Target Switzerland10 February 1999
Slowly but surely, the electricity supply industries of Europe are moving towards deregulation and open competition. Janet Wood talks to Georg Weber about how the changes will affect Switzerland, which relies on water for 60% of its electricity.
Electricity supply deregulation is very often a matter of breaking up a monolithic, state-controlled power supply company into a number of smaller companies and allowing them to compete. On these terms, Switzerland is already on its way. This small country packs over a thousand electricity supply companies into its 41,000km2. The companies vary in form; some have generating facilities, and distribute the electricity in a specific service area, while others carry out generation or distribution only. As a whole, the country relies on hydro power for 60% of its electricity, with the remainder arising mostly from nuclear power (there are five nuclear stations) with a small top-up (some 2%) from thermal stations.
The water on which Switzerland relies so heavily for its power is not available all year round. It derives mostly from summer rain and snowmelt, and is scarce in winter. Many Swiss hydro stations therefore employ dams and reservoirs to retain snowmelt until it can be used to meet the peak loads of the winter. Even so, for the past decade or more winter demand has outstripped supply, and Switzerland has relied on imports from France, which has nuclear baseload capacity to sell. In practice, in recent years France has run two nuclear plants almost entirely to meet Swiss needs.
In the summer, Swiss hydro power is often available for export. In practice, however, the market for Swiss power has not always been a large one. In part this is simply due to prevailing market conditions: the fit between capacity and demand, which for so long in Europe was fairly close, has been replaced by overcapacity in much of the region. The general overcapacity has not stopped cross-border trade, and a good part of it does pass through Switzerland: France’s electricity exports to both Italy and Germany, and trade between Italy and Germany can all pass through the Swiss grid.
In a dry year, Switzerland cannot store enough water to meet its own needs, and no power is available for export. But even when there is rain, Swiss hydro power may not be attractive. The cost of Swiss power, like any water power, depends to a great extent on the physical conditions that attended the plant construction. Some plants, built early in the century, take advantage of the best possible sites and provide cheap power. But it is in the nature of the development that once the best site is taken, the next will be less attractive. Despite all the advantages gained from new developments in construction and implementation, it is a fact of geography that electricity from each plant built is generally more expensive than the last.
Georg Weber from the Swiss Association for Water Economy explains the situation. ‘Hydro power costs in Switzerland can vary from 3c/kWh to 30c/kWh,’ he says. ‘Companies who built their plants 40 years ago have taken advantage of good sites and offer cheap rates — there are some extremely economical plants along the Rhine, for example. For companies who built their plants ten years ago the rate is much more expensive.’ And, Weber points out, ‘distribution must also be taken into account, and in mountainous regions that cost can be very high’.
If the price of production varies so much in Switzerland, how is the price to the consumer set? Weber explains: ‘In each region the distributor is fixed, and the customer cannot buy elsewhere,’ he says. ‘Each distributor fixes the price depending on the capacity that is available and the local distribution costs.’ There is always a check on the price: in a town like Zurich, where the power company is publicly owned, the town government fixes the price and the people can vote on it. In other places, the power company has a treaty with the town that agrees delivery rates.
Even with these checks, he says, the price varies from region to region, from a 18c/kWh to as much as 30c/kWh.
Change is coming
The trend towards privatisation is as important in Switzerland as it is elsewhere, and changes to Swiss law are already passing through the legislative process: Weber estimates that the process could be complete in as little as a year. Following that legislation, electricity in Switzerland will be sold on an open market and some categories of consumers will be able to choose their electricity supplier; a similar process to that happening in many countries in the EU. The effects on Switzerland’s many utilities are likely to be harsh, Weber suggests. ‘Existing power companies will not be removed under the legislation,’ he says, ‘but they are unlikely to remain the same. In a market system, companies owned by the local town or village will no longer have the right to a monopoly service area. They will have to grow to survive, and small companies will likely be bought out by the larger ones’. The publicly owned power companies will not change owners as a direct result of the legislation, but for many the result will be the same; privatisation, because a private company has more freedom of action than a public one.
