Common European Energy Market 2011

The Common
European Energy
Market
Electricity, gas and heat
Vattenfall AB (publ)
162 87 Stockholm, Sweden
Visiting address: Sturegatan 10
T +46 8 739 50 00
For additional information,
please visit www.vattenfall.com
A book from Vattenfall AB
Cover: Paulina Westerlind
Illustrations: Svenska Grafikbyrn
Photographers: Paulina Westerlind, Mikael Svensson,
Anders Modig, Vattenfall, Nuon, iStockphoto, Johnr
About Vattenfall
Vattenfall is one of Europes largest
electricity generators and its largest heat
producer.
Vattenfalls main products are electricity,
gas and heat. In the areas of electricity
and heat, Vattenfall works in all parts of
the value chain: generation, distribution
and sales. In the gas area, Vattenfall is
primarily active in sales. Vattenfall is also
engaged in energy trading and lignite
mining.
The Group has approximately 34,700 employees. The parent company, Vattenfall
AB, is wholly owned by the Swedish state.
Core markets are Sweden, Germany and
the Netherlands. During 2011 operations
were also conducted in Belgium,
Denmark, Finland, France, Poland
and the UK.
Key facts and figures 2011

Net sales: 20.25 billion EURi

Operating profit: 3.2 billion EURii
Total assets: 58.68 billion EUR
Electricity generation: 166.7 TWh
Heat sales: 41.6 TWh
Gas sales: 53.8 TWh
Total number of employees 34,685iii
Customers as of 31 December 2011:
7.7 million electricity customers,
2.2 million natural gas customers and
5.7 million electricity grid customers
Exchange rate used is 1 EUR = 9.554 SEK

Excluding items affecting comparability
iii)
FTE (Full Time Equivalents)
i)
ii)
Foreword
Foreword
The energy issue cuts across many aspects of our
modern society, from industrial competitiveness and
private economy to climate change and other environmental issues. It is therefore natural that there is a
considerable degree of interest in what todays energy
system looks like and how tomorrows energy system
should be designed.
Vattenfalls publication on our six sources of energy
biomass, coal, hydro, natural gas, nuclear and wind
power was quickly accepted as a valued source of
information. But the energy system as a whole is comprised of a long value chain stretching from the energy
source to final consumer delivery. In order to provide a
comprehensive picture, there was a need for a followup publication describing what happens following the
production stage. We are now filling that need, by
providing a detailed description of wholesale markets,
transmission and distribution system construction,
energy market operation and the delivery of electricity,
gas and heat to consumers. We also provide a historical
review and a section on transmission and distribution
systems of the future.
A key element is the ongoing integration process of

European energy markets. The integrated and
competitive European electricity market will benefit all
consumers through greater cost efficiency and better
resource utilisation. This will be particularly important
as we approach the time when a large part of the
European electricity production capacity will need
to be replaced.
It is crucial that Vattenfall as an energy market
actor keep a close eye on developments, and to do
this we need to have a well-functioning public dialogue.
Needless to say, we cannot deliver all the answers on
our own. We need partnerships with all stakeholders,
because all of our stakeholders have a role to play.
The investment decisions we make today will remain
with us for decades. This makes it extra important
that the regulatory landscape facilitates the necessary
investments.
Our aim is to give readers an overall understanding of

how the energy system functions in order to promote
further discussion and debate on energy issues.
The energy sector faces many challenges. How do
we secure the investments that are needed to meet
expectations for reduced CO2 emissions and continued
security of supply? How can consumers be allowed the
greatest opportunity to control their consumption and
costs? Where are the bottlenecks in transmission and
distribution capacity and how does this affect market
operation? All of these issues are relevant to individual
households and to society as a whole.
I hope you find this book interesting. Please visit our

website for further information: www.vattenfall.com.
ystein Lseth
CEO and President, Vattenfall
Table of contents
Introduction
From Energy Source to Consumer
The Energy Triangle....................................................................9

Competitiveness...........................................................................10
Security of supply........................................................................ 11
Climate and environment......................................................... 12
An energy system in balance................................................. 13
Summary.....................................................................................14
Energy Sources ........................................................................48

Biomass............................................................................................ 49
Coal power...................................................................................... 49
Hydro power................................................................................... 50
Natural gas...................................................................................... 50
Nuclear power................................................................................51
Wind power......................................................................................51
Electricity................................................................................... 52
How is electricity transported and distributed?............52
Overhead or underground power lines ............................. 54
How does the electricity market work?............................ 56
Vattenfall and electricity ......................................................... 64
Gas................................................................................................66
How is gas distributed?............................................................. 66
How does the gas market work?........................................... 66
Vattenfall and gas ........................................................................72
District Heating........................................................................ 74
What is district heating?............................................................74
Combined Heat and Power plants........................................74
How does district heating work?...........................................75
Vattenfall and district heating................................................78
Summary.....................................................................................80
The Energy System Electricity, Gas and Heat

The Electricity Market............................................................20
The Gas Market.........................................................................22
The Heating Market.................................................................24
Summary.....................................................................................26
Historical Background Electricity, Gas and

District Heating
Development of Electricity...................................................30
Milestones in the history of electricity.............................. 30
Development of electricity grids...........................................32
Development of a European electricity market............ 34
Development of a Nordic electricity market................... 36
Development of a German electricity market................ 38
Development of a Dutch electricity market.................... 39
Development of Gas................................................................40
Development of gas in the Nordics..................................... 40
Development of gas in Germany...........................................41
Development of gas in the Netherlands............................41
Development of District Heating ........................................42
Development of district heating in Sweden.....................42
Development of district heating in Germany...................42
Development of district heating in the Netherlands...42
Summary.....................................................................................44
Electricity Grids and Markets of the Future

Future Challenges for the Energy Market .......................84
Conversion towards a sustainable energy system .... 86
Guaranteed energy security ..................................................87
An integrated and interconnected market ..................... 89
A more integrated grid.............................................................. 90
How can we reduce transmission losses?........................ 90
Smart Grids................................................................................ 92
What are smart grids?.................................................................93
Energy storage future possibilities................................. 94
How are consumers affected?.............................................. 95
Everyday Energy Efficiency .................................................96
One Tonne Life .............................................................................. 96
Summary.....................................................................................98
Glossary................................................................................... 100
Informationsplattform
The Common European

Energy Market
Page 8
Page 16
Page 28
Page 46
Page 82
INFORMATIONSPLATTFORM
Introduction
Infrastructure systems for energy are integral
to the economy. A well-functioning energy
market is a prerequisite for the efficient
consumption of resources with competitive
prices.
THE COMMON EUROPEAN ENERGY MARKET
Introduction | The Energy Triangle
The Energy Triangle

Meeting societys energy needs requires balancing three key dimensions: competitiveness, security of supply, and
climate and environment. In other words: How much are we prepared to pay for our energy? How much energy
does society need? And what impact on the environment are we willing to accept? This energy triangle can be
used to illustrate the pros and cons of each energy source, and also to demonstrate how transmission and distribution systems which transport energy to end users after conversion and markets for electricity, gas and heating contribute to the different dimensions.
Infrastructure systems such as grids and pipelines for different types of energy are one of the most crucial
elements of a societys infrastructure. Electricity, gas and heat flow through large networks and pipelines and are
distributed through progressively smaller branches, similar to the way the bodys blood is pumped from the heart
to the major arteries and on to smaller blood vessels.
Climate and environment

Reduced environmental and climate impact is a goal in the supply of electricity, gas and heat.
Infrastructure for electricity, gas and heat has an impact on the local environment such as
constructing power lines and pipelines but is also important for minimising transmission and
distribution losses. The expansion of the distribution system is in turn an important measure for
bringing the advantages of an increased share of renewable production to consumers.
Climate and
environment
Security
of
Supply
Competitiveness
Security of supply
Competitiveness
Fuel shortages and unreliable energy supplies create major problems

for societies and economies. In order to provide a high level of security
of supply in the energy system, it is necessary to both manage
variations in production capacity - resulting from an increased share
of renewable energy sources - and to guarantee a reliable supply of
electricity, gas and heat.
Energy is fundamental for all economic activity, and thus to human

welfare and progress. Competition benefits society by eliminating
excess capacity and pushing down operating and maintenance costs.
A well-developed, functioning energy market is a vital requirement for
achieving competitiveness and thus affordable energy.
THE COMMON EUROPEAN ENERGY MARKET
Competitiveness
Energy is a fundamental input to economic activity, and
thus to human welfare and progress. Historically, energy
costs have steadily declined, which means that tasks
that were previously performed by people could be
performed by machines and become increasingly automated. Competitiveness is not only a matter of cost,
but also of value for consumers and society. Todays
energy systems help create added value for consumers
through their overall reliability and efficiency.
The management of energy costs is also a key competitive issue for businesses, particularly those exposed to
international competition. The cost of electricity and
heating is often also an essential part of the cost of
living. It is therefore important to offer affordable
energy prices to consumers. Neither should we
underestimate the significance of energy costs for
10 THE COMMON EUROPEAN ENERGY MARKET
many public services, such as health care facilities

and public sports grounds. It is important that overall
energy costs are as low as possible given the available
resources.
Competitive energy markets benefit society by eliminating excess capacity and pushing down operating
and maintenance costs. Much of the old generation
production capacity in Europe needs to be replaced in
coming decades. Market competition will ensure that
investments in new capacity are cost-effective to
the benefit of society, consumers and, of course, the
environment. Protecting the environment costs money
and, since public resources are limited, measures should
be as cost-effective as possible.
Security of supply
Access to energy is one of societys fundamental prerequisites. It is hard to imagine what our lives would be
like if we had no electricity to power our appliances or
heat to warm our homes in the winter. Infrastructure for
electricity, gas and heat therefore needs to be reliable
and capable of continuously delivering energy when
and where it is needed. This along with the ability to
guarantee gas delivery and the availability of fuel used
for electricity and heat production is normally termed
security of supply.
Ongoing research projects are studying ways to

develop electricity grids and equip them with more
extensive storage capacities and technologies to
control and adjust electricity consumption to fluctuations in generation (smart grids). This will hopefully
produce networks that are more reliable and will reduce
dependence on balancing power to compensate for
uneven generation from renewable energy sources,
improving the electricity systems security of supply as
a whole.
Security of supply thus entails guaranteeing both the

availability of fuel and the reliable, virtually constant
delivery of energy. This presents political and technological challenges. Today, options for storing electricity
are limited this means that a balance must constantly
be struck between production and consumption. At any
given time, the amounts of electricity produced and
consumed in the grid are identical. This imposes high
demands for security of supply in electricity production.
In both the short and long term, investments will be
needed in infrastructure and power plants.
To meet societys basic electricity demands, we
need power plants that can produce even quantities of baseload power as well as balancing power that
can be adjusted to variations in short-term demand.
Baseload power is essentially comprised of nuclear
power, fossil-based power, biomass in combined heat
and power plants and to some extent hydro power.
Many renewable energy sources, such as wind and solar
power, are intermittent. They contribute to the electricity
production mix, but cannot function as baseload power.
Solar cells and wind turbines, for example, produce
energy only when the sun shines or the wind blows. To
handle ups and downs in electricity demand, we therefore need access to energy sources that can be quickly
converted to produce more or less electricity. Natural
gas and hydro power allow a high degree of flexibility
in electricity generation, enabling them to function as
balancing powers.
THE COMMON EUROPEAN ENERGY MARKET 11
Climate and environment

