Christian Rynning-Tønnesen: End of electricity sharing is big risk

Statkraft is one of Europe’s largest clean energy companies and a major operator of hydropower dams in southern Norway. Owned by the Norwegian state, the company operates in 19 countries and is expanding rapidly into wind and solar.

Last year, the company had revenues of NOK 82.9bn ($7.9bn) and generated around 70 TWh of electricity. It operates around 370 power plants, of which 347 are hydropower plants, and is also a significant trader of electricity in Europe.

Here, in the first of our Climate Exchange dialogues, Statkraft’s president and chief executive officer, Christian Rynning-Tønnesen, talks to the FT’s natural resources editor, Leslie Hook, about the impact of the energy crisis on European markets.

Leslie Hook: Right now, Europe is considered to be in an energy crisis, with high gas prices and high power prices affecting all countries. What impact are you seeing on Statkraft, in particular, and how is this current energy crisis changing your outlook?

Christian Rynning-Tønnesen: My concern is regarding the market itself. Energy prices in Europe are simply too high. And the reason for that is, first and foremost, the Russian invasion of Ukraine and, as a consequence, that the Russians are throttling the gas supplies to Europe. So, the problem is in the market — for the customers, private persons, and businesses.

For Statkraft, this is not a problem. We produce energy, and we have a solid income. There has been volatility in the market, so we have also needed to handle margin calls on our financial contracts, but there’s no problem for us. My concern is for the market itself.

LH: High electricity prices must cause high income and high profits for you. How will you use this extra money to invest, to grow the business? What’s your plan?

CRT: The plan for us is to invest all our retained earnings in new renewable energy projects. So, we have an ambition to become one of the best renewable energy companies in the world, and so we would reinvest that money in new wind parks, solar parks, hydro power plants, hydrogen projects and biofuel projects. And this is the key thing.

LH: There have been a lot of discussions in the UK, and also at the EU level, about changing the way electricity is priced, and changing the way the market works. Right now, it’s the cost of the final unit of production that sets the price for everyone. Do you think there needs to be an energy market reform across Europe?

CRT: I think that it is important to bring prices back to reasonable levels, and in the long run, renewable energy is the lowest cost of energy that we can construct. So, I believe, in the end, this will sort itself out. But in the situation where we are now, where there was an abrupt, almost stop of gas from Russia, then the markets have reacted adversely, to such an extent that political intervention is necessary. And that’s what the EU has done.

So, this is not a market reform, but it is intervention that is needed and [for] as long as the effects of the Ukrainian war are affecting the markets. So, interventions, yes. When it comes to market reform, then we need really to make sure we are not making short-term decisions that change the fundamentals of the market, without proper analysis.

LH: Is there a risk of that happening? Do you think policymakers are at risk of making the wrong short-term decisions when they try to fix the market?

CRT: I think as long as it is short term, we can live with it, and we need some intervention. So, I’m not afraid of that. But what we must avoid is permanent changes being made in a stressed situation.

LH: Now, Statkraft, the majority of your electricity production is in Southern Norway, but the company also has assets in the UK and other countries. How much of your electricity are you exporting, in effect, or trading across borders?

CRT: All electricity is supplied physically into the places where the power plants are, so it’s not easy to say exactly how much of our electricity is brought in and out of the country. It’s put into the whole energy balance of the region. But Norway as a total country is exporting, on average, 10 per cent of what we produce. We have an overproduction of 10 per cent electricity, and it is all renewable.

If you add what Statkraft [is] selling on behalf of others, then we are one of the largest sellers in Europe of renewable electricity, from our own power plants, but also from more than 1,500 power plants owned by others.

So, we are a large company when it comes to energy supply, but that is partly sourced from what we produce ourselves, and partly by what others are producing.

LH: In Norway, there has been discussion over whether electricity exports should continue, particularly given the very high prices that households in Southern Norway are facing. Do you think that Europe will still continue to share electricity in the same way that it has in the past, or will it be every man for himself?

CRT: I think the biggest risk we are facing is that each nation is thinking more about itself than the neighbouring nations. That goes for all countries, including Norway.

It’s very prudent to build up gas reserves on the continent, and also for the hydro producers in Norway and other hydro-rich countries like France, Austria and also Switzerland, to make sure that we have enough water on stock before the winter.

Storing energy now, this autumn, is the right thing to do, for all countries. But what we should avoid is having restrictions on the buying and selling of energy — so we ensure that we share the resources we have, both on gas and electricity.

In Norway, we should make sure that we have a high water level before we enter into the winter, we should not put restrictions on the use of the [interconnector] cables, and produce the maximum gas we can to supply Europe.

