Facts about the German Electricity Grid

Facts about the German Electricity Grid Contents INTRODUCTION ........................................................................................................3 ELECTRICITY GRID FACTS .....................................................................................4 THE GERMAN ELECTRICITY GRID ..............................................................................4 THE VATTENFALL GRID .............................................................................................7 INVESTMENT REQUIREMENT ...................................................................................11 REGULATION ..........................................................................................................12 FUTURE ALTERNATIVES ..........................................................................................14 GRIDS IN OTHER EU STATES ..................................................................................16 CASE STUDIES .......................................................................................................17 SALE OF THE TRANSMISSION GRIDS .................................................................18 POTENTIAL INVESTORS ...........................................................................................19 FAQS........................................................................................................................20 FURTHER INFORMATION ......................................................................................23 STUDIES ................................................................................................................23 LAWS AND REGULATIONS........................................................................................24 POLITICAL BODIES AND ASSOCIATIONS ....................................................................24 CONTACT ................................................................................................................25 2(25) INTRODUCTION Potential sale of our high voltage grid The German high-voltage grids are today owned by Germany’s four large energy supply companies. However, more far-reaching unbundling appears inevitable in view of the political debate in Brussels and Berlin. Various models are under review. Vattenfall accepts and supports this discussion since Vattenfall believes in a European energy market and has already gathered positive experience in countries where ownership unbundling has been established for years. Following detailed analysis of several options for the future of the transmission system, Vattenfall has reached the conclusion that a sale to a serious and financially strong investor can be a sensible solution. A process for sale was therefore initiated in summer 2008. Vattenfall is aware of the importance the transmission system has for society. Accordingly, each potential buyer is required to meet stringent criteria: They must have a long-term focus, ensure substantial investments in network extensions, grant continued free access to the grid to all energy producers, and the should promote the flow of electricity across European borders. Vattenfall has itself a keen interested in the fulfilment of these criteria as Vattenfall would remain one of the major customers of the transmission system after conclusion of the sale. If Vattenfall receives attractive offers from serious and financially strong investors, the sale could be concluded in the first half of 2009. Selling the Vattenfall grid would not be a decision against a national system operator (“Netz AG”). On the contrary – the move could create the nucleus for this form of enterprise. However, a multitude of issues as yet unresolved means that consolidating several transmission system operators could take many months or even years until the new system operation construct would have full capacity to act at operations level. Valuable time would be lost for planned network extensions. The development of the European marketplace would lose momentum, and the process of integrating renewable energy generators into the system would slow down. Various options for the future of the German power grid are currently the subject of debate in the general public. They provide for diverse forms of cooperation between the companies operating the grids today. Vattenfall, E.ON and EnBW have submitted a proposal to the regulator Bundesnetzagentur on how available cost-cutting potential can be tapped into swiftly, unbureaucratically and without compromising service security. This “synergy model“ will preserve the high reliability of the German power supply system and contain the rise in energy prices by way of further savings on the network side. On 27 October 2008, Vattenfall Europe Transmission published a press release on this proposal. 3(25) ELECTRICITY GRID FACTS The German Electricity Grid From power plant to consumer Regardless of whether it is a private household or a major corporation: Without electricity nothing functions nowadays. However, in order to reliably bring energy from the power plant to the end consumer, an elaborate distribution system with transport grids (the "Electricity highways") and distribution grids is required. The transport of the electrical energy is the task of the transmission grids: They ensure there is a stable supply system and that electricity is always exactly available in sufficient quantities –everywhere in Germany 24 hours a day. The structure of the electricity grid is comparable with that of the road network. In order to reach a smaller locality, you first drive as long as possible on a highway and the rest of your journey on country roads. With electricity, the high voltage grid is responsible for the transport of energy over long distances; the distribution grids transport the electricity regionally. Effective and reliable – the German electricity grid When it comes to security of supply, Germany is at the forefront in Europe. An elaborate grid system ensures that energy always arrives exactly where it is just then required. Germany is Europe's largest energy market. At a total length of approx. 