Consideration of the climate and environment is something the energy system must be equipped to deliver
on. Two overall goals must be addressed environmental targets and sustainability targets. Emissions rights
trading is one example of the way market-based instruments help stimulate investment in production methods
that emit low levels of CO2. Other methods include the
increased usage of coal power with Carbon Capture
and Storage (CCS).1
Electricity certificates (used in Sweden and Norway)
and feed-in tariffs are the two most common methods
of creating incentives for increasing electricity production from new renewable energy sources. The electricity certificate system is also market-based. The state
allocates certificates to renewable electricity producers
for every MWh produced. Electricity retail companies
must in turn buy a certain number of certificates in proportion to how much electricity they sell (quota requirement). Electricity producers receive extra income when
they sell their electricity certificates to retailers, so it is
more attractive for them to invest in new renewable
energy (e.g., wind power, certain types of hydro power

and biomass, solar energy, geothermal energy, wave energy and peat power generation), and the cost of these
energy sources is decreasing. For ordinary consumers,
the cost of electricity certificates is included in the total price, making it easier to compare prices at different
companies.
Feed-in tariffs, on the other hand, guarantee producers
of renewable electricity a certain amount of compensation for each MWh of renewable electricity they feed
into the grid. This is paid by the network company, who
charges this cost to consumers.
To meet these two important targets we need well
developed infrastructure. In terms of infrastructure for
electricity, gas and heat, this involves impact on the local environment such as constructing power lines and
pipelines and minimising transmission losses. Quite
often, remote (e.g., offshore) locations are those best
suited for renewable energy production. In the absence
of an expanded grid, it will be impossible to transport
electricity produced in these locations to consumers.
An energy system in balance

Achieving cost-competitiveness, securing supply and
minimising the energy systems impact on the climate
and environment require some trade-offs. Improving one
dimension of the energy system often entails making
sacrifices along another dimension. For instance, sourcing cost-competitive energy may increase a countrys
dependence on unstable energy imports, and using
fossil fuels to improve security of supply will have a
negative climate impact. And managing environmental
impact frequently entails increased costs. Win-winwin solutions do exist, particularly in terms of improved
energy efficiency. Technological developments and improved electricity network design will deliver even more.
Finding the balance between these three dimensions is
ultimately a societal and political decision.
Physical access to energy is one important aspect of
the energy system but without functioning energy
markets, consumers and industries will be unable
to utilise the energy they need in the required form.
Functioning energy markets also create conditions for

competitive prices, especially in times of increasingly
scarce resources. This document therefore places great
emphasis on the ways the markets for electricity, gas
and heating (particularly district heating) operate.
Furthermore, electricity, gas and district heating overlap
in certain areas. For example, electricity can be used for
heating and, increasingly, to power vehicles; gas can be
used to produce electricity and district heating, as vehicle fuel and as a direct energy source for households
and industries for cooking and industrial processes.
The first section of the book briefly describes the
infrastructure systems and markets for electricity, gas
and heating. This is followed by a historical review and
a more detailed review of the chain that starts at the
energy source and ends in the consumers home.
Finally, we take a closer look at the challenges facing
infrastructure systems and energy markets.
Introduction | Summary
Summary
Meeting societys energy needs requires balancing three key dimensions: competitiveness, security of supply,
and climate and environment.
Energy is a fundamental to economic development, and thus to human welfare and progress.
Infrastructure systems for different types of energy constitute one of the most crucial elements of a societys
infrastructure.
Competitive energy markets benefit society by eliminating excess capacity and pushing down operating and
maintenance costs.
Infrastructure for electricity, gas and heat needs to be reliable and capable of continuously delivering energy
when and where it is needed.
Consideration of the climate and environment is something the energy system must be equipped to deliver on.
Without functioning energy markets, consumers and industries will be unable to utilise the energy they need in
the required form.
Footnotes - The Energy Triangle

1
To read more about EU policies please visit http://ec.europa.eu/clima/policies/
The Energy System

Electricity, Gas and Heat
On Europes energy markets, three types of
products are of primary interest to the end
consumer: electricity, gas and heat.
The Energy System
The Energy System

Electricity, Gas and Heat
A modern energy system can be viewed as a value
chain starting at the energy source wind, water or
coal, for instance and ending with end use. In order to
be able to utilise the energy stored in various types of
energy sources, the energy must be converted into an
energy carrier. An energy carrier is a substance or process used to store and/or transport energy. The most
common energy carriers are electricity, gas and oil, and
also hot water in the district heating networks.
Following the conversion process, the energy carrier
is transported through a distribution system to the end
user. The end use of energy is normally divided into
three sectors: industry, transport and residential. All
primary energy cannot be utilised. Much is lost during
conversion and distribution, so final consumption in
the energy system is lower than the amount of energy
supplied by energy sources at the beginning of the

value chain. Approximately two-thirds of the total energy input is utilised in final consumption. Much of the
research within the energy sector focuses on increasing transmission and distribution efficiency to reduce
energy losses.
In addition to physical power plants and the transmission and distribution systems that transport energy to
end users, the energy market also includes financial
institutions. The various electricity retail companies and
power exchanges are examples of financial actors on
the electricity market. End users come in contact with
electricity, gas and heating retail companies as well
as local distribution companies that own the physical
distribution system.
From energy source to end user - EUs energy system

Energy sources
Energy carrier
End user
Electricity
Nuclear power
(14%)
Conversion
ersi losses
Renewables
(10%)
Heating
Other sectors (50%)
13,432.7 TWh
19,236.0 TWh
Industry (22%)
Fuel
Fossil fuels
(76%)
Transport (28%)
Source: IEA, World Energy Outlook, 2009
The Energy System
Electricity, gas and heat usage
The illustration shows final energy

usage of electricity, gas and heat
in the Nordics, Germany and the
Netherlands. Gas is used in both the
end-use stage and as fuel for electricity production; total gas usage is
therefore greater than that shown in
the illustration.
Data provided in TWh.
Source: IEA Statistics, 2009
The Nordics (TWh)

129.1
Electricity
Gas
Heat
48.6 337.4
The Netherlands (TWh)

23.9
Germany (TWh)
271.9 104.0
119.1
740.2
495.6
The Energy System | The Electricity Market
The Electricity Market

The electricity market is comprised of different sections, from producer to consumer. One important part is
the wholesale market, which includes power exchanges
Nord Pool1 in the Nordic regional market, EPEX2 in
Germany and APX-ENDEX3 in the Netherlands. In these
exchanges, producers meet suppliers and consumers
and the market prices of electricity are established. An
electricity producer is responsible for generating electricity from the energy source coal, hydro or nuclear
power, for example. Network companies own a particular
regional or local network and are responsible for transporting electricity from producer to end consumers.
These companies are paid for the transport of electricity, and are responsible for ensuring that this can be
done reliably and as efficiently as possible. Electricity

retail companies buy electricity via the power exchanges
or directly from the producer and sell it to end consumers. These companies may also be owners of production
capacity, in which case they play a more prominent role
in the chain.
People can choose their electricity supplier just as they
choose the brand of car they drive. But just as they are
unable to choose a road construction contractor, they
are unable to choose their network company. The main
reason for this is that, for practical and cost-related
reasons, there is only one electricity grid just as there
is only one road system.
The Energy System | The Electricity Market
Electricity producer Produces electricity in power plant(s) e.g., coal, hydro, nuclear and wind power plants and then
sells it to the electricity market.
Power exchange Producers meet suppliers and customers and the market price of electricity is established.
Electricity retail company Buys electricity from electricity producer on the power exchange for resale to end users.
Transmission System Operators (TSOs) A TSO is entrusted with transporting energy on a national or regional level.
Large volumes of electricity are distributed through the high voltage transmission grid (220 - 400 kV) over long distances.
Distribution System Operators (DSOs) A DSO owns a specific local low or medium voltage network and is
responsible for the distribution of electricity from producer to end user. Similar to a freight company. The transmission
grid branches off into regional (70 - 150 kV) and local networks (less than 50 kV) which distribute electricity to end users.
Voltage levels in the transmission grid vary between countries; the range cited above applies to Sweden, Germany and the
Netherlands.
Electricity bill Includes electricity consumption and distribution costs, as well as fees related to renewable electricity
production subsidies, VAT and taxes.
Overview of the electricity market
Power exchange
Electricity retail company
tricit
y wh
olesa
le
ty bill
Electrici
TSO
Electricity
producer
Tran
tricit
sion
15
0 k
V
Transmission grid
Distr
15
ity price
Electric
es
fe
rid
G
y ret
DSO
smis
<40
Elec
ail
tax
Energy
& VAT
ibutio
0 k
V
Regional network
Industries
0 k
V
<50
kV
Ele
ctr
ici
ty
co
ns
um
ers
Elec
Elec
tricit
y ge
nera
tion
Local network
Households
Commercial
properties
The upper arm of the illustration shows the contract

chain of the electricity market - i.e., the sale of electricity from producer to consumer. The lower arm shows
the physical transmission and distribution of electricity,
from producer to consumer.
The Energy System | The Gas Market
The Gas Market

Gas includes both natural gas and biogas, though
natural gas is still predominant. Natural gas deposits
are formed where gas is trapped in the earths crust.
It is formed under the same conditions as oil and is
therefore often found in the same places. Biogas,
on the other hand, is a gas produced by the biological breakdown of organic matter in the absence of
oxygen. Shale gas a type of natural gas that is often
referred to as unconventional gas is natural gas
extracted from shale. Reserves containing shale gas
are usually found a few kilometres below the earths
surface. The gas is extracted by fracking - a combination of small explosions, high-pressure water and
chemicals that creates cracks in the ground through
which the gas can be extracted. Since Europe has
large shale gas resources, use of shale gas would
allow Europe to decrease its import dependency from
other parts of the world. To date, production remains
on an experimental level in Europe.
Gas is produced by gas producers around the world.