Weber notes that the process has already started. ‘Zurich has an electricity utility owned by the town,’ he says, ‘which may become a shareholder-owned company owned by the town, and although the present mood is not to sell it, in time it is likely to be sold on to a larger operator.’ The future of the utility will be decided by the town residents in a vote, and one is expected in two or three years, Weber explains. The Zurich gas company has already been converted to a shareholder company. Similar decisions are being considered elsewhere: ‘Baden is discussing a similar conversion,’ he notes, ‘there has been discussion of converting its entire utility company — which manages electricity, gas and water services.’ In this fluid situation, utilities that own expensive hydro generation are in a very weak position. In many cases, in particular for newer plants, operators have to charge a high price for the energy they supply because they are carrying a heavy debt from the plant construction phase. According to Weber, the Swiss legislature has recognised this problem and a number of solutions are under discussion at the political level:
•Ensure the switch to an open market is completed slowly, to give companies time to regroup their capital debt.
•Reduce taxes and overheads on hydro power plants. These plants have always carried an additional tax, paid to the Swiss cantons, as an acknow-ledgement that they are making use of a public resource. Naturally, there is great opposition from the cantons to the possibility that this source of revenue will be lost.
•Introduce a tax on CO2 generation. This option is under discussion within the legislature but introducing such a tax is not a simple process, as Georg Weber explains: ‘The benefit of such a move is that it acknowledges that hydro power is a renewable resource. It places the burden of CO2 generation where it should be on thermal power producers. The most important problem with a carbon tax is that Switzerland cannot possibly introduce it alone. When the European Union’s open electricity market is in place Switzerland cannot be the only country bearing this burden.’
Europe at the door
While the future shape of the Swiss electricity market is debated, and potential solutions to the problem of debt discussed, Swiss hydro owners are settling in and preparing for the advent of competition. Fearful of increasing the debt burden, operators plan maintenance and new investments with extreme care. Weber points to the recent announcement that the Eglisau plant will be refurbished at a cost of SF90M as the kind of project that is very carefully considered. ‘Plants are built and will operate,’ he says, ‘but it is expensive to run some of these plants and investment has been delayed. No-one dares invest unless it is really necessary.’ The operators are very well aware that outside Switzerland some electricity companies see this small country with expensive hydro and nuclear power as a prime target. Swiss deregulation is keeping careful step with the EU’s programme, and when both are complete there could be a race for the pickings of the Swiss industry.
Some Swiss observers put their faith in water power’s important role in the grid, providing peaking power on demand. Switzerland certainly has fulfilled this role, and its pumped storage stations currently play an important part, using cheaper imported power to prime its storage stations and selling the power on when it can obtain a higher price. In the long term, however, Georg Weber is not quite so sanguine: ‘The question to be asked is how well [an operator] will be paid for its supply,’ he says. ‘Shortage of power has become overcapacity. Even when it comes to peaking power, France and Germany have their own pumped storage stations, and they use gas fired stations for peaking.’ Once again, the answer may come back to a putative carbon tax. Such a tax is under development by the EU, but with fifteen different countries and any number of electricity companies and special interest groups to satisfy, no-one is taking bets on the final form of the tax, and certainly no one expects it to go into operation any time soon. Once again, Switzerland is keeping step with the EU, aiming not to lead the way with its own carbon tax, or to follow behind its competitors.
The past of the Swiss hydro industry is well known and much admired in hydro circles. But Georg Weber agrees that the industry cannot turn back the clock to the world of monopoly suppliers and select service areas.
The future of the Swiss hydro industry? It may be a benefit to the whole of the new European industry: providing flexible power; performing vital functions maintaining the stability of the grid; reaping the economic and moral benefits of its renewable power sources. Georg Weber is less sure: ‘For us,’ he says, ‘nobody knows where it will lead.’