1.7 million kilometres, not only does Germany have the most extensive electricity grid in Europe, but also the most reliable one. Hence the length of any electricity outage resulting from breakdowns is clearly shorter in Germany than in other European countries. 4(25) Different voltage levels for different requirements In order to take into consideration the different demands of all end consumers, the German electricity grid consists of several voltage levels: Pan-regional 380 and 220 kV high voltage transmission grids transport energy over long distances through to large centres of population or major corporations. These "electricity highways" form the backbone of the German energy supply infrastructure. From these, the electricity is then further transported regionally or locally at a lower voltage. Balancing zones ensure optimal security of supply So that a country as big as Germany can be reliably supplied with the energy it requires, the territory covered by the Federal Republic of Germany has been divided into four balancing zones. This division has developed historically. Originally there were more individual balancing zones (VEBA, VIAG, VEAG, VEW, RWE, EV, etc.), however over the years these were integrated into four grid operators. Today, the individual high voltage grids in the respective zones are operated by the four grid operators EnBW Transportnetzgesellschaft, E.ON Netz, RWE Transportnetz Strom and Vattenfall Europe Transmission. 5(25) Responsibility of the grid operators The grid operators play a vital role in the secure supply of electricity. They are responsible for the electricity frequency and voltage remaining constant, for maintaining safety limits and ensuring that the generation and consumption is always in a balanced relationship (balancing capacity/balancing energy). This challenge has grown with the increase in wind energy, due to the fact that the volumes of wind energy generated fluctuate heavily. Since 2001 the German transmission grid operators (TSOs) have procured their balancing energy requirements on an open, transparent and nondiscriminatory market for balancing energy that corresponds to the requirements of the German Federal Cartel Office. In order to process their daily bidding activities, the German transmission grid operators have set up IT platforms, such as www.regelleistung.de. Not least, the grid operators guarantee the most cost-effective further transport of electrical energy in all parts of Germany. The components of the electricity price The amount of money that a grid operator is permitted to earn from his high voltage grid is strictly regulated by the German regulator Bundesnetzagentur. However the grid fees for the usage of the high voltage grid also only account for a mere four percent of the electricity price for an average private household – hence any changes to the grid fees have a barely noticeable impact on the end consumers. An integrated grid for the benefit of Germany and Europe All of the grids on the European continent are connected together in the so-called integrated grid. The integrated grid increases the profitability of all power plants connected to it and further improves the security of supply. In the event that a major power plant breaks down, all of the transport grids together immediately balance out the supply gap that occurs, and that without any noticeable impacts for the customers. Furthermore, the German high voltage integrated grid plays an important role as a transit grid in the cross-border exchange of energy in Europe. Through the grids, the electricity market is growing together. 6(25) The Vattenfall Grid Competent grid operations – the basis for a secure supply of electricity The transmission grid of Vattenfall Europe is the newest and most modern in Germany. Every single day it supplies more than 19 million people securely and reliably with electricity. In addition thanks to its central location, it also plays a decisive role in the development of the European market. The Vattenfall Europe Transmission GmbH with its approx. 500 employees operates the 380 and 220 kV transmission grid in the German Federal States of Thuringia, Saxony, Saxony-Anhalt, Brandenburg, Berlin, Mecklenburg-Western Pomerania as well as Hamburg. It extends across a total area of 110,000 square kilometres, while the grid length itself amounts to approx. 9,500 kilometres. Electricity for Germany The transmission grid of Vattenfall Europe Transmission forms the technical basis for the secure supply of electricity to more than 19 million people as well as for the economic output of companies with a share of approx. 