The gas is transported from extraction site to distribution networks via transmission lines. If natural gas
deposits are too far away from end users, or if it is too
difficult to build a piping system for other reasons, the
gas is converted to liquid form, Liquefied Natural Gas
(LNG), and is transported by tanker. Gas transported
in pipelines is a fairly regional product while LNG is an
international commodity.
The network owner is responsible for transporting the
gas by pipeline from source to consumer. This is an
important function the network owner must ensure
that the pipeline system is safe, reliable and efficient.
The storage owner owns a facility that stores natural
gas for market actors, and the system administrator
has overall responsibility for maintaining a balance
between gas feed-in and withdrawal. Gas consumers
are everything from industries to private households.
The Energy System | The Gas Market
These consumers enter into contracts with suppliers

and network owners. Since trade in gas is competitive,
consumers are able to choose their gas supplier (gas
trading company). The gas supplier is engaged in the
gas trade, selling and delivering gas to consumers.
As on the electricity market, gas market network
operations (the transmission or transport of gas)
are regulated as a natural monopoly. Network owners
therefore have exclusive rights within their geographic
areas, so they can achieve economies of scale.
Overview of the natural gas value chain
Network companies are required to provide access to

their network to all suppliers.
Electricity generation is one of the primary application
fields for gas. Another significant application field is
district heating production. Natural gas is used as a fuel
by district heating plants to heat the water that is used
in the district heating network. Combined Heat and
Power (CHP) systems are finding applications in commercial, industrial, and even residential settings. CHP
utilises more of the energy contained in natural gas
than does a simple gas turbine for electricity generation, thereby improving energy efficiency and requiring
less energy to start with.
Drilling rig
Processing
plant
Gas export
G
Drilling rig
Transport
Storage
Industries
Storage
Drilling rig
Transport
Natural gas is extracted from oil or gas deposits. Before

the gas can be used as energy, it must pass through
a processing plant where undesired substances are
separated out. After processing, the gas is transported through pipelines or converted to liquid form and
transported by tanker to the end user.
Households
Commercial
properties
The Energy System | The Heating Market
The Heating Market

Options for heating homes and offices include gas,
electricity, oil, heat pumps, pellet burners and geothermal energy. Consumers are therefore able to choose
between different types of heat sources. District heating is one such alternative and is particularly suitable
for areas with densely built housing. District heating
is a system for distributing heat generated in a centralised location for residential and commercial heating requirements. One precondition for using district
heating is connection to a district heating network.
Traditionally, these networks mainly supplied heating to
urban areas; as district heating has become an increasingly attractive heating alternative, the network has
also been extended to smaller towns. Thanks to this
expansion, waste heat from industries and heat from

Combined Heat and Power (CHP) plants can be used
more efficiently. The simultaneous production of heat
and power is the most efficient way of converting
energy to heat. CHP requires approximately 30 per
cent less primary energy than split power and heat
generation.
District heating operations differ from other energy
markets. The major difference is that the scope of
district heating is nearly always well-defined within
local boundaries. Due to its geographically limited
area, district heating is operated as a local monopoly
with integrated distribution, trade and, in many cases,
production.
There is only one supplier in a district heating network

so consumers are not able to switch suppliers. If a
consumer wants to switch district heating supplier, the
only option is to move and connect to another network
or switch to another heat source. In recent years there
has been much discussion about opening up access to
the district heating network to actors other than district
heating companies, with the aim of creating local com-
petition and allowing consumers to choose from

among different suppliers. The introduction of such
third-party access to the district heating network
would, for instance, allow waste heat suppliers to
access the actual distribution network and sell heat
directly to consumers.
District heating distribution from energy source to consumer
Waste heat
Commercial
properties
C
Cooled water
T
The cooled water returns
tto the district heating
p
plant to be reheated
Biomass transported
to district heating plant
Heated water
The hot water is directed
from the district heating
plant to houses via a
closed piping system
Households
Industries
A variety of energy sources including biomass, waste

and natural gas can be used as fuel in a district heating plant. Biomass is used in the above illustration as an
example.
The Energy System | Summary
Summary
A modern energy system can be viewed as a value chain starting at the energy source and ending with end
use.
In order to be able to utilise the energy stored in various types of energy sources, it must be
converted into an energy carrier, e.g., electricity, gas, oil or hot water.
The electricity market is comprised of different sections, from producer to consumer. One important part is
the wholesale market, which includes power exchanges. On the power exchange, producers meet suppliers
and consumers, and the market price of electricity is established.
Gas includes both natural gas and biogas, though natural gas is still predominant. As on the electricity market,
gas market network operations (the distribution or transport of gas) are regulated as a natural monopoly.
Various options for heating homes and offices include gas, electricity, oil, heat pumps, pellet burners and geothermal energy. Consumers are able to choose between different types of heat sources. District heating is one
such alternative, particularly suitable for areas with densely built housing.
Due to its geographically limited area, district heating is operated as a local monopoly with integrated distribution, trade and, in many cases, production.
Footnotes - The Energy System

To read more about the power exchanges please visit www.nordpoolspot.com
To read more about the power exchanges please visit www.epexspot.com/en/
To read more about the power exchanges please visit www.apxendex.com
1
2
3
Historical Background
Electricity, Gas and District Heating

Energy has been a scarce resource throughout
human history. The quest for a secure supply
of competitive and environmentally efficient
energy sources and energy carriers has been
in constant focus.
Historical Background | Development of Electricity
Historical Background
Electricity, Gas and District Heating
Development of Electricity
Many innovations have transformed society, but few as
much as electricity. Over the past 200 years, technological advances such as electricity and the internal
combustion engine have altered and improved the
way we use energy, laying the foundation for todays
societies, industries and transport methods. This trend
gained momentum in the late 1800s as electricity
began to be used in industrial processes for lighting
and heating. Today, electricity is a basic requirement for
modern society, and the vast majority of people regard
electricity as matter of course.
Historically, electricity, economic development and technological innovations have interacted to spur on a long
chain of advances. In the early 1900s, electrification
was dependent on major financial investments. Today,
a competitively priced, reliable supply of electricity is a
prerequisite for economic growth.
Electrification had an impact on industry and working
conditions. When electric lights were introduced, people
could rearrange work shifts and work round the clock,
not only during daylight hours. Production could thus
be significantly increased and there were more jobs for
more people, albeit with tougher work hours.
Transporting energy also became easier and more
efficient industries that were previously powered
mechanically by hydro power could move farther from
the energy source. Heavy, slow work processes could
be streamlined. Electrification was thus a major driving
force in economic and technological development.
Electrical generation became more profitable with these

advances. Meanwhile, as the distance between energy
source and industries increased, there was a growing
need for transmission capacity and high voltage lines.
The trend gradually moved towards increasingly large
and increasingly integrated electric systems from
having a power station in each building, to having a few
in each city, to connecting national electricity production to a large system. The next major step is the
integration of the entire European electricity market
and reorientation of the grids to small scale production
in order to distribute renewable electric energy.
Milestones in the history of electricity

Early technological breakthroughs
A number of necessary technological breakthroughs
preceded the advancement of the industrial use of
electricity. With his 1752 kite experiment, Benjamin
Franklin demonstrated the relationship between lightning storms and electricity. Lightning strikes were a
common cause of household fires at that time Franklin solved this problem by inventing the lightning rod.
One of the most important inventions in the history
of electricity was the first battery the galvanic cell,
also called the voltaic pile invented in 1800 by Italian
physicist Alessandro Volta. The unit indicating electric
potential energy per unit charge volt is named after

Key dates in the development of electricity
1752
Benjamin Franklin
invents the lightning rod
1800
The first battery invented by
Italian Alessandro Volta
1820
1821
Electromagnetism
discovered by H.C. rsted
Invention of the electromagnetic telegraph
By this time, lighting was the only true field of application for electricity. Electricity also faced fierce competition from gaslights and paraffin lamps. In Sweden,
Germany and the Netherlands, electric lights began to
be used on a limited scale. The first practical use of
electric lighting in Sweden was in 1876. The carbon
arc light was the first commercially successful form of
electric lamp and was installed in sawmills to facilitate
timber sorting in waning daylight hours. A few years
later, in 1881, the installation of a lighting system in a
Dutch factory attracted considerable attention from
other companies that also wanted electric light giving
rise to the idea of a shared power plant. Amsterdam
eventually became the first municipality in Holland with
its own electricity supply.
Volta. In 1820, H.C. rsted from Denmark established

that electrical current generates a magnetic field.
Michael Faraday defined Faradays Law of Induction,
stating that if an electric current can be the source of
magnetism, the reverse should also be true. In 1821,
Faraday invented one of historys greatest technological breakthroughs: the electric motor. The first light
bulb was presented by Thomas Edison in 1879, the
same year that the first commercial power station was
put into service in San Francisco, USA.
Once electricitys development was well under way,
several advances followed in quick succession. In the
1890s, electricity began to be used in private homes,
in most cases by affluent people who had the means
to invest in the latest technology. Electrification was
primarily spurred on through economic development.
But there was stiff resistance towards and scepticism
of the new technology in many areas, and it took many
years to build the planned power plants. The transport
of electricity over distances exceeding a few kilometres
was still a rare occurrence, and this also served to limit
expansion.
The light bulb was first introduced in Sweden in the

1880s, and the new technology spread to the large
cities and selected industries. Advances in Germany
were more rapid in many areas. Outdoor lighting was installed in Berlin along Leipziger Strasse and Potsdamer
Platz in 1882. Two years later, in 1884, the first commercial energy company was founded by the German
Edison Association.
Thomas Edison, inventor of the light bulb.