LH: If there’s storage build-up, gas storage, high water levels for the hydro, and the sharing continues, will that be enough to get Europe through these winter months ahead?

CRT: It looks like it’s most critical on the gas side. If Europe is able to use around about 15 per cent less gas than last year, it seems like the supply of gas will be in balance with demand in Europe, with the added LNG imports forecasted, and also with some extra production in Norway and other supply sources.

The biggest risk we are facing is that each nation is thinking more about itself than the neighbouring nations . . . what we should avoid is having restrictions on the buying and selling of energy — so we ensure that we share the resources we have

So, the answer is, yes, I think the gas market seems to be able to handle this, with some conservation of usage. But it is a critical situation. When it comes to electricity, it also seems to be enough, but the prices are too high for normal consumption to be easy to handle. But I don’t think there will be a shortage. I just think there’s a real price risk, yes.

LH: Are you concerned that Europe will deindustrialise as a result of these high energy prices? We’ve seen smelters close, whether it’s aluminium or lead, and factories shut down because of the high energy prices, and basically they never reopened. What do you think will happen?

CRT: What has happened so far is temporary, but there is a risk that this can last a long time, and then there’s a risk that it could turn out to be permanent closures, which will be sad.

For that reason, we need to do whatever we can to increase energy supply in Europe, and also do what we can in energy conservation, where it is possible. And not by direct closures, but just more effective use of energy.

On the supply side, for construction, we need all forms of energy now, so make use of the coal-fired plants, even if it’s going a step in the wrong direction when it comes to the climate. We simply need the energy. And keep nuclear running — it’s also the right thing to do at the moment.

But what helps the most, in the medium-term perspective, is to speed up the construction of new renewable plants, because that will mean supply forever, it will be emission free, and it will be self-production in each country. And it is relatively cheap to do.

The most important thing for European countries now is to shorten the time the authorities take to give permission to construct, which is especially important for onshore wind and solar, and offshore wind.

Plus, increase the capacity of the hydro power plants, so they’re more flexible, with more swing production when there’s no wind and sun.

LH: I also wanted to ask about how individual households should get through this winter, and what demand side measures you recommend for just ordinary people who are preparing for winter right now.

CRT: I think what can be done quite quickly and efficiently is to install heat pumps, air-to-air. So, you take heat from the outside — the air outside the house — and have this equipment so that you roughly add one unit of electricity. You can take out between one and one and a half units of heat from outside, and bring into the house two to two and a half units of heat.

Also, see what can be done with the buildings to make sure there is as little leakage of heat as possible.

One problem, here, is the price of the heat pump itself. [But] there are several energy companies that are offering lease agreements, so you actually pay it down with the energy you save. It doesn’t need to hurt your budget.

LH: I know that Norway has a new target for 30 gigawatts of offshore wind by 2040. Will Statkraft be going into offshore wind? Is that part of the company’s plan?

CRT: Yes, we are part of two consortiums. On wind turbines fixed to the bottom of the ocean, we are in a consortium with Aker and BP. And on floating turbines, we are in another consortium with Aker and a company called Ocean Winds. So, we are positioning ourselves in both, and we are also developing offshore wind in Ireland.

LH: If you look at the next decade ahead, what will Statkraft’s energy mix look like by 2030?

CRT: We should be able to produce one-and-a-half times what we produce today, so going from around 70 terawatt hours a year to just over 100. And all this new capacity will be renewable. We should be able to construct as many as 40 new power plants per year, so one every 10 days. And they’ll either be wind or solar parks, or a hydro power plant, or hydrogen facility. That means we are stepping up to be one of the large developers of renewable energy in Europe. And Europe is the area that needs renewable energy the most now.

LH: That’s quite a significant investment. How will you fund the capital expenditure for this scale of new projects?

CRT: Retained earnings will be the main financing source. We will also take up loans, and we will have co-investors in some of these projects. And we can sell some projects and recycle the capital into the next one.

We would like to keep what we can but if we have financing challenges, we may sell some in order just to speed up the next development.

LH: There’s been a lot of discussion of how the energy sector and coal and carbon dioxide have led to climate change, but more recently we’ve also seen how climate change is coming back to have an impact on the energy sector.

Will stress on water, and stress on water systems, make hydro power a less reliable source of electricity in the future?

CRT: What I expect on hydro power is, in general, that the trend will be for more evaporation from the sea because of the higher temperatures. So, on average, there will be more water – more rain, you could say – not less.