20 percent of Germany's gross domestic product. In addition to operating it, Vattenfall is also in charge of the maintenance, planning and expansion of the grid. On both a technical and economic level, Vattenfall Europe Transmission is managed independently from the generation, trading and sale of electricity within Vattenfall Europe AG, hence making it an independent company in the meaning of the legal unbundling requirement. Interconnecting point in central Europe For the exchange of electricity in Europe, the transmission grid of Vattenfall Europe has a vital function due to its central location. It connects the grids of Denmark, Poland and the Czech Republic with Germany. The manifold tasks of the transmission grid As an "infrastructure operator", Vattenfall Europe Transmission is directly in charge of and responsible for the high voltage transmission grid functioning without fail. As a "system operator", Vattenfall Europe Transmission provides a secure basis for the electricity market and ensures there is a smooth interplay between the market players in its region. As a party responsible for balancing groups, Vattenfall Europe Transmission is in charge of maintaining the balance between feed-ins and extractions in its region and balances out electricity transactions. As the party responsible for processing the German Renewable Energy Act (EEG) and the Combined Heat and Power Act (KWK-G) in its region, Vattenfall Europe Transmission carries out the physical and financial transactions that ensure there is a fair sharing of the burden from same throughout Germany. 7(25) We take our responsibility seriously Our transmission grid is more than masts and cables. Rather, this complex system is responsible for the reliable transportation of electricity and for system security in Germany and Europe. Vattenfall takes its special responsibility seriously. Furthermore it is in our own overriding interest to ensure a stable system operation and grid expansion – because without transmission grids we could neither feed electricity into these grids from our power plants nor supply it to our customers. 8(25) Statutory Framework The legal environment The legal / regulatory environment that determines the actions of the German electricity grid operators consists of the EC Electricity Directive, the German Energy Industry Act (EnWG), the German Renewable Energy Act (EEG) and the German Combined Heat and Power Act (KWK-G). These statutory requirements also determine the expansion of the high voltage grid. Single European Electricity Market Directive The Single European Electricity Market Directive stipulates that the grid operators must structure the grids in such a way that they guarantee unrestricted trading in electricity, open access to the grid for all electricity producers and non-discriminatory grid usage at all times. Hence the transmission grid operators must make available sufficient transportation capacities for all electricity producers. Energy Industry Act (EnWG) As per the Energy Industry Act, the transmission operators are obliged to operate and maintain a secure, reliable and efficient energy supply grid that they must also expand in line with requirements (Sec. 11 Para. 1 EnWG) and guarantee a balanced relationship between generation and consumption. Doing so, the transmission of electricity must occur in the most reasonably priced and environmentally friendly way possible (Sec. 1 Para. 1 EnWG). The obligation is also established in the law to connect new offshore wind power parks to the grid (Sec. 17 Para. 2a EnWG). The complete text of the Energy Industry Act (in German) can be read at http://bundesrecht.juris.de/enwg_2005/. Renewable Energy Act (EEG) The Renewable Energy Act (EEG) obliges grid operators to give prioritised acceptance and transportation to electricity from renewable energies. This means that every kilowatt hour produced from renewable energies must be accepted by the grid, and that if necessary to the detriment of electricity from conventional sources. In this way the generation of electricity from regenerative sources, e.g. wind, sun and biomass, is promoted. In order to be able to fulfil the feed-in and transmission duty, the EEG obliges the grid operator to expand the grid without delay when this is necessary for the feed-in and the transport of electricity from renewable energies. The complete text of the Renewable Energy Act (in German) can be read at http://bundesrecht.juris.de/eeg_2004/index.html. 9(25) Combined Heat and Power Act (KWK-G) The aim of the law on the maintenance, the modernisation and the expansion of combined heat and power – in brief: German Combined Heat and Power Act (KWK-G) – is to make a contribution to the reduction of CO2 emissions and hence to climate protection in Germany. The law supports existing combined heat and power (CHP) plants for a limited period of time and offers an incentive for the modernisation and replacement of existing units. In addition the law is intended to promote the construction of small CHP units and the introduction to the market of fuel cell units. Operators of CHP plants are entitled to a payment of a surcharge on the agreed price when they feed in CHP electricity into the grids (Sec. 7 KWK-G). Grid operators are obliged to connect CHP plants to their grid and to accept the electricity generated in these plants (Sec. 4 KWK-G). On 6 June 2008 the German Bundestag enacted the amendment to the Combined Heat and Power Act – with the aim of doubling the share of CHP electricity to 25 percent by 2020. The amendment becomes effective on 1 January 2009. In order to comply with all of these statutory requirements (prioritised feed-ins of electricity from renewable energies, connection of new plants, unrestricted trading) and also maintain the high quality standards in the future, significant investments are required in the transmission grids. 