1821
1879
1881
1882
Faraday invents the

electric motor
Light bulb invented by

Thomas Edison
First factory lighting installed in the Netherlands
Outdoor lighting
installed in Berlin
Generators at Porjus hydro power plant in northern Sweden.
Development of electricity grids

There was no extensive network for transporting electricity in the late 1800s. Those wanting to take advantage of the new technology obtained their own small
power plant, often steam-driven. Some major industries
used hydro or coal power. This type of plant could
light a short stretch of road or an industrial building.
Progress was also made in electricity transmission, and
with time, power could be transported over longer distances without excessive losses. The first transformers
were installed and the three-phase system a longrange electricity supply breakthrough that became the
dominant system was developed. This trend continued through the early 1900s, and the electricity grid
branched out into increasingly larger systems as power

plants became larger throughout Europe.
By 1921, a connected electricity grid extended from
Nancy, France via Switzerland to Milan, Italy a distance of about 700 kilometres. Transmission technology
had begun to develop in earnest, although it did face
challenges. A supervisory body for transmission lines
was needed, and the International Union of Producers
and Distributors of Electrical Energy (UNIPEDE) was
founded in 1925. The organisation was comprised of
representatives from the Italian, French and Belgian
power industries.
1884
Establishment of first commercial energy company in Germany
1929
1954
Idea of a European network

is born
First commercial HVDC

pipeline is opened
Technological innovations were developed, such as

cables for long distance power transmission and
interconnection of power grids with different voltages.
Vattenfall was first in the world to introduce 380 kV AC
in the 1950s, along the Harsprnget-Hallsberg route in
Sweden. The first commercial HVDC installation (High
Voltage Direct Current, which produced fewer losses
than traditional AC engineering) was constructed in
Sweden in 1954. This technology had a major, global
impact on the power transmission field and enabled
increased, more efficient transmission capacity. A large
number of transmissions with HVDC cables went into
operation between the Nordic countries and later between the Nordic region and Europe. The Baltic Cable
between Sweden and Germany and the SwePol Link
between Sweden and Poland are two such examples.
1963
gestaverket, Swedens first
nuclear power plant, is opened
The electricity grids of Sweden, Norway, Finland and

the Danish Sjlland region are synchronous they use
the same frequency at all times. This is also true for the
Danish Jylland region, Germany, the Netherlands and all
other continental European countries. Later cross-border transmissions were built with DC links, which made
it possible to connect two different synchronous grids.
Synchronised electricity grid

An integrated electricity market presented some
technological challenges, primarily due to the need for
synchronised grid frequency. Cross-border transmissions were initially built with AC links, meaning that
the same frequency was used throughout the grid.
Frequency is measured in fluctuations per second. The
physical unit is hertz (Hz); the standard AC frequency
is 50 Hz in Europe and 60 Hz in the US. Frequency
in the electricity system is used as a control parameter to regulate physical balance in order to achieve
equilibrium between supply and demand on a common
electricity market. Due to electricitys distinctive physical characteristics and the constant fluctuations in
production and consumption patterns, it is difficult to
accurately predict flows at a certain point in the grid.
Grid operators manage this uncertainty by applying
rules that ensure that the grid has sufficient amounts
of free capacity and can thus function under various
types of extreme conditions.
Direct Current (DC) and Alternating Current (AC)

Electric currents are moving electric charges. The
electric current either flows in the same direction,
called Direct Current (DC), or changes direction constantly, called Alternating Current (AC). Batteries are
powered by DC while regular sockets are powered by
AC. The oscillations for AC currents occur so rapidly
that we dont notice them. We cant see the oscillations when we look at a light bulb, for instance, since
they occur with such a high frequency, averaging 50
times per second (equivalent to 50 Hz). Frequency
measured in hertz refers to how often these
oscillations are repeated. One hertz is one oscillation
per second. In a synchronous (connected) system, the
frequency remains more or less the same throughout.
Today, the electric currency that is transferred to end
consumers is delivered using AC, while a growing
share of appliances produced today use DC. Regular
household sockets therefore require AC generators
that can convert AC into DC when needed.
1987
Free trade in electricity and gas
within the EU is introduced
1996
1996
1997
Liberalisation of Swedish
electricity market
Establishment of Nordic
power exchange, Nord Pool
EUs Electricity Market

Directive comes into effect
Development of a European electricity market

On the European level, politicians have for several years
had the goal of improving the integration of the energy
market. The idea of an integrated European energy
market was first introduced back in 1929 by George
Viel, director of Compagnie lectrique de la Loire et du
Centre, at a trade fair in France. Viels idea was never
implemented, but the idea had been born.
The link between economic development and the electrification of Europe grew stronger after World
War II. Existing power and energy infrastructure had
been seriously damaged during the war years, and
maintenance had been neglected. Effective restructuring of the energy supply was needed to spur economic
growth in all countries that had been impacted by the
war. Existing capacity needed to be repaired, expanded
and streamlined.
The Organisation for European Economic Co-operation
(OEEC) was established as part of this process in 1951.
An important OEEC subgroup was the Union for the
Co-ordination of Production and Transmission of
Electricity (UCPTE). This organisations primary purpose
was to promote the efficient utilisation and expansion of energy and transmission capacity in the region,
thereby encouraging economic development. Nordel
was founded in 1963 to promote co-operation between
transmission system operators active on the Nordic
electricity market. The organisations objective was the
further development of an efficient, harmonised Nordic
electricity market. Nordel was discontinued following
the formation of ENTSO-E (European Network of Transmission System Operators for Electricity), and Nordels
responsibilities were transferred to ENTSO-E.
During the late 1960s, however, the positive trend
began to slacken and Europes competitiveness fell,
particularly in comparison with the US. The definitive
end to the European economys post-war prosperity

was ushered in with the 1973 oil crisis, and it became
obvious to many countries that the energy issue was
central to competitiveness.
The trend of free trade across borders gained momentum in Europe in 1985. The EU Commission identified
300 action proposals to increase European integration,
which led European countries to initiate efforts to dismantle technical trade barriers and tariffs. At the same
time, a number of industries were singled out as being
overly protected and acting as brakes on economic
development. These industries were telecommunications, postal services, railroads, banking and financial
markets, and electricity and gas.
The 1987 Single European Act provided that free movement of trade in electricity and gas would apply across
national borders. This ambition was further strengthened by the 1992 Maastricht Treaty.1
A few basic principles served as the basis for the EUs
efforts to develop a well-functioning liberalised electricity market:
Legislators and regulators responsible for legal framework and oversight of the electricity market.
Transmission System Operators (TSOs) with a monopoly for transmission grid operations in a geographically limited area, responsible for ensuring a
constant balance between supply and demand.
Distribution System Operators (DSOs) responsible for
operating and ensuring the maintenance of a distribution system in a given area.
Wholesale market place for generators, suppliers and
consumers, where pricing is transparent and based
on supply and demand.
1998
Liberalisation of the German
and Dutch electricity markets
2000
2003
2005
Germanys first power

exchange, LPX, opens
EU adopts expanded internal

market package for electricity
and gas
Emission rights scheme

introduced in the EU
2007
EU adopts 20-20-20
climate targets
The EUs Electricity and Gas Market Directives, effective as

of February 1997, regulated the gradual opening of European
electricity and gas markets. These directives have subsequently been revised several times.
The internal energy market package, adopted by the European Parliament and Council on 26 June 2003, was an expansion of the 1997 Electricity and Gas Market Directives and
includes two directives and one regulation. The aim of the
package is to establish a common energy market for EU
countries and a level playing field and equal market conditions within the electricity and natural gas industries. To
facilitate this, individual countries electricity markets must be
structured to conform to each other. But even today, several
obstacles to full market integration remain in place.
On 13 July 2009, the European Parliament and Council
adopted the third internal market package for electricity and
natural gas.2 The package is a revision of the legislative packages adopted in 2003 and 2005, and includes five directives
for improved integration of Europes common energy market.
The UK and Norway were the first European countries to liberalise the market for electricity. Liberalisation of the electricity
market was and is a crucial part of the EU-wide ambition
to facilitate the free flow of goods and services on the internal
market. The integrated competitive European electricity market will benefit all consumers in the long term
through improved resource utilisation and cost efficiency.
The EUs energy policy is based on the energy and climate
targets for the year 2020 adopted in March 2007 by the European Council, the EU institution comprised of member states
heads of government. The targets are sometimes referred to
as 20-20-20 greenhouse gas emissions are to be reduced
20 per cent over 1990 levels, the share of renewable energy
increased to 20 per cent, and energy efficiency improved 20
per cent.3
The European Council has also endorsed an additional target
of reducing carbon dioxide emissions by 80 to 95 per cent
by 2050.4 The long-term plan is ambitious, but the European
Commission has indicated that

much of the infrastructure being constructed today is based
on the assumption that it will
be used through 2050 and
that it is therefore important
to adopt a long-term perspective.
2009
Third internal market package for
electricity and natural gas is
adopted
An emissions trading scheme (ETS) for the EU (also

referred to as the EU-ETS) was launched in 2005, in line
with the European Councils goal of reducing CO2 emissions.
Emissions trading a way to reduce CO2 emissions

The EUs Emissions Trading Scheme (ETS) is the worlds
first large-scale trading system for greenhouse gas emissions. Under the scheme, each member state sets a cap
on the total allowable amount of carbon dioxide emissions. The emissions cap is determined by mutual agreement between member states.
To prevent the cap from being exceeded, a limited
number of emissions rights are distributed - at no charge
or via auction - to the industries and energy companies
responsible for emissions. If a company emits less CO2 it
can save the rights for the next period or sell the surplus
to other companies that need to emit more. The effect of
the scheme is that companies that reduce their emissions
do not have to purchase more emissions rights.
The next trading period under the trading scheme starts
in 2013 and will incorporate a number of changes. The
aviation sector will be included in the system and a common, EU-wide cap on the total allowable amount of CO2
emissions will be set. The long-term plan is to gradually
increase the proportion of auctioned emissions rights,
with all emissions rights sold via auction by the year 2030.
Development of a Nordic electricity market

The creation of a common Nordic electricity market
(with the exception of Iceland) was followed by liberalisation of each national market and entailed the breaking up of several small geographic monopolies. All trade
in electricity would now be conducted in a competitive
market, in which any and all companies were entitled
to operate. No company could be denied the right to
utilise the electricity grid, and companies and private
individuals were free to choose their electricity supplier
and to switch supplier whenever it suited them.
Grid operations were separated from electricity production and would continue to be regulated by a state
authority. Because of this, grid owners were obliged to
make their grids available to all electricity suppliers at
a reasonable rate. Nordic electricity consumers were
thus free to choose their electricity supplier. As part of
the same process, the electricity markets in Sweden,
Norway, Finland and Denmark were co-ordinated and
the Nordic power exchange, Nord Pool, was established
in 1996. The power exchange had actually begun operating in Norway in 1991 and was then extended to
Sweden, Finland and Denmark.
The reforms were based on the goal of creating conditions for efficient price formation and thus improving
competition and the markets long-term efficiency.
In general, a common electricity market makes the
electricity system more robust and cost-efficient. The
Nordic countries have a common electricity market for
both geographic and technological reasons. It would
seem natural, for instance, for Norway and Sweden to
exchange a large amount of electricity, since they share
such a long border. They also have a large amount of
hydro power that fits well with other Nordic power. In
dry years, with limited precipitation, hydro power can
be replaced by increasing the capacity of other power
plants this often involves fossil power.
Initially, new companies flocked to the electricity market
following liberalisation, hoping for high profits. Most
were short-lived, however, following intensified competition. Many new operators started by offering aggressive
pricing, dropping prices so low that they were unable to
cover their costs. It took some time before the benefits of the newly competitive market began to be felt
The Swedish electricity market prior to liberalisation

