I want to begin by saying that Vattenfall is taking the COVID-19 outbreak with the utmost seriousness. We are closely following the authorities’ recommendations and have taken steps to lower the risk for contagion among our employees and make sure that the impact on our operations will be as small as possible.
As for developments in the electricity and heat markets in Europe, we find ourselves in a dynamic time. Driven by the need to gain control over the climate issue through lower carbon emissions, a transition is imperative, and one of the most important solutions is electrification of the areas in which fossil fuels today dominate. This applies for transports, for heating of homes on the continent, and for a number of important industrial processes in which fossil-free electricity – directly or indirectly – is replacing coal, gas or oil. In district heating, fossil-free or low-fossil fuel solutions will increasingly dominate development in pace with the successive closure of coal-based production.
Vattenfall sees great opportunities to develop our business in the coming decade. Our strategy is to expand the supply of fossil-free electricity and heat at the same time that we develop and sell solutions to facilitate electrification for our various customer groups.
2019 was a year that validated our strategy in several ways. The downward trend in costs for both solar energy and wind power led to decisions on investments without subsidy support. We received confirmation in the form of a higher customer inflow, greater employee engagement and a steadily rising number of industrial partners seeking collaborations with us.
Earnings improved over 2018
Following a period of strained market conditions and large impairment losses, we have seen a gradual improvement in our earnings performance. Net profit for the year totalled SEK 14.9 billion, an increase of SEK 2.9 billion compared with the preceding year. The underlying operating profit increased by SEK 5.2 billion to SEK 25.1 billion. We can also note that 2019 was a year in which Vattenfall returned to achieving its financial targets. Return on capital employed was 8.5%, and we maintained a stable balance sheet, with funds from operations/adjusted net debt at 26.5%. The Board of Directors proposes a dividend to the owner of SEK 7.2 billion.
The path to fossil freedom requires extensive financial resources, which are derived both from our continuous work in the operating activities and from external sources of funding. Vattenfall’s first green bond, which was issued last summer, met great interest among our investors, and we are funding ourselves at a very competitive cost.
Major investments in renewable energy
In 2019 the Horns Rev 3 offshore wind farm (407 MW) off the Danish west coast of Jutland was commissioned. We also started construction of Kriegers Flak (605 MW) in the Baltic Sea. Together, generation from these wind farms will correspond to the consumption of roughly a million households.
We have a strong project pipeline, which was further strengthened by our winning tender for Hollandse Kust Zuid (HKZ) 3 & 4 in the Netherlands (~750 MW). Together with the first stage, HKZ 1 & 2, which we are also developing, these projects will measure 1,500 MW. They make up the world’s first fully commercial offshore wind farm, which means that their production will be sold at market price, entirely without subsidy systems. The power they generate will correspond to the electricity consumption of more than 2 million households.
Solar energy was previously considered to be too costly and small-scale for Vattenfall’s business model, but in recent years the cost level has changed dramatically, and in 2019 we began building our first free-standing large-scale facility, Coevorden (7 MW) in the Netherlands. There we also initiated a hybrid project, Haringvliet, where we are combining wind power (22 MW), solar energy (38 MW) and energy storage (12 MW) at one and the same facility. The project is an example of the breadth of engineering competence we have in Vattenfall. Our business model for solar energy in other respects is based on us developing and building solar farms that are then sold to other investors.
Closing plants to reduce CO2 emissions
Germany’s decision to phase out coal for power generation by 2038 marked a major milestone in its energy transition. As for Vattenfall’s position in Berlin, we have completed a feasibility study which shows that it will be possible to phase out coal from the district heating operations by 2030. In line with this ambition, last autumn we closed our coal-fired Reuter C combined heat and power station and have now connected Europe’s largest power-to-heat facility to the district heating network. This new solution generates heat from excess electricity produced by renewable energy sources. In Hamburg we would have preferred to continue working in the same way to transform the heating system. However, we have now completed the transaction for the city’s repurchase of the district heating operations after the city opted to exercise its option to take over Vattenfall’s previous stake of 74.9%.
Coal is also being phased out in the Netherlands, where Vattenfall closed its last remaining coal-fired power plant, Hemweg 8, at the end of the year. This has reduced annual CO2 emissions by more than 2 million tonnes. We also plan to invest more than SEK 4 billion in the district heating network in Amsterdam during the period up to 2022 to accelerate the pace of the city’s shift to heating without natural gas.