10(25) Investment Requirement Standstill is a step backwards The integration of renewable energies as well as the liberalisation and internationalisation of the electricity business is currently driving the German electricity grids to the limits of their capacities. Likewise, connecting up the offshore wind parks represents a challenge. Over the coming years, significant resources will have to be invested in the grid. In the past electricity was mostly generated in the area where it would also be consumed. Today better use is made of regional conditions in order to generate energy. In this regard wind energy can be produced far more efficiently along the coasts than in other areas. In northern Germany increasing volumes of electricity are being generated by wind power, while in the Lausitz region many coal-fired power plants are located because of the especially large deposits of lignite in this area. Due to the use of these unique regional aspects to achieve the most efficient production of energy possible, generation and consumption are widely separated in parts. Large quantities of electricity have to be brought over vast stretches to the centres of consumption. Also as a result of the Europeanisation of the electricity markets, the German electricity grid has to transport much larger volumes of electricity over far longer distances today than it did just a few years ago. The EC Electricity Directive requires non-discriminatory access to the grid for all providers, i.e. Vattenfall Europe Transmission and the other grid operators are obliged to treat all grid users equally regardless of the respective company law situations. Originally the German electricity grid was neither conceived for such large volumes of electricity nor for the fluctuating sources of renewable energies such as wind. Hence it must be strengthened. Furthermore the expensive connections for the so-called offshore wind parks off the North Sea and the Baltic Sea coasts must also be included. 11(25) Regulation Regulatory framework must safeguard investments Secure and efficient grids require a regulatory framework that permits economic operation of the grids and safeguards long-term investments – the regulator Bundesnetzagentur has responded to the arguments by the grid operators and announced important changes. The transmission grid is a "natural monopoly". There is no alternative way to transport electricity. In order that a secure and reasonably priced supply of energy can be guaranteed in such a monopoly, all energy providers must get access to the grid and fees for grid usage have to be reviewed regularly. In Germany this is secured by the regulator Bundesnetzagentur (BNetzA) on the basis of the German Energy Industry Act (EnWG) and the regulations and ordinances existing in this regard. Among other areas, the BNetzA regulates how high the returns may be that the grid operators earn from their grids. Latest announcements by the German regulator Bundesnetzagentur When viewed realistically, the return on equity achieved to date by the transmission grid operators EnBW Transportnetzgesellschaft, E.ON Netz, RWE Transportnetz Strom and Vattenfall Europe Transmission from their grid operations has been less than four percent, as the corporate income tax still has to be paid from the return of 7.91 percent provided in the law. In addition the current regulatory framework disregards the fact that for instance the construction of a new electricity line or the modernisation of the existing ones often takes years to complete and that during these periods the energy groups invest significant amounts yet do not earn any income from these investments. These costs are not recognised in the calculation of the permitted rate of return. Furthermore the regulator has assumed to date that the companies can refinance themselves with an interest rate of 4.3 percent above the capital market, i.e. above the bank loan rate for instance – a rate that does not reflect the actual circumstances in the capital market by a long way. These are points that the four transmission grid operators have repeatedly explained, and the German regulator has demonstrated that he is responsive to good arguments and is prepared for proper and appropriate solutions. Already in May 2008 the BNetzA announced the following changes to the regulation: Recognition of actual rates of interest on borrowed capital Recognition of the 2007 and 2008 investments On 7 July 2008 the BNetzA declared that the rate of return on equity is being increased to 9.29 percent. BNetzA also announced several measures to alleviate the impact of (required) grid expansions for transmission system operators. Matthias Kurth from the Bundesnetzagentur explained: "We are giving a clear signal that infrastructure investments in energy grids are now even more attractive. (…) We did not take this step easily, but rather we subjected it to a fundamental and detailed analysis. 12(25) In the end both the legal situation, which still requires more interpretation, as well as the economic arguments supported the grid operators' position. In this way we are also demonstrating that we do not regard proceedings and consultations as pro forma events, but rather that when the better argument is convincing then we give it a chance." Matthias Kurth's complete speaking notes (in German) are available at: http://www.bundesnetzagentur.de/media/archive/13919.pdf Incentive Regulation The new Incentive Regulation (“Anreizregulierung”) goes into effect in January 2009 and regulates the grid fees for electricity and gas. Under the Incentive Regulation, the costs of the transmission grid operators are compared with each other – then the maximum permitted annual revenues are determined on the basis of the most efficient operator. The intention is that costs which can be influenced are to be lowered in line with general advances in productivity and on the basis of individual efficiency requirements. The grid operators are permitted to keep any efficiency gains above and beyond this. The opportunity to achieve additional profits as a result of a more efficient operation management is intended to represent an incentive for the grid operators to improve their efficiency. 