Sweden joined the liberalisation trend in 1996, although preparations had been going on for quite some time, including
the 1992 conversion of state-owned Vattenfall into a limited company. In conjunction with this, the transmission grid
was separated from Vattenfall and transferred to a government agency, the Swedish National Grid.
Through 1996, the Swedish electricity market was governed primarily by the 1902 Electricity Act5, which stipulated
that all fees charged by companies must be cost-based. A special permit concession to operate on the electricity
market was also required. The concession was valid within a specific geographic area, and each company was required
to demonstrate financial stability and specific expertise in the area of electricity.
There have traditionally been many private and municipal electricity companies in Sweden. However, consumers were
not able to switch electricity supplier but were obliged to use the supplier operating in their geographic
area. There was therefore no competition between suppliers. Rather, the market was characterised by co-operation and
companies exchanged power between themselves in order to optimise electricity production on the national level in both
the short and long term. Collaboration also took place in technological development and training.
Although cost-based fee structures and local monopolies fostered co-operation, they also continuously tilted the system
towards overproduction. Prices were not determined by supply and demand, but by producers total costs.
Manufacture of stators for Olidans hydro power plant in Trollhttan. Photo taken just prior to 1910.
by households. In order to be able to switch supplier, households were first required to install an hourly meter at
substantial cost, a requirement that was not lifted until 1999. Not until the winter of 2002-03 did households begin
to switch suppliers electricity prices were high that winter and, for the first time, consumers were able to save
significant amounts of money by signing new agreements.6
The entire end user market for electricity will be a Nordic common market by 2015, meaning that consumers will
be free to choose their suppliers across borders.
Development of a German electricity market

The German electricity market was liberalised in 1998.
Initially, changes occurred slowly, in part because the
industry was allowed to regulate itself and transmission systems were not separated from generation and
sales. Several new operators have entered the market
since then, many of which have foreign owners. Small
and medium-sized electricity retail companies have also
joined forces and formed strategic alliances aimed at
strengthening their market position. Today, Germany is
the most competitive electricity market in continental
Europe and forms a single price area with Austria.
The price of electricity plummeted immediately following
liberalisation, but has since recovered and is now higher
than 1998 price levels. Taxes and energy costs have
both risen. The first German power exchange, LPX,
The German electricity market prior to liberalisation

In Germany, there has never been a state-owned or predominantly state-owned electric monopoly, as there has been in
Sweden. Rather, the market was characterised by a mixture
of private, municipal and quasi-municipal companies. Local
monopolies were common and a result of post-WW2 market
sharing among energy companies. The definition of boundaries
meant that companies were obliged to refrain from operating on markets outside their individual zones. A 1935 energy
reform reinforced the system of local monopolies, resulting
in increased co-operation between municipalities and energy
companies.
Before delineation came into effect, the market was fragmented and consisted of a number of regional monopolies.
Companies were responsible for all parts of the value chain
production, distribution and operation of high voltage grids. In
1997, prior to liberalisation, eight energy companies active
in several regions produced 79 per cent of all electricity in
Germany. At a regional level, there were around 80 energy
companies that produced ten per cent of all electricity. An
additional 900 or so local operators accounted for eleven per
cent of total electricity production.7
opened in Leipzig in 2000. A second power exchange,

EEX, opened in Frankfurt later that year. LPX and EEX
merged in 2002 to form the new European Energy
Exchange (EEX), located in Leipzig. Later on, the merger
of spot activities on energy exchanges Powernext SA
in France and EEX in Germany resulted in a new spot
market called EPEX and further integration of European
power markets.
Today, the German energy market is one of the largest in Europe and beginning to mature after ten years
of free competition. Switch levels were initially low, but
690,000 households switched electricity retailer in
2006 and 1,300,000 did so in 2007. A total of around
ten per cent of consumers have switched energy company.
Development of a Dutch electricity market

The Dutch electricity market has been liberalised
since 1998 in accordance with EU ambitions for a more
integrated European electricity market. Following liberalisation, the model is no longer cost-based. Liberalisation was aimed at opening up the market to a greater
number of operators, with the expectation of lower
consumer prices and a more efficient market.
In many respects, the liberalisation of the Dutch electricity market proceeded at a faster pace than that
required by the EU. Ownership distinction was required
rather than disclosure and there were more opportunities for third-party access. The 350 largest electricity
consumers, those with an annual consumption of at
least 100 GWh, had the option of choosing their electricity supplier immediately. The middle segment was
offered the same option in January 2002, and ordinary
households on 1 July 2004.8
Since 2011, grid operators may not be owned by a

company that also produces electricity. Ownership must
be transferred to the companys public shareholders.
The goal is to ensure that grid operators have an entirely independent role in the Dutch electricity market.
Prior to 2009, 15 to 20 per cent of all electricity consumed in the Netherlands was imported. This figure fell
to 2.5 per cent by 2010. Trade in electricity has also
increased on the Dutch market 31 per cent of all
electricity was traded on the power exchange in 2010.
The remainder was directly traded via two-party agreements.
The Dutch electricity market prior to liberalisation

Historically, the Dutch electricity market was characterised by a
few operators who were responsible for the entire value chain, from
power plant to consumer. Between 1900 and 1920, many Dutch municipalities began to assume responsibility for electricity supply in
their area. Until the 1980s, all electricity supply was monitored by
municipal companies. A series of mergers between such companies
created regional companies that, over time, also merged to become
larger entities.
In 1949, the municipal energy companies merged to create the
Association of Electricity Producing Companies (SEP). This organisation handled issues related to electricity production and transmission, eventually assuming responsibility for the national interconnection of the grid and determining ways in which power plants
should be economically optimised.
Historical Background | Development of Gas
Development of Gas
When considering the development of gas as an energy
source, a distinction must be made between the gas
itself and its distribution. Distribution which is often
accomplished via large pipelines can be viewed as
natural monopolies, while gas itself can be traded
on an open market. The most common type of gas is
natural gas, a fossil fuel. A rapidly growing type of gas
is biogas, which is generated through the anaerobic
digestion of biomass. When biogas is converted into
biomethane, it has the same chemical structure as
natural gas and can thus be mixed in pipelines with
natural gas.
Until the 1960s, natural gas was an unusual component
in the European energy market. An enormous gas field
was discovered in the Dutch Groningen province in
1959, prompting the expansion of the European natural
gas network. Due to new discoveries in Great Britain
and the North Sea, natural gas became a normal part of
European countries energy mix. But demand for natural
gas became so great that it began to be imported from
ever greater distances. In the 1970s, Germany contracted to buy energy from Russia and a pipeline from
Jamal, Siberia was built.
Interest in natural gas as an energy source increased
during the 1970s oil crisis. Due to various factors, natural gas was well poised for a strong expansion phase.
The oil crisis served to clearly demonstrate the extent
of oil dependence and the economic consequences
of a fourfold oil price increase. A higher degree of self
sufficiency was sought this was very compatible
with natural gas and led, for example, to large-scale oil
and gas production in the North Sea. The natural gas
system was now able to develop into an interconnected
regional market in Western Europe. The 1973-2000
rate of increase was 3.7 per cent per year for OECD
countries in Western Europe.9
The European gas grid extends from the Baltic Sea to
the Mediterranean and from the Atlantic to Eastern
Europe. It is comprised of grids belonging to various
European gas companies and is connected at some
points. The European grid consists of a total of 1.5

million kilometres of gas pipeline.
Prior to adoption of the European Gas Directive, commercial forces had begun to take action to promote
more widespread competition. Two events were behind
this development: the surge of natural gas as an energy
source in Europe during the 1990s and the liberalisation of Eastern European gas markets in the early
1990s, which provided a larger market for the major
European natural gas operators.
Nowadays, trade in natural gas unlike natural gas
grid activities allows the establishment of competitive markets. Trade has gradually moved from local
monopolies to full competition. The final step in opening the market was taken on 1 July 2007, when natural
gas markets in most EU countries were fully opened
to competition. With the market reforms, consumers
are free to choose their natural gas dealer. However,
due to limited harmonisation of market rules and few
market actors, gas still lags behind electricity in market
development.
Development of gas in the Nordics

The market for natural gas is relatively young in the
Nordic region, with the exception of Denmark which
has its own natural gas deposits. Gas was introduced
relatively late and the market is small from a European
perspective. In Sweden, natural gas began to be used
as an energy source in the 1980s, following an import
agreement with Denmark. Denmark has the Nordic
regions most extensive natural gas system, and is selfsufficient in natural gas.10 Norway is one of the largest
natural gas producers in Europe, although its domestic
market is very small.
Development of gas in Germany
Development of gas in the Netherlands
Until the late 1990s, the German gas market was

characterised by municipal and regional monopolies and
imports were dominated by Ruhrgas. A first attempt at
market liberalisation followed the introduction of the
1998 EU Gas Directive, which permitted member states
to choose between regulated or negotiable third-party
access to the gas market. Germany chose the latter, allowing market actors to stipulate the terms for access
to gas pipelines.
Dutch natural gas consumption began with the 1959

discovery of the large Slochteren gas field near the
town of Groningen, although a number of smaller gas
fields had been discovered during the preceding two
decades. The Slochteren field was so large that the
decision could be taken to convert the towns gas
networks to natural gas. At the same time, construction
was also started on the national gas grid which was
linked to the regional network. Gas from Slochteren
was exported to other continental European countries;
the field has been very important to the Dutch state in
economic terms.
Following the negotiations, a first contract was agreed

upon in 2000 and a second was signed in 2002. But the
new system caused difficulties in terms of new operators entering the market, and new energy legislation
aimed at fully opening up the market was introduced in
2005. In October 2006, network operators and regulators agreed on a new distribution system and Germany
was divided into 19 market areas. The market areas
were reduced to three in 2011 and will be further reduced to two in 2013.
Testing the Groningen discovery well, Slochteren 1, in 1959 .
Historical Background | Development of District Heating
Development of District Heating

District heating systems were tested in the US and
Germany back in the late 1800s. New Yorks district
heating system which currently supplies heat to Manhattan was put into service in the spring of 1882.
Development of district heating in

Sweden
The history of district heating in Sweden began in earnest in the late 1940s, when municipal energy agencies
began to invest in untested methods for heating buildings. Swedens first municipal district heating system
was started in Karlstad in the late 1950s, with electricity and heating being provided by the agency to a
newly-built foundry. Before long, the benefits of district
heating became more widely known and more people
joined the network. The development of district heating
was initially quite slow. It was not until the mid-1960s
that several district heating power plants were put into
service. Sales then doubled within five years, from five
to ten TWh per year. Sweden soon became a leading
district heating country today, district heating heats
approximately 50 per cent of all Swedish residences
and buildings.11
District heating has had free pricing since 1996. Due to
amendments to the Local Government Act in conjunction with the liberalisation of the electricity market,
district heating operations can now be run on a commercial basis. Many municipalities and municipal energy
companies sold their district heating operations in connection with liberalisation. From 1990 to 2002, there
was a large-scale concentration of district heating in
Sweden as three companies bought municipal district
heating plants and thus a significant share of district
heating production. In 1990, for example, approximately
98 per cent of all district heating production was
managed by municipalities, through administration or
municipal companies. By 2007 that figure had fallen to
around 60 per cent.12
Development of district heating in