Vattenfall’s goal to achieve gradually lower emissions has been approved by the Science Based Targets initiative, which is proof that our goal is in line with the Paris Agreement’s CO2 reduction targets going forward.
Working with customers and partners for a fossil-free future
We want to contribute to the work on phasing out fossil fuels in key industrial processes, including steel and cement production, and refining. In September our partner-project for fossil-free steel, HYBRIT, was recognised at the UN climate summit in New York as one of the world’s four most ambitious climate initiatives. The owner-companies – Vattenfall, SSAB and LKAB – are part of the Leadership Group for Industry Transition that was launched by the prime ministers of Sweden and India. Vattenfall is working very actively for a development in which electrification is creating a new generation of industries. We see a future business opportunity in being a part of these industrial processes and being able to integrate them in an increasingly volatile electricity market.
Electricity network at centre of energy transition
In order for us to succeed with the energy transition, growth of renewable forms of energy as well as energy efficiency improvements and greater electrification of industries, transports and heat are decisive. Sweden is in an exceptionally good position to succeed with this shift, not least owing to its ample access to fossil-free electricity. But this puts high demands on the energy system. In parts of Sweden, capacity shortages in the electricity network are a fact already today. This is a historically unique situation that is very problematic for our customers. The market is in need of fundamentally new rules for permitting processes and better conditions for future investments. This is to ensure that the network is modernised and expanded at the pace required for continued growth and achievement of the country’s climate goals.
Owing to Storm Alfrida, we began the year with a very tough situation for our customers in Roslagen and the Stockholm archipelago. Vattenfall led the intensive work on repairing the electricity network, deploying hundreds of people out in the field without any serious incidents. Costs for disruption compensation and repairs weighed heavily on profit for the full year.
In Berlin we are securing electricity supply to the city’s inhabitants by modernising the electricity network via our subsidiary Stromnetz Berlin, which is well-positioned to continue as the electricity network operator. We will continue to point this out in the appeal process for the concession that was initially granted to the city’s own company, Berlin Energie.
A customer-oriented, safe and reliable operation
Vattenfall can once again look back on a very stable year of production for its Swedish nuclear power and hydro power operations. Owing to a focus on safety, cost-cutting and efficiency improvement, the operations have upheld their competitiveness and also made the greatest contribution to the favourable earnings performance for 2019. The work on shutting down Ringhals 2 at year-end has gone according to plan. We are now preparing for the closure of Ringhals 1 at the end of this year at the same time that we are also working to ensure that the issue of final storage of spent nuclear fuel will come closer to a necessary approval.
The margin for the electricity sales business is being affected by high competition and growth investments at the same time that we are increasing deliveries of fossil-free solutions and are seeing continued customer growth. During the year the sales company DELTA Energie in the Netherlands was acquired. We have also expanded in e-vehicle charging solutions, including a new and innovative charging network that we launched together with partners in Amsterdam.
Responsibility to respect human rights
Vattenfall supports the UN’s 17 Sustainable Development Goals and is working to ensure sustainability along the entire value chain. Respect for human rights is an important part of this. By providing training to our buyers and other internal key persons and by collaborating with existing suppliers in human rights matters, we continue to strengthen our ability to identify and reduce risks in the entire value chain. Beyond our supply chain we have also laid the foundation for broadening our sustainability assessment of potential partners to ensure that they also show they are committed to respecting human rights.
Our employees enable us to continue playing a leading role in the energy transition
Finally, I want to thank our employees for their exceptional work. In our annual employee survey we can see that engagement in our company is increasing. This is highly inspiring and I look forward to now bringing Vattenfall into the 2020s where we will build upon our 110-year history as a pioneer in the energy industry.
The challenges in today’s energy landscape are not likely to decrease given the prevailing market conditions. However, the capacity to solve problems and achieve change is part of our identity as a company. Vattenfall continues to drive the electrification of society with investments in technology and projects that are making a difference in the energy transition. The goal is clearer than ever: fossil-free living within one generation. Together with our customers and partners we are making this possible.
Magnus Hall, President and CEO