13(25) Future Alternatives It is not about "who?" When you cast an eye on potential future alternatives, these are concerned first and foremost with securing a reliable supply. Every solution for the German electricity grid must fulfil the strictest of criteria. No one may be neglected – neither the electricity consumer nor the electricity generator – be they big or small. Ensuring that there is a reliable supply is not only in the interests of the electricity consumers but also in the best interests of the electricity generators. Without the transmission grids, the generators could neither feed into these grids from their power plants nor supply their end customers. Hence every solution for the transmission grid should at least fulfil the following four criteria: Investors must have a long-term focus. Investors must ensure substantial investments in network extension. Investors must grant continued free access to the grid to all energy producers. Investors should promote the flow of electricity across European borders. In the public debate, diverse potential solutions have been discussed over the past months. Ownership unbundling For quite a while now, the EC Commission has called for strict "ownership unbundling ". From the Commission's perspective, only a complete separation of generation and sales will bring non-discriminatory access to the grids and true competition to the energy sector. Suppliers who at the same time operate grids should be forced to sell their grid assets. Countries such as Great Britain and the Netherlands support this proposal. However in the opinion of critics, the planned "ownership unbundling" represents a grievous intrusion into ownership and property law. For this reason the German Government has opposed the Commission's plans. On 18 June 2008, a majority in the European Parliament voted in favour of complete ownership unbundling (449 votes for, 204 votes against). "Third way" The "third way" was developed as a counterproposal to "ownership unbundling" by the German Federal Government together with seven further EU Member States. With this proposal the grids should remain under the ownership of the energy groups in the socalled "ITO" (independent transmission operator) construction, however they are to be managed on the basis of an extensive body of rules and regulations by subsidiaries which are independent to a large extent. The Council of the European Energy Ministers voted on 6 June 2008 in favour of this alternative. However on 18 June 2008 the proposal submitted by the Industry Committee to recognise the "third way" as an alternative option to "ownership unbundling" was rejected in the European Parliament by 381 to 261 votes. A compromise now has to be found between the Member States and the Parliament. In the opinion of participants, the discussion about this middle way could 14(25) be very protracted. The German newspaper Das Handelsblatt quoted experts on 19 June for instance who spoke of any agreement occurring "at the earliest in the first half of 2009". "Netz AG" – national grid company The idea of a "Deutsche Netz AG" – a German national grid company – in which the German grids are consolidated has numerous supporters. A "Netz AG" and the other models are not necessarily mutually exclusive. In this manner, the sale of a transmission grid could for instance also represent an interim step on the way to a "Netz AG". To date however several issues still remain open with regard to such a "Netz AG", such as for instance: Is it a precondition that all major generators participate in a "Netz AG"? Could today's grid operators be forced to participate in a "Netz AG"? Does a "Netz AG" fulfil the requirements of ownership unbundling? Could further investors also participate in it? How would the voting rights of the participating energy companies be structured? Which time schedule will be followed in establishing a uniform "Netz AG"? Can the energy suppliers buy back their shares following the expiry of a certain period of time? How will the investments required over the short-term be secured and financed? In addition in order to have a conclusive assessment of this option, it must be clarified whether the bureaucratic challenges of integrating four companies would initially slow down the development of the European market and entail a delay in urgently required investments in the grid. Nationalisation Calls to nationalise the grids have been made repeatedly, especially from the German leftwing "Die Linke" political party as well as from several trade unions and consumer organisations,. From the perspective of the "Die Linke" Parliamentary party in the Bundestag, electricity grids are a significant component of the public infrastructure which should not fall into the hands of private investors due to this being "in the paramount interests of the general public". Also voices in the centre left SPD political party have called for a "Netz AG" under state participation. Critics counter this by pointing out that the state is no guarantee on more competition and fair prices. It would be overburdened financially by the investments required; in addition the maintenance of the security of supply would be guaranteed to a greater extent with a private investor. And the German Federal Government has also clearly spoken out against any nationalisation. Sale Following exhaustive analysis of all options, Vattenfall has decided to approach potential investors for its high voltage grid. With this step, Vattenfall would like to actively participate in the upcoming changes in the electricity market. Further information on the reasons for a possible sale and on potential investors is available in the "Sale of the Grids" section on pages 18-19. 