Germany
District heating has a long history in Germany. The
first modern district heating system in Germany was
constructed in Hamburg in 1893. Development was
delayed by two World Wars, but accelerated during the
second half of the 20th century. As in many other countries, development was hastened by the oil crisis in the
1970s. The 1998 liberalisation of the German electricity
market resulted in plummeting electricity prices, which
had a particularly adverse impact on the district heating
market. The German district heating market remains
relatively small, though future prospects are bright. A
number of support measures have been introduced to
stimulate expansion.
Development of district heating in the

Netherlands
District heating has long been used as a heating source
in the Netherlands. The first district heating plant was
put into service in Utrecht in 1923, although expansion
was delayed during the 1980s and 1990s due to falling
natural gas prices. The late 1990s saw dramatic growth
in district heating consumption due to factors such as
the stabilisation of market conditions. New electricity legislation was enacted in 1998, stipulating that all
prices must be set on a competitive market. It eventually became clear that Dutch district heating companies had a hard time competing, since electricity price
was determined by lower cost electricity generated by
coal-fired power plants and imported electricity. Thus,
district heating operations had difficulty competing with
electric heating on the Dutch heating market. A subsidy
was introduced in 2001 aimed at energising the district
heating industry.
Only about three per cent of Dutch households are
heated with district heating. This share has increased,
however in 1982 only one per cent of households
were connected to district heating. The differences
are largely geographical: in The Hague, 45 per cent of
office buildings (including the Dutch Parliament) are
heated with district heating.
Historical Background | Summary
Summary
Electricity
Electricity, economic development and technological innovations have interacted to spur on a long chain of
advances over time. Important inventions in the history of electricity include the battery (1800), the electric
motor (1821), the light bulb (1879) and the first commercial HVDC installation (1954).
On the European level politicians have had the goal of increasing energy market integration since after World
War II.
In 1987 the Single European Act provided that free movement of trade in electricity and gas would apply
across national borders.
A few basic principles served as the basis for the EUs efforts to develop a well functioning liberalised electricity market:

- Legislators and regulators

- TSOs

- DSOs

- Wholesale marketplace for generators, suppliers and consumers
Gas
Until the 1960s, natural gas was an unusual component in the European energy market, but the 1959 discovery of a large gas field in the Dutch Groningen province prompted the expansion of the European natural gas
network.
Interest in natural gas as an energy source increased during the 1970s oil crisis. Demand for natural gas then
became so great that it began to be imported from ever greater distances.
The final step in opening the natural gas markets to competition was taken on 1 July 2007.
District heating
District heating systems were tested in the US and Germany back in the late 1800s. New Yorks district heating system which currently supplies heat to Manhattan was put into service in the spring of 1882.
Today, district heating heats approximately 50 per cent of all Swedish residences and buildings, but only three
per cent in the Netherlands.
Footnotes - Historical Background

To read more please visit www.eurotreaties.com
To read more please visit www.energy.eu
Read more about the EU Climate Change Policy on www.energy.eu
4
Ibid.
5
You can read more about the 1902 Electricity Act on www.svk.se
6
Nringsdepartementet (2002): Mnadsvis avlsning av elmtare
7
Pique (2006): Liberalisation, privatisation and regulation in the German electricity sector
8
CentER and TILEC (2005): Liberalizing the Dutch Electricity Market: 1998-2004
9
Energimyndigheten (2006): Europas naturgasberoende
10
Danish Energy Authority
11
Svensk Fjrrvrme, you can read more about district heating in Sweden on www.svenskfjarrvarme.se
12
Ibid.
1
2
3
From Energy Source

to Consumer
A functioning energy system is comprised of a
distribution system for the physical transmission of electricity, gas and district heating
as well as energy markets that enable trade in
energy.
From energy source to consumer | Energy Sources
From Energy Source

to Consumer
The delivery of electricity, gas or heat to consumers represents the end of a long chain
of events and is the result of involvement on the part of many different operators. This
is a matter of infrastructure electricity grids and gas and heating pipelines as well
as the financial aspects of the energy markets. Electricity is the main focus of this review, though gas and heating are also discussed.
Energy Sources
Access to energy plays a vital role in wealth creation and economic development in all corners of
the world. The modern energy system is central
to much of what we take for granted today, and
electricity is essential for our daily lives. Global
demand for energy has soared in recent decades,
propelling the energy supplys role in society
to a prominent position within political systems
throughout the world.
The EUs energy mix in electricity production (2009)
3%
27%
23%
4%
The production mix used in EU countries electricity production is dominated by fossil energy sources. Oil, coal and natural gas together account
for 53 per cent of the EUs electricity production.
Other energy sources utilised in the EUs energy
mix are nuclear power (28 per cent), hydro power
(ten per cent), biomass and waste (four per cent)
and wind power (four per cent).
4%
10%
28%
Coal 27%
Biomass and waste 4%
Wind 4%
Natural gas 23%
Hydro 10%
Oil 3%
Nuclear 28%
Biomass an opportunity to reduce

carbon dioxide emissions
Bioenergy is a type of stored solar energy, collected
by plants through photosynthesis. Biomass is an
organic material that contains bioenergy, a renewable
energy source used to produce electricity, heat and
fuel. Biomass and waste are used to generate roughly
four per cent of all electricity in the EU and have the
potential to play a key role in reducing carbon dioxide
emissions from existing coal-fired plants through processes such as co-firing. Carbon dioxide is emitted
into the atmosphere when biomass is burned, but
when biomass grows it binds carbon dioxide through
photosynthesis. Properly managed biomass is therefore carbon neutral over time.
Six Sources of Energy

- One Energy System
Biomass used for power and heat production comes

primarily from forest products, waste and various
residues from the agriculture and forestry industries.
Today, using biomass for power production is more
expensive than using energy sources such as coal,
natural gas or nuclear power. The global supply chain
for biomass is still under development; technological advances and improved logistics are expected to
lower prices over time. The economic competitiveness
of biomass will also improve as the cost of emitting
CO2 rises.
Coal power a cornerstone of the

global energy system
Due to its economic competitiveness and stable
power production characteristics, coal is a cornerstone of the global energy system and will continue
to be so for the foreseeable future. Many European
countries depend on coal power to meet their energy
requirements. Coal offers economic advantages and
has characteristics that allow stable, large-scale
power production. Coal power accounts for approximately 27 per cent of all power production within the
EU,1 while the combustion of coal accounts for a large
proportion of global CO2 emissions.
Two types of coal are used in electricity generation:
lignite and hard coal. Lignite is peat that was converted under high pressure 15 to 20 million years ago.
Read more about

energy sources in
Vattenfalls book,
Six Sources of Energy
- One Energy System,
available at
www.vattenfall.com.
Hard coal is lignite that is exposed to additional pressure deep within the earth. Lignite has lower energy
content and is only used in power plants located adjacent to lignite quarries. A hard coal-fired plant is slightly
more efficient, although in terms of heat value lignite is less expensive than hard coal per gigajoule (GJ).
Coal-fired power plants emit high levels of carbon dioxide into the atmosphere during the combustion
process, and this has a negative impact on the environment. Coal mining also entails a substantial degree of
interference with the environment, and opencast mines
must be re-cultivated and restored after mining is
completed.
Hydro power a renewable and competitive energy source

Hydro power is a renewable energy source that is economically attractive, offers security of supply and emits
low levels of CO2. However, power plants are a significant encroachment on the landscape and impact river
ecosystems. A power plant may also affect animal and
plant life in the vicinity. Hydro power is one of our oldest
energy sources and has been utilised for thousands of
years. It is by far the leading renewable energy source
in the European energy mix according to the IEA,
hydro power accounted for approximately ten per cent
of the EUs electricity production and more than half of
total renewable electricity production in 2009.2
Utilising waters natural cycle by harnessing the energy
of rivers and streams is the most common form of hydro
power. In general terms, hydro power works by converting the kinetic energy of water falling from one level to
another into electricity. Dams create reservoirs that allow for greater heights of fall and also serve to regulate
electricity production, a key requirement for increasing
production of other types of renewable energy such as
wind power.
Hydro power is, however, sensitive to year-to-year

rainfall variations. In a dry year, for instance, Nordic
hydro power production may be 90 TWh lower than
during a wet year representing nearly one-quarter of
total Nordic electricity production. But the expansion
of hydro power is limited in many regions due to the
conservation of rivers and streams.
Natural gas a transition technology

towards a sustainable energy system
Natural gas is a fossil energy source formed through
the slow decomposition of biological matter over millions of years. It is currently a growing energy source
in Europe and is considered by some to be a transition technology towards a sustainable energy system.
Natural gas emits lower levels of carbon dioxide when
combusted than other fossil fuels, and is also economically advantageous and offers higher levels of flexibility in electricity and heat production. Supplies can
be somewhat uncertain, and some regions that export
natural gas face political instability.
Natural gas is a growing energy source within Europe.
In 2009, natural gas accounted for approximately 23
per cent of the EUs electricity production.3 The EU is
a net importer of natural gas. Around 40 per cent is
produced within the EU and the rest is imported, primarily from Norway, Russia and Algeria. Due to the large
natural gas reserves found in Great Britain and the
Netherlands, these countries are EUs largest natural
gas producers. Natural gas consumption varies widely
between EU countries. The largest markets are Germany, Great Britain and Italy, which together account
for approximately 50 per cent of the EUs gas consumption.4 Natural gas is also a significant part of the
energy mix in the Netherlands, Spain and France.
Fuel is one field of application for natural gas that has
become more prevalent in recent years. As demand for
alternative fuels has risen, compressed natural gas and
biogas has become an increasingly common vehicle
fuel. Biogas and natural gas have the same chemical
composition, and the gases can be mixed and transported in the same pipelines.
Nuclear power an energy source that is

important for many countries
Due to the economic competitiveness of nuclear power
and its high degree of security of supply, it is currently
an important part of the energy mix in several European countries. Nuclear power also emits low levels
of CO2 over the entire life cycle and none at all during
production. The management of spent, highly radioactive nuclear fuel requires storage in secure facilities for
up to 100,000 years. Uranium mining does affect the
landscape, but the environment is repaired when mining
is completed. There are currently 143 nuclear reactors
in operation within the EU, with another four under
construction.5 These power plants have a combined
installed capacity of 130 GW and account for around
30 per cent of the EUs total power production.6
Wind power an energy source with

growth potential
Wind power has no fuel costs, and emits very low
amounts of carbon dioxide from a life-cycle perspective
and none at all under operation. Due to large investment costs, total cost per produced kilowatt hour (kWh)
is relatively high. Wind turbines have a visual impact on

the landscape, which some people may find disturbing.
Due to the EUs target for renewable alternatives and
to high subsidies, wind power is the fastest growing
form of energy in the EU. In 2009, installed capacity
increased 23 per cent and accounted for 39 per cent
of total newly-installed electricity production capacity
in the EU.7 In 2011, wind power accounted for 6.3 per
cent of the EUs total electricity production. The largest
share of new installations was land-based turbines.8
In general, wind turbines produce electricity when wind
speed is between 3 and 25 m/s. When there is light or
no wind, turbines rest in standby mode; when there is
too much wind, turbines must be shut off to prevent
turbine damage. Wind turbines are often situated in
groups, or wind farms, either on- or offshore. Large
wind farms may consist of hundreds of turbines that are
interconnected through an internal electricity grid. A
particular challenge with offshore wind farms is to connect them to the grid. Adding electrical cables on the
seabed is technically complicated and expensive.
From energy source to consumer | Electricity
Electricity
Electricity transmission
Electricity is an efficient energy carrier for transporting energy over long distances. Various energy sources
(e.g., rushing water) are used to drive mechanisms that
generate the electricity we use in our everyday lives. A
bicycle dynamo generator is another example: the rubber
head of a dynamo is placed against the bicycle wheel,
creating a mechanical motion that generates electrical
energy that is conducted to a light bulb in the headlamp,
creating light.
Electricity is transported through transmission grids.