But it will not be equally distributed. In general, areas in the world that are already wet, will become more wet, and dry areas will become more dry. What we have already seen in Norway is 10 per cent more rain than three to four decades ago, and we expect this to continue – that on average we will have more rain. So, we are, on average, a wet area in this aspect.

But, as long as we have reservoirs, and Statkraft has a lot of reservoirs, we will be able to control when we produce hydro power.

The biggest impact, for us, is that we have to strengthen the dams to handle more extreme rain in short periods of time. We are preparing ourselves for tropical rain in the high, mountainous areas of Norway, so that we can safely release water out of the dams when they are full, and not damage the structures. We are spending a lot of capital to strengthen the dams.

The weather will be more unstable. And that goes in both long waves — which creates a dry year — and shorter waves, which creates extreme rain and no rain. What happened this year was simply an arbitrary period of less rain, but the whole of Europe was affected. That will happen again – but there will also be periods with a lot of rain.

LH: The UK government has recently restarted the onshore wind process. What would you like to see the UK do in terms of energy policy?

CRT: It should relax the rules for onshore wind developments in the UK. Of course, there must still be processes for awarding permissions.

Wind turbines should not be built everywhere. It is important that there’s both central and local government involvement so there is a democratic process to decide where wind turbines should be allowed.

But the situation in the UK and the whole of Europe – and the whole of the world – is that we need a combination of wind and solar to help out both with the climate crisis, and also simply to get more energy into the system. And onshore wind is a part of it.

When it comes to offshore wind, the UK is probably still the leading nation in the world when it comes to developments there, and that clearly should also continue.

The UK is also one of the leading nations in stimulating hydrogen production from electricity, [including] green hydrogen {produced using renewable energy}, which is a very interesting and promising development.

The UK is an island, not only in physical aspect, but in terms of electricity. [As such it ] will see the need for a supplementary system . . . to ensure that the frequency and the stability of the grid is intact

What is also the case for the UK is that it is an island, not only in physical aspect, but in terms of electricity, with cable connections to France and other countries. [As such it] will need stabilisation, a supplementary system to ensure that the frequency and the stability of the grid is intact even when there is more volatile production from wind and solar.

So, the UK is also going to be the first large area in Europe that will have to develop a good system for grid stabilisation, to handle a very high share of renewables.

It is a challenge, but it is also an opportunity for Britain to develop technology that can be sold elsewhere.

LH: The UK is also in discussions with power producers in the UK about long-term contracts and, of course, an effort to push prices down for the consumer, for the government. Have you been involved in those discussions, personally?

CRT: We have participated in auctions, so we will be able to deliver some electricity there, but most of what we do is direct to large companies.

LH: With the auctions, that’s under the contract for difference . . . structure?

CRT: Yes.

LH: And with the contract for difference structure, those contracts do not benefit from the extraordinarily high electricity prices?

CRT: This is interesting because, when this contract type was invented, the strike price, the agreed price, was above the market price. But, nowadays, it is below market price. So, a lot of energy companies are giving money to the British state, they have to pay back the difference between the market price and the agreed CFD price.

Now the state is getting back a big part of the money that was given out in the early days of offshore wind.

LH: How much do you think those repayments come to, on a total basis?

CRT: I have not calculated this, but this must be significant. This must be a lot.

LH: Do you think this current situation with the Ukraine war and the energy crisis is going to speed up or slow down the transition to clean energy in Europe?

CRT: I think it will clearly speed up because there’s more need for energy, and a huge part of that will be renewables. We also need all nations need to have incentives to have enough speed in the energy transition. In Norway . . . quite a lot of taxes [are] on fossil fuel cars. And for that reason, 90 per cent of all new car sales in Norway are now either fully battery electric or hybrid electric. Most of it . . . is battery electric. So, incentives work. And we should make sure that the policies are made so that there are costs on emitting CO2, and incentives to buy non-emitting technology like electric vehicles.

Industry obviously needs to supply all of this, including the car industry, but it could be a really fast transition if the incentive systems are well designed. We still are living with an inherited 150-year-old taxation system that taxes people much, so you have to pay taxes on your income.

And emissions were originally not taxed at all, and are still very low taxed, because nobody cared about emissions 150 years ago. In our lifetimes, we have understood that emissions, all, especially climate emissions, are extremely dangerous, so they must be taxed.

But my main point is, when it comes to the climate, to make sure that we have both taxation on emissions, but also incentives in a positive way, to choose green. It should be cheap to choose green. It should be the best option for every person. Then, development can go really fast.

And we are communicating at the speed of light . . . so we can learn from each other faster than any generation had been able to learn from another before. So, there is hope.

The above transcript has been edited for brevity and clarity