15(25) Grids in Other EU States Other countries, other grids Everyone is talking about the German electricity grid – yet it is also well worth having a look at our European neighbours. In Germany the electricity transmission grids are owned by the four major electricity generators Vattenfall, E.ON, RWE and EnBW. They each operate a balancing zone. Only one major grid operator in most European countries Most of the European countries have only one transmission operator each. One exception is Austria, however its three grid operators are in majority state ownership. On the other hand in Scotland, two operators listed on the stock exchange share the electricity grid. Overall however, most of the European grids as such are significantly smaller than the four German sub-grids. The number of grid operators listed on exchanges is increasing in Europe Several major electricity grid operators in Europe are listed on exchanges – such as for instance National Grid in Great Britain, Red Electrica in Spain, elia in Belgium or Terna in Italy. This model functions, with the companies named demonstrating positive development over the past. The shares of National Grid for instance have increased by 250 percent within twelve years; the value of the Red Electrica shares have even quadrupled within a seven year period . Both operators guarantee a stable and qualitatively high level of grid operations. However not all independent grid companies are listed. Electricity grids in state hands In Sweden and Denmark as well as in France, Ireland and the Netherlands, the transmission grid operators are in state hands. Austria has a stake in the three major grid operators in the country. The German Government has already rejected any model for Germany which has a state share in it. 16(25) Case Studies A view from abroad There is never one perfect solution. Over the past years different routes have been taken in the EU Member States. Here are a few case studies. Terna case study (Italy; listed): Terna owns 98 percent of the Italian transmission grid. The group was established in 1999 from Enel in line with company law unbundling. 50 percent of the shares were listed on the exchange in 2004. Then in 2005 the sale of further shares to institutional investors occurred. Today Enel only holds five percent of the exchange listed group. The largest shareholder with a third of all the shares is the Italian bank Cassa depositi e prestiti which pursues non-profit aims above all and has invested extensive resources in infrastructure projects. National Grid case study (Great Britain; listed): National Grid started as a pure electricity grid company and in 1995 went public. In 2000 the company merged with Lattice, the operator of the British gas transport grid. The group has combined a high level of expertise in the operation of electricity and gas grids. By now the British have even exported this to other countries, such as in the USA and to Argentina. National Grid shares are spread among many small shareholders. Even the two largest shareholders only hold roughly three and four percent respectively. Elia case study (Belgium; listed): Elia owns the Belgian grid between 150 and 380 kV and almost 94 percent of the 30 to 70 kV grid. In a first step in 2002 Elia became an independent and fully fledged transmission grid company and in 2004 it took the risk and went public. Since then Suez/Electrabel has held only 24.4 percent of the shares. 40 percent of the shares are free float. By now the Elia group is also active on electricity markets outside of Belgium and is even earning revenues not subject to regulation. Energienet.dk case study (Denmark; state owned): The Danish electricity and gas grid operator was established in 2005 by merging the Eltra, Elkraft System, Elkraft Transmission and Gastra companies. The company is completely owned by the Danish state. Svenska Kraftnät case study (Sweden; state owned): The Swedish electricity grid is completely owned by the Swedish state. The Svenska Kraftnät company was founded in 1992. Since 2005 the company has also controlled the Swedish gas grid. Inalta case study (Spain; formerly in private equity ownership): In 2002 the consortium Inalta under the management of the British private equity company CVC Capital Partners acquired the electricity grid of the Spanish energy group Iberdrola. Following several successful years in private equity hands, the grid was sold in 2005 to the Spanish company Red Eléctrica de España. 17(25) SALE OF THE TRANSMISSION GRIDS Voluntary unbundling A sale would be an "upward compatible" solution. Over the last months, an intensive debate has taken place in Brussels and Berlin on the ownership structure of the transmission grids. While the discussion has not yet been concluded, extensive unbundling seems unavoidable. For this reason in the last few months, Vattenfall has reviewed all potential options for the future of its high voltage grid from a corporate viewpoint. A sale to a serious and financially strong investor could be a sensible solution – provided an investor is found who fulfils all the criteria. A sale would be an "upward compatible" solution. In this way for instance, an investor who buys the transmission grid from Vattenfall could subsequently permit further owners to invest in the company. And it is also possible that this company subsequently acquires further grid shares. Strict criteria for the investor Vattenfall takes its own special responsibility seriously and has an overriding self-interest in securing stable system operations and grid expansions. This is because without the transmission grids, we could neither feed into these grids from our power plants nor supply our end customers. For this reason we will only sell our high voltage transmission grid when the investor has fulfilled all of our criteria: Investors must have a long-term focus. Investors must ensure substantial investments in network extension. Investors must grant continued free access to the grid to all energy producers. Investors should promote the flow of electricity across European borders. It goes without saying that Vattenfall would only sell its transmission grid to a serious and financially strong investor. 