Transmission grids in Europe are of fundamental importance modern society is dependent on a secure
and safe supply of energy. The transmission grids are
designed to transport electricity from surplus to deficit areas, e.g. from geographical areas rich in natural
resources to more densely populated areas. Transmission
grids also enable the levelling out of occasional over- and
undersupply between regions. Transmission grids may
also play an important role in achieving EU targets for renewable energy and reduced greenhouse gas emissions.
Each country has one or more system administrators
also referred to as Transmission System Operators
(TSOs) which operate, maintain and develop the transmission grid. TSOs also work together to develop
a common European transmission grid. In essence,
system administration entails the operator guaranteeing
that there is a continuous balance between electricity
production and consumption. Monitoring of the electricity systems various facilities is done via control
rooms, where it is also possible to steer the facilities to
co-operate and ensure that there are sufficient reserves
to be used when needed.
How is electricity transported

and distributed?
The electricity grid connects electricity-producing power
plants with electricity-consuming end users. The power
plants produce electricity by converting the energy found
in various energy sources, while the end users consume
the electricity by running industrial machinery, for
instance, or by turning on the lights at home.
The core of the electricity grid is divided into transmission grids and (regional and local) distribution networks.
The spine of this grid the transmission grid is like a
highway that transports electricity with high voltage over
great distances. Not infrequently, a countrys geographical characteristics are such that electricity is generated
far away from densely populated areas, so electricity
needs to be transported from source to end user in an
energy-efficient manner.
Electricity is distributed from the transmission grid to
large metro areas and energy-intensive industries via regional networks. Before the electricity arrives at ordinary
residential properties and offices, the network branches
off once again into local networks. At each branch point,
the electricity passes transformer stations that reduce
the voltage. The transmission grid has the maximum
voltage, approximately 400 kV. In Sweden, Germany and
the Netherlands, regional network voltage levels vary
between 70 and 150 kV. The final, local network portion
has a voltage less than 50 kV. When the electricity finally
reaches residences it is transformed down to 230 V.
Electricity distribution
Electricity is conducted from the transmission grids to
regional and local networks, which provide energy for
daily consumption to households, companies, transport
systems and heavy industries. Ownership of regional
and local networks is divided between private and public
operators. Each owner has the exclusive right and duty
to make the grid available to consumers within a geographic area, and is thus responsible for connecting
everyone within this area to the network. All distribution
companies are subject to the same regulations and are
required to distribute electricity on equal terms to all.
This is monitored by the national authorities.
The German electricity grid
The Swedish electricity grid
The German electricity grid is comprised of nearly 1,700,000 kilometres of

power lines of varying voltage levels from high voltage transmission grids
with 220 kV or 380 kV, via regional networks with 110 kV, to local grids with
varying voltage of up to 30 kV. Due to Germanys central location, its grid
can be viewed as the hub of the entire network on which the EUs internal
electricity market is based. This has meant that Germany has become an
important transit country for European cross-border electricity trade.
The total extension of the Swedish electricity grid is 482,000

kilometres of power lines and
approximately 150 transformer
and switching stations that
connect the grid. It also includes
connections with foreign
countries. The state-owned
public service company, Swedish
National Grid, is both TSO and
owner of the Swedish transmission grid, with a maximum voltage of 400 kV.
Unlike Sweden and the Netherlands, the German transmission grid is owned
by individual energy companies: Amprion, TenneT, 50 Hertz and EnBW.
These four TSOs are responsible for different German geographic areas.
There are around 1,000 different network companies on the regional and
local levels.
The Dutch electricity grid

The Dutch electricity grid is comprised of over 390,000 kilometres of power
lines of varying voltage levels from the national transmission grid with voltage levels of 220 kV or 380 kV, to regional networks with voltage levels ranging between 110 kV and 150 kV. Normal voltage levels for local networks
reaches a maximum level of 50 kV.9 The transmission grid is state-owned.
As in the Nordic countries, regional networks branch off from the transmission grid to smaller local networks before the electricity reaches households. Ownership of distribution networks is separated from production and
delivery operations, due to the liberalisation of the electricity market.
Voltage levels for regional

networks vary between 70 kV,
110 kV and 130 kV, while local
networks have voltage levels up
to 50 kV. The regional and local
networks are owned mainly by
private or public network companies. Although networks are
owned by major power companies, municipalities or other
operators, grids must be operated by independent legal
entities.
high
n
a
e
p
Euro e grid:
g
volta 00 km
300,0
s
e
m
i
t
7.5
arth
E
e
h
nd t
arou
Overhead or underground power lines

Lower-voltage electricity grids have traditionally been
comprised of overhead lines. Initially, these lines were
entirely uninsulated and presented a high degree of
risk for short circuits in the event of storms, fallen trees
or heavy snowfall. As we became more dependent on
electricity, the ability of the grid to deliver reliable access
to electricity became more important and old lines were
gradually replaced with buried cables or insulated aerial
cables.
Submarine power cables are used for electricity transportation to connect islands and offshore wind farms
with the mainland. As some cables are several hundred
kilometres long, good insulation and loss minimisation are
crucial. The cross-section of the copper conductor is usually between 1400 - 2100 mm2 for high voltage and long
distance cables.
Power cables connecting offshore wind farms
Land cable
buried
Wind farm
Transformer station
Copper or
aluminium
conductor
Control centre
Exterior
Insulation
kV
0
30
e
g
a
Volt
Wire reinforcement
D
Deep
sea cable placed
at depth o
a
of approx.
1 m below seabed
Land cable
connect
Due to low consumer tolerance for power failures,

extreme weather conditions are now a factor for distribution companies to deal with. Following hurricane
Gudrun in Sweden in 2005, for instance, distribution
companies made more investments in underground
cables even in rural areas. Underground cables are
exposed to less stress and strain and are generally
more reliable than aerial cables in terms of extreme
weather conditions such as storms, hurricanes or slush
although they are more difficult to access. Another
aspect is that the cost of underground cable construction is often much higher than for overhead lines, and
this has also slowed the rate of investments. Costs
also vary quite a lot depending on local soil conditions;
in some areas, it is not economically justifiable to lay
underground cable.
Deep sea or submarine cables represent a third alternative to overhead or underground power lines. As a rule,
cable can be laid directly on the sea bed, without any
covering. In shallow areas depths of less than
12 metres the cable must be buried or covered.
Environmental disturbances from submarine cables
occur mainly during construction. Once the cable is in
place it has a marginal impact on the environment. This
alternative is of increasing interest as the grid becomes
more integrated and electricity is transported over
large distances. Submarine cables are also of interest in
connection with the extension of offshore wind power
and research into various types of marine hydropower
(e.g., sea-wave power and tidal power).
How does the electricity market work?

A market in balance
In order for the electricity system to function, there
must always be a balance between electricity generation and electricity consumption. This feature is unique
to the electricity market. Different energy sources have
different characteristics, and not all energy sources can
swiftly switch production to deal with temporary peaks
or troughs in electricity demand. New renewable energy
sources such as wind and solar power produce
electricity irregularly and only under the right conditions
(intermittent power). On the other hand, baseload
power such as nuclear, fossil-based and hydro power
plants can produce large, regular quantities of electricity over time. We therefore need access to energy
sources that can quickly switch over to produce greater
or lesser amounts of electricity (regulating power).
Hydro power works well as regulating power, since dam
flow can be increased or decreased in a very short time,
thereby regulating electricity production and adapting
it to demand at a certain time. Gas power plants can
also be adapted relatively quickly to meet fluctuations
in demand.
How is the price of electricity determined?

The price of electricity is essentially comprised of three
parts: the price of the actual electricity (electricity retail
price), the price of connection to the grid (the freight
rate) and tax and fees (energy tax and VAT).
Electricity retail price
Grid price
Taxes and fees
The power exchange is the hub of the electricity

market, and the market price for electricity is determined on the power exchanges spot market. The
actors on the spot market are producers, retailers and
traders who choose to trade on the electricity
exchange. Large end users also trade on the
electricity exchange.
The majority of producers sell their electricity on the
spot market, where short-term trade in electrical power
is done via day-ahead auctions. During the trading
process, electricity producers who want to sell power
to the spot market must send their sale offers (for
the amount of electricity they are prepared to deliver
at various prices during the 24 hours of the following
day) to the power exchange by 12:00 noon on the day
before the power is delivered to the grid. Electricity retailers must send their purchase orders (corresponding
to the amount of electricity they believe customers will
consume during the 24 hours of the following day), and
the amount they are willing to pay. The market price
is then used by electricity retail companies to set the
price of electricity for end consumers (the electricity
retail price).
Sale offers (sell bids) are aggregated to a supply
curve, just as purchase orders (buy bids) are aggregated to a demand curve. The intersection of the two
curves produces the spot price for one specific hour.
The actual market price may vary somewhat between
different market regions, depending on physical transmission limitations that sometimes occur.
Thanks to competition, the market price is pressed
down to the marginal cost (market price) of the
electricity required to meet demand each hour, which is
often on par with the cost of producing electricity with
coal or natural gas, especially on the European continent. This means that the price of electricity is often
dependent on the price of fossil fuel or emissions rights.
Coal and natural gas are the dominant energy sources
Overview how the price of electricity is determined

Several factors affect the price of electricity.
The variable electricity price is set on the power exchange based on the supply of and demand for electricity. The price is also affected by the amount of available electricity and the level of demand. An electricity
consumer can choose a variable or fixed electricity price. The fixed price is determined by electricity retail
companies based on estimated price development on the local power exchange during the contract period.
The way in which electricity is produced has an impact on its price. The electricity offered on the power
exchange is generated, for instance, by hydro, nuclear, wind, coal and gas-fired power.
The availability of hydroelectric power varies with the amount of water stored at the power plant; prices
are lower if the water supply is abundant. The production and cost of nuclear electricity are dependent
on power plant capacity. Coal-fired and particularly gas-fired electricity are often the most expensive to
produce, and are therefore used when there is insufficient availability of other power. The high cost of coal
power is due to various factors, including the cost of emissions rights charged to all CO2-emitting electricity production.
The spot price on the power exchange is determined by the last connected production source. Due to
market integration, the national electricity price is affected by international price. Electricity markets are
increasingly interconnected, and trade between countries is on the rise. Nordic prices are thus impacted by
Central European prices, and vice versa. For end consumers, it is important to be active on the electricity
market, but also to explore ways to increase energy efficiency.
in continental Europe and will affect

electricity prices for many years to
come not only on the continent, but
also in the Nordic region during certain hours of the year. Market price
is the prevailing pricing method on all
competitive markets.
There must always be a balance
between supply and demand. One
important method for creating
balance is to utilise the regulated
portion of hydro power that is very
flexible and has high opportunity cost
(the cost of using the water today
rather than waiting for a time when
the electricity price is higher). Water
Principle diagram in reality, the buy bid curve (demand) is more vertical.
can be stored for production when the market has the

greatest need for electricity (i.e., when electricity prices
are high). Regulated hydro power thus has a moderating effect on the market price of electricity in both the
short and long term. In terms of making the European
electricity production system more renewable, Nordic
hydro power may be more highly valued precisely because of its flexible production.
Hydro power is also a valuable resource in terms of
keeping the cost of electricity system operation as low
as possible: it can be used for frequency and balance
control during the operational phase. At selected

(mainly hydro) power stations, production is automatically increased when frequency drops and reduced
when frequency rises. If frequency falls to the lowest
allowable level, this is a sign that balance can only be
maintained through maximum utilisation of primary
regulation (rapid regulation, performed within seconds).
When the frequency approaches the upper or lower
limits, it is therefore necessary to reallocate production to relieve pressure on the primary regulation. The
TSO does this by activating major regulation measures,
chiefly by starting or stopping the hydro power installation.
The Nordic electricity market debate

The Nordic electricity market attracted criticism following high sometimes extremely high electricity prices during
past winters.
Through numerous surveys and research reports, electricity market researchers and experts have determined that the
electricity market works, that the market price is determined by supply and demand (just as on all other competitive
markets) and that there is no evidence of inappropriate market manipulation.
When a competitive market delivers a market price that is consistent with the overall systems marginal cost, competition is functioning. The electricity market is a good example of a competitive market in which the market price equals the
overall systems marginal cost. The effect of competition is that overcapacity disappears and operation and maintenance
costs are driven down. In coming decades as large parts of old European production capacity is replaced competition
on the market will guarantee cost efficiency. Even so, confidence in the electricity market is gravely uncertain.
Why do consumers pay a higher electricity price now as compared to before liberalisation? Three main factors have
caused an increase in electricity prices:
1. Electricity tax. Prior to electricity market liberalisation, small electricity consumers paid electricity tax of
0.009 EUR10/kWh. This figure rose to 0.030 EUR/kWh in 2011.11
2. Electricity certificates. A special subsidy for renewable energy production was introduced in 2004. All electricity
consumers pay an electricity certificate fee (currently 0.003-0.004 EUR/kWh) which is included in the electricity price
paid to the electricity supplier.12
3. Emissions rights. As of 2005, all fossil fuel consumers receive emissions rights. The electricity price often
corresponds to the marginal cost of producing electricity at fossil-fired power plants, and is therefore dependent on the
price of fossil fuel and emissions rights. Today, the increase in electricity price due to emissions trading totals
0.010 EUR/kWh.13
An electricity consumer with electric heating who consumes 20,000 kWh per year and who purchased electricity from
Vattenfall in 2011 through a fixed three-year contract paid 0.057 EUR/kWh plus electricity tax and VAT a total of
0.110 EUR/kWh. Around half of that amount is made up of electricity tax, electricity certificate fee and additional costs
arising from emissions trading.14
Handling bottlenecks in the grid
Division of bidding areas in Sweden
Constructing a grid capable of handling all flows

under all conditions (e.g., natural variations
in hydro power inflow) is simply not possible
without incurring great costs for society. Desired
transportation levels will therefore sometimes
exceed physical capability a bottleneck in
the grid. Grid bottlenecks are managed by two
primary methods: market splitting and countertrading. A third method, decreasing cross-border
trade, contravenes EU legislation. Market splitting results in different market prices in different
areas, and in this way balances the markets
demand for transportation. With counter-trading,
the TSO pays to reduce electricity production
in one side of the bottleneck and to increase
production in the other side. The electricity price
remains the same throughout the entire region.
Bidding area Lule (SE1)
ELECTRICITY SURPLUS
ELECTRICITY SURPLUS
Both methods are market-based and can

theoretically produce the same efficiency levels.
Market splitting creates a local price signal that
reaches all market participants. With countertrading, the retail market only needs to use
one price. This means that the end users are
not stimulated to either decrease or increase
their electricity consumption, relative to the
electricity retail price. Instead, congestion costs
are transferred to the grid tariffs. A TSO must
therefore consider the price signals that it wants
the market to have in the long run, as well as the
section of the electricity value chain that should
assume the costs of the bottleneck.
Bidding area Sundsvall (SE2)
ELECTRICITY DEFICIT
Bidding area Stockholm (SE3)
If bottlenecks are frequent and large, the

long-term solution is to invest in new lines in
the transmission grids. In Sweden, the TSO has
introduced four bidding areas to manage bottlenecks. It has also presented plans to reduce
bottlenecks in the long term by investing in more
transmission capacity, which is important for
the fulfilment of climate and renewable energy
targets.
ELECTRICITY
DEFICIT
Bidding area Malm (SE4)

GRID
CONSTRAINT
Source: Svenska Kraftnt
Swedish bidding areas

As of 1 November 2011, the Swedish TSO (Svenska Kraftnt) has divided the Swedish electricity market into four bidding areas. The purpose of the division is to clarify where there is a need to expand the transmission grid while optimally
utilising existing grid capacity and clearly demonstrating where electricity production should be increased to meet needs
in that area.
The Nordic countries are sparsely populated, and electricity is often transported over long distances and rough terrain on its way to the end user. In northern Sweden there is a surplus of electricity production in relation to demand for
electricity. In southern Sweden, the circumstances are the opposite. Due to bottlenecks in the transmission grid, transmission capacity during certain hours is not always sufficient. These bottlenecks are targeted through the division into
bidding areas. Bottlenecks between areas also cause price differences prices are higher in areas with more demand
and less supply, and vice versa. The bidding areas thus introduce economic incentives for investments in the grid and
new production capacity.
Cost of electricity grids

Today, consumers can choose the company from which
they buy their electricity. Network companies, on the
other hand, are monopolies consumers are unable to
switch companies and are therefore regulated. The
Energy Markets Inspectorate (EI) is the supervisory
authority in Sweden responsible for monitoring network
companies. Similar authority is held by Bundesnetzagentur (BNetzA) in Germany and Nederlandse Mededingingsautoriteit (NMa) in the Netherlands.
major investments to reduce interruptions and thereby

improve the quality of electricity deliveries.
One task of the state authorities is to ensure that

network companies do not set consumer prices that
are too high or excessive. It is also important to create
conditions for network companies to maintain a grid
that is robust in the long-term. This means that grid
quality should be maintained at a high level to prevent
interruptions and that network companies should adapt
their grids to demands for an increased share of renewable electricity (from e.g., wind power).
All network companies operate their business under
different conditions. Distances between grid consumers may be large or small. Various types of terrain also
present different types of costs for grid companies.
Fees therefore vary depending on where consumers are
actually located. In recent years, increased demands
have been placed on network companies in terms of
power failures. Companies have accordingly made
The regulation of grid companies is aimed at creating

stable long-term fees while enabling grid renovation,
expansion and adaptation to the goal of increased
renewable energy production.
Grids across Europe are undergoing extensive modernisation, both to improve delivery quality (fewer interruptions through fallout-protected buried cables) and to
facilitate connection to additional power plants particularly geographically dispersed wind turbines. The
grid also needs to be expanded and reconstructed to
meet the demand for increased flexibility in both withdrawal and input and to enable decentralised electricity
production. Grid expansion is also a prerequisite for
future smart grid functionality.
Network companies are required to connect everyone

who wants to be connected to their grid. The cost of
a new connection is charged to the consumer, and
reflects the additional cost incurred by the network
company for supplying the new connection.
For end users, grid tariffs are comprised of fixed and
variable components. Each person can control the
variable component by varying electricity consumption;
tariffs also vary between different network companies.
The grid tariff paid by electricity subscribers to the local network company covers costs of the transmission
grid, regional network and local network. This includes
transmission of electricity, administration, operation,
grid maintenance, measuring and reporting.
Consumer and public welfare determine framework for network companies
Customer needs and

public requirements
Investment requirements
To ensure delivery quality
To feed in more electricity (often wind
power) to the grid
High quality electricity deliveries

Option of feeding in renewable
energy to the grid
Improved grid
Grid protected from storms
Improved options for feeding in wind
power to the grid
Decision on revenue cap
Application for revenue cap
Authority reviews application and

makes decision
Network company submits proposal

to authority based on investment
requirements
Vattenfall and electricity

Vattenfalls electricity generation
Vattenfalls electricity production mix
Vattenfall is Europes sixth largest electricity producer.

In 2011, Vattenfall produced 166.7 TWh of electricity
with six energy sources: biomass, coal, hydro, natural
gas, nuclear and wind.
2%
Biomass and waste
1%
Wind
Natural gas
8%
Vattenfalls electricity grid

Vattenfall has a total of nearly 4.5 million grid customers. Vattenfall is the largest electricity distributor
in Sweden, the third largest in Germany and the third
largest in the Netherlands. Uninterrupted energy supply
is the key requirement of grid customers, and Vattenfall invests large sums on an annual basis to improve
security of supply. The growth of wind power production and use of electric cars creates a growing need
for intelligent, flexible and reliable grids. Coupled with
a number of general societal trends, particularly within
energy consumption and energy policy, this has led to
the development of smart grids. Vattenfall is involved in
a smