As the Swiss Federal Council s energy policy specifically embraces nuclear energy, structures now need to be created at administration level which are capable of processing nuclear licence procedures in a competent and timely manner. To complain of insufficient human resources simply will not do. The KWO plus capital expenditure scheme is one of the most important projects in which BKW has a 50% holding. The construction permit issued by the canton for enlarging Grimmelsee lake has been rescinded by the courts and referred to a licensing procedure. BKW is of the opinion that this procedure should clarify as swiftly as possible which projects may still be implemented during the remainder of the KWO licence period. General licences for nuclear power plants are subject to a national referendum, and larger hydroelectric power licences in Berne canton are governed by an optional referendum. This regulation results in many years of planning uncertainty. It would be irresponsible not to ensure alternative solutions. For many years now BKW has been working successfully in neighbouring countries, guaranteeing long-term production in

7 7 Italy and Germany: electricity generated from gas, hydropower and biomass in Italy, and from wind and coal in Germany. However, we are confident that our country will ultimately approve the plans for replacement and expansion that are so urgently needed here in Switzerland and will not accept long-term dependency on other countries. Only by working in tandem with the political authorities can BKW achieve its long-term strategic target of CO 2 -free electricity production A warm thank-you On behalf of the General Shareholders Meeting and the Board of Directors I would like to thank all the employees, the management and the Executive Board for the varied and outstanding work you have performed for the company and for our customers over the past year. For many years now you have been confronted by major challenges, and the challenges you face in the future are sure to be no less exacting. The work we do is exciting and demanding, with success and setbacks along the way. As always, we wish you unyielding determination and every success for the future. The Board of Directors and Executive Board would like to thank you, our valued shareholders, for your interest in a strong BKW. Your support is a major contribution to enabling our company to position itself effectively in the electricity market as it gradually embraces liberalisation. I now declare the General Shareholders Meeting open.