18(25) Potential Investors Responsible partners – potential groups of investors Many interesting parties come into question as potential investors for the high voltage transmission grid. However in order to be taken into consideration, an interested party must satisfy the high requirements set by Vattenfall and conform completely to the strict criteria for a sale. Transmission grids provide returns which are predictable in the long term and provide significant growth prospects. Due to their long investment phases, an investor must be interested in a long-term commitment – otherwise the investment will not pay off. The following groups of investors are examples of potential interested parties. Strategic investors Strategic investors are companies which could for instance expand their own grid through this take-over and aim to achieve synergies in this way. Another objective could be to establish the acquiring company in the German market. In line with this, major grid companies would be considered here. It would be equally conceivable that manufacturers of grid components might be interested in extending their value chain, or infrastructure operators may wish to expand their field of activities. Infrastructure funds Infrastructure funds place their investment capital exclusively in infrastructure companies and projects. The investment aim of these funds is long-term in line with the assets they invest in: Infrastructure funds focus on consistent predictable returns that pay back the investment over long periods of time. With this strategy, the infrastructure funds set themselves apart very clearly from the more widely known private equity funds: Private equity funds Mid-term High Infrastructure funds Long-term Moderate Investment horizon Expected return Insurance and pension funds Likewise, insurance and pension funds have a long-term investment horizon. Both are obliged to guarantee the pension funds of their investors, and hence they are interested in investing in assets which generate stable revenues over a long time period. As with all funds being considered as investors, their focus is on the security of the assets they invest in. 19(25) FAQs We are here to answer your questions With an issue such as what is going to happen to the German electricity grids, everyone has different questions. We have compiled the most important ones for you on this page. 1. Why does Vattenfall want to sell its transmission grid? As a first step, we are only approaching potential investors. There is no buyer yet, and a final sales decision has not yet been made. Over the last months, an intensive debate has taken place in Brussels and Berlin on the ownership structure of the transmission grids. While the discussion has not yet been concluded, extensive unbundling seems unavoidable. For this reason in the last few months, Vattenfall has reviewed all potential options for the future of its high voltage grid from a corporate viewpoint. A sale to a serious and financially strong investor could be a sensible solution – provided an investor is found who fulfils all the criteria. In our view, an investor: must have a long-term focus. must ensure substantial investments in network extension. must grant continued free access to the grid to all energy producers. should promote the flow of electricity across European borders. 2. Why are transmission grids interesting for investors? Transmission grids provide returns which are predictable in the long term and provide significant growth prospects. There are many investors such as insurance, pension or infrastructure funds, but also strategic investors, who are looking for exactly such businesses as a long-term secure investment for their funds. 20(25) 3. Would it not be the best solution if the complete German grid were in the hands of an independent grid operator, such as is the case in Great Britain with National Grid? National Grid is proof that such a model works, also with financial investors as shareholders. Seen over the long-term, this definitely could also be a good solution for Germany. For this reason we constructively follow the discussion on the subject of a "Netz AG", a national grid company, also in the sense of potential investors. A sale would be an "upward compatible" solution. In this way for instance, an investor who buys the transmission grid from Vattenfall could subsequently permit further owners to invest in the company. And it is also possible that this company subsequently acquires further grid shares. In order to have a conclusive assessment of this option, it must be clarified whether the bureaucratic challenges of integrating four companies would initially slow down the development of the European market and entail a delay in urgently required investments in the grid. Whatever way the solution looks in the end: For us it is essential that the strict criteria which we have set are fulfilled (see answer to question 1). 4. Will the German electricity grid now fall into the hands of private equity houses, in Germany often referred to as "locusts", or foreigners? Should it not remain in German hands instead? We think that the transmission grid should be in reliable and long-term oriented hands. Regardless of who the buyer is and where they come from, they will have to meet the strict criteria we have set for the sale and – first and foremost – comply with the stringent German regulation and the laws. Every owner must, for instance, present reports about the condition of the grid and about the investments annually. If they fail to take good care of the grid, there is even the possibility that the operation of the system may be prohibited. The consequence then would be that the responsibility as system operator would have to be transferred to another legal entity. By the way, the transmission grid is not in German hands now either: We are a 100% subsidiary of a Swedish company, EnBW is half French, and more than half of E.ON's and about 40 percent of RWE's shares are currently held by international shareholders. This seems to be working quite well. The transmission grid is not a typical investment for conventional buy-out funds from private equity companies (the so-called "locusts") or hedge funds because they expect much higher returns than can be earned with the grid due its regulation. 21(25) 5. Will we end up sitting in the dark more often following a sale? Every owner must fulfil the strict requirements of the German regulatory framework. This also includes investments so as to guarantee the secure operation of the grid and to avoid electricity outages. Apart from that, no owner would be interested in having power outages as they cannot earn money from a non-functioning grid and would also be threatened with the imposition of high fines. 6. Will we have to pay more money for our electricity in future? The prices which an electricity grid operator may charge for the transportation of electricity are regulated in detail by the regulator Bundesnetzagentur and cannot be adjusted arbitrarily. And even if the prices were adjusted, this would have a barely noticeable impact on the consumer as the transport costs for the "electricity highways" account for less than four percent of the electricity bill of an average private household. 7. Will the sale have any impacts on the employees of the grid operator? The employees at Vattenfall Europe Transmission welcome a long-term solution with regard to their employer. A new owner will be interested in the long-term and will invest in the grid – which ultimately is also good for the employees. All of the rights and duties vis-à-vis the employees of Vattenfall Europe would be transferred one-to-one to the new owner. 8. Will layoffs for operational reasons occur? No. Vattenfall Europe has excluded layoffs for operational reasons until 2012. Any change in the ownership structure would not affect this commitment. 22(25) FURTHER INFORMATION On the following pages we have put together a collection of relevant sources of information. Links are provided to studies on potential investors, on the energy market and on the electricity grids as well as to the wording of important laws and regulations and to the internet homepages of political bodies and other associations. Studies (Weblinks embedded) Studies on the electricity grids and on the energy market in general German Federal Ministry of Economics, 2008 Energy in Germany – Trends and background to the supply of energy in Germany (in German) Bundesnetzagentur, January 2008 Report on the Assessment of the Grid Condition and Grid Expansion Reports of the German Transmission Grid Operators (in German) Deutsche Energie-Agentur/German Energy Agency - dena, February 2005 dena Grid Study – Energy management planning for the connection to the grid of wind energy in Germany on land and offshore until 2020 (in German) Studien zu Fusionen und Übernahmen im Energiemarkt Fulbright/mergermarket, 2008 Energy M&A Forecast – A study providing insights into energy deal making (in English) PricewaterhouseCoopers, 2007 Power Deals – Mergers and acquisitions activity within the global electricity and gas market (in English) Studien zu Infrastrukturinvestoren Deloitte, 2007 The road ahead – Results and analysis from the 2007 survey of infrastructure funds (in English) Siemens Financial Services, 2007 Private Money for Public Infrastructure – Financial solutions for the energy, industrial and health sectors (in German) 23(25) Laws and Regulations (Weblinks embedded) Relevant laws Energy Industry Act (EnWG) (in German) Renewable Energy Act (EEG) (in German) Overview of the EU legislation currently applicable (in English) Relevant regulations and ordinances Ordinance on the Incentive Regulation for the Energy Supply Grids/Verordnung über die Anreizregulierung der Energieversorgungsnetze (in German) Regulation on the Access to Electricity Supply Grids/Stromnetzzugangsverordnung - StromNZV) (in German) Regulation on the Fees for the Access to Electricity Supply Grids/Verordnung über die Entgelte für den Zugang zu Elektrizitätsversorgungsnetzen (in German) Political bodies and associations (Weblinks embedded) German Federal Ministry of Economics on the subject of energy (in German) German Federal Environment Ministry on the subject of renewable energies (in English) German regulator/Bundesnetzagentur (in English) European Regulators' Group for Electricity and Gas – ERGEG (in English) German Energy Agency / Deutsche Energie-Agentur (dena) (in English) European Commission – Directorate-General Energy and Transport (in English) German Federal Energy and Water Industry Association – BDEW (in German) German Association of the New Energy Suppliers – BNE (in English) German Wind Energy Association – BWE (in German) Union for the Co-ordination of Transmission of Electricity – UCTE (in English) European Transmission System Operators – ETSO (in English) Union of the Electricity Industry – EURELECTRIC (in English) German Energy Consumers Association/Bund der Energieverbraucher e.V. (in German) German Industrial Energy and Power Industry Association – VIK (in German) German Federal Association of Energy Users – VEA (in German) 24(25) CONTACT Media Relations Vattenfall Europe AG Telefon: +49 30-8182 2321 E-Mail: presse@vattenfall.de 25(25)