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Times of change: interview with Christian Rynning-Tønnesen, President and CEO of Statkraft

Since the early 1990s, Christian Rynning-Tønnesen has enjoyed a unique position observing the changes in the Norwegian, Nordic and European power industry. So, we decided to sit down with him and explore some of his views and reflections on the developments so far, and his perception of what the future might bring.

PA: Would you describe events such as the first nonsupported windfarm projects, the close-down of several large pumped storage hydro stations and price volatility as disruption of the industry?

Christian: Yes, I would. We find ourselves in the midst of a large transformation of our industry – so large that one may make use of the word disruption.

I often say that the scale of change is comparable to historic events like sail to steam ships and paper to electronics.

We are faced with solar and wind power replacing traditional power generation at an unprecedented scale.

In Statkraft, we believe that by 2040 (which is just above 20 years from now) 40-70 per cent of all global power generation will be renewable, with a large dominance of wind and solar energy. The wind power will first and foremost be onshore wind, but the share of offshore wind will be significant.

This implies that the majority of both fossil fuel and nuclear generation capacity will be replaced by renewable power. In about a generation, the power system will be dominated by wind and solar energy, as well as hydropower and other renewable power sources. In the future, any building in the world will be its own power house where the solar panels are not just mounted on the roof, but fully integrated in a nice way – into the roof tiles or on the south wall. It will be inconceivable to construct a new residential or office building without solar capacity.

PA: But how should we balance such a system, will it not become a gigantic challenge?

Christian: Sure, but our system today is really robust and designed to tackle varying consumption based on the grid, the procedural mechanisms plus a generation system basically mirroring the consumption variations.

What we are looking at in the future is gradual transition to a situation where the power demand, to a larger degree, will follow the generation – everything is turned around.

The good news is, however, that this change does not really require system changes regarding the physical grid, we will only need new IT systems to tackle it.

PA: And you believe that we’ll witness many of these changes within 20 years?

Christian: Yes, our prediction of 40-70 per cent of all power generation being renewable by 2040 implies that we are in the middle of the change already. It may not even be that evident to everyone right now. As is the case for this type of transformation, the change is almost unnoticeable until you one day realise that the ‘new order’ is here.

A classic characteristic is when the real pace of change is faster than the prognoses on change, and that is exactly what we are looking at now.

PA: Should we expect the emergence of a new market model?

Christian: Our fundamental belief is that we will retain a price-setting marginal production through Europe, in the form of coal and gas, for decades still.

However, given the large renewable generation volume, there will be an increasing part of the day where prices will be low or even negative. I believe that we are fully able to continue operating the current market system for quite a long time still.

If the renewable share reaches 70 per cent, the remaining 30 per cent will come from other sources that determine the price, but the thermal sources will set the electricity price most of the time.

PA: But what about the next generation of consumers? If they have their own local generation-capacity, is it likely that large parts of today’s power demand will disappear and shift the market-balance-point?

Christian: Yes, there will be less and less volumes available for existing thermal capacity. This will lead to continuous shut downs/decommissioning of assets due to insufficient dispatching.

Such a situation may even give us a certain renaissance of gas-powered generation, this may even include ‘simple’ technologies like ‘open-cycle’ assets with poor efficiency based on low investments, low fixed costs, but with high variable costs.

Today, we have large capacities of thermal-assets which are likely to be sweated for a long time. Existing capacities are likely to be run all the way up to negative cash-flows.

It is a classic situation for an industry with large capital investments in production capacity with no alternative source of income. We have seen it happen in the refinery industry and pulp & paper. All players are reluctant to eliminate capacity unilaterally in order for the rest of the community to benefit. They will be willing to push the assets really far before giving up. The players will keep going with no upgrades or overhauls, apply minimum maintenance and directly decommission assets as they incur outage.

PA: How much uncertainty is there in these types of predictions?

Christian: There is always increasing uncertainty about predictions that reach further into the future. There may be a technology revolution that changes the playing-field fundamentally. However, the enormous volumes of wind and solar power we are bound to receive will turn this industry around. But we will always have a need for, say, hydro for balancing the market as periods have little access to both sun and wind.

PA: Will hydro seize a golden opportunity in the new landscape, or will it end in decline?

Christian: Existing hydro will survive, at least in general. There are sufficient economics in the market to cover for normal maintenance.

However, I do find it necessary to point out that Norwegian hydropower has a tax system that grossly disfavours normal investments. We should re-introduce a normal deduction enabling us to pay normal tax based on normal earnings. This will enable larger upgrading jobs to the hydro portfolio
that are profitable – after tax.

Today’s system is skewed to the disadvantage of hydro to such a point that a hydro-project requires almost double the pre-tax margin of a wind-project to end up equal after tax.

In Europe, we can expect batteries and adjusted consumption to balance the system against large parts of the day-night and sun swings, but we will still need additional backup in the winter season.

PA: But the sun never really goes away?

Christian: No, in geographies where there is enough sun through the year you only need the night regulation. If you have batteries installed in the buildings and some older hydro-plants which gives rotating reserves for stabilising, the ability to absorb large volumes of wind and solar is there.

PA: How do you consider the future willingness to pay for system services to a point that may substitute and compensate for the loss of base-load and day-peaking services for large hydro-plants?

Christian: What we have seen so far is that as long as there is a sufficient surplus supply from other balancing services, there will not be a specific demand for pumped storage. Statkraft collects a small fraction of our revenues from system services; even doubling or tripling that share will not make a big difference.

PA: How about the role and position of hydro-generation as we know it today? I have heard you say that “we must realise the good old days where we (the producers) defined the parameters and thrived on our influental position are behind us.”

Christian: Sure, that is correct. However, we will remain the suppliers of all the rest; the parts that are not delivered by wind or solar, which is a more marginal role to play compared to our historic one.

This also points to the current situation in Norway and Sweden where we have an abundance of wind-projects being built while there is hardly any new hydro-projects at all. So, once again, I want to mention the inefficient tax-system which should be remodeled in a way that creates an even playing field between wind and hydro.

PA: Going forward, how will you position your reinvestment activities given the future outlook?

Christian: We have already turned down a planned complete overhaul of the “Nore 1” power station. We realised that the economics were not supporting such a comprehensive and expensive intervention. Instead, we will implement a plan with a series of smaller efforts to gain a sufficient life-extension after all.

PA: And how about other possible threats to your business, for instance, the EU’s water directive and new regulation in relation to this?

Christian: Within the next five years, 80 per cent of all of Statkraft’s Norwegian hydropower stations will be relicensed. It is about harmonising the EU directive with a time-based relicensing process. In this process it is important that we don’t loose to much production and flexibility to operate efficient.

Also, we currently experience increased attention from regulators regarding beefed-up safety measures, driven by climate changes, about reinforcement of dams. This hits us at the same time with softening market price trend - a challenging combination.

PA: Who will be winners, and who will be the losers, in the landscape ahead of us?

Christian: I think that the winners will be the companies with a large share of renewable generation and small share of costly capacity. They will have the right generation-mix, optimising all the demand-phases of the day and seasons.

In addition to this, the players who master the game of “client-proximity” (getting their power delivered in the right format at the right time) will benefit. These will be players who are able to capitalise on their advanced IT-systems to optimise the running of their complete asset-portfolio.

PA: You have been successful in growing your presence in Europe for nearly two decades now, what is your secret?

Christian: We have continued to develop our energy management systems beyond optimising our hydrogeneration. To be successful, we analytically develop a market view and value price development in short term (hour), 24-hours, seasons and multiple years. It is about the continuous evaluation of dispatching our hydro resources now or choose to hold them back for later use. We have adopted our Norwegian thinking, competence and systems in Sweden, Germany and the UK. We then discovered that we could utilise the system-platform and apply it as third party operator of German wind portfolios. This has made us the largest independent service-provider of wind-assets, and we are currently running and controlling more than 1,000 wind farms in Germany alone.

Our ambition is to further develop this portfolio into tens of thousands of power assets in various countries. You might compare us, model-wise, to Uber and Airbnb. In addition to the optimization of production, we are talking about a phenomenal volume of renewable power, enabling us to create large-scale power-sales exploiting the demand for such deliveries – we see the trend peaking upwards.

PA: Which is really an exciting development for Statkraft, entering into a true downstream business?

Christian: Yes, it is. Our customers will partly be small and medium size generators, but we are also talking about corporate end-users, B2B clients. Our thinking is that we need to get even better at continous client contact and follow-up, making sure that we are on top of our game.

PA: Are you saying that Statkraft’s strategy is to turn the ‘Prosumer’ into a client rather than a competitor?

Christian: Most companies are happy to get a professional actor to optimise their energy business in the best way possible. On the continent, the power carries a higher value if it is based on a good prognosis (made beforehand) instead of unpredicted variations. We shall also be strong at buying and selling power to mitigate and manage the imbalance which will occur, and optimize power procurement so that the customer gets the lowest possible cost.

PA: As we see more power produced locally, is there a threat that people will be less willing to pay for the grid, undermining the community principle as more people and companies want to opt out of the cost-sharing?

Christian: There will be less power-volumes transmitted due to the local generation, hence the paymentmechanisms have to be revised toward more fixed payments to make it sustainable. There is a risk, of course, that the willingness to pay is put under pressure, but my conviction is that we need to keep the networks intact to cover for shortage, imbalance etc. I really believe that disconnecting oneself from the grid and rely only on self generation is such a drastic step and is associated with a high risk that very few are willing to take on. Nevertheless, the network-companies are subject to pressure of reducing costs and tariffs. It is important we do not over-invest in the grids. The volumes will decrease, and we should not underestimate that fact.

PA: It sounds to me like you are suggesting that the classic split between upstream and downstream activities are becoming more blurred?

Christian: That is correct. Modern IT systems and enabling technologies will make this distinction a lot more blurred than it used to be both in physical networks and digital systems.

PA: Finally, is everything that we have talked about heavily Nordic biased, or is there talk of a more universal and global trend?

Christian: The similarities are huge. The biggest difference is that in Norway and Sweden we are already enjoying a close to 100 per cent fossile free power-system and the key challenge is about complete replacement of fossile-based energy in the other sectors of society. In other countries, the agenda is about supporting growth and making sure that the growth is kept renewable both in electricity generation and all consumption of energy. This trend is universal and in Statkraft we capitalise on the benefits of re-using all our competence and IT systems on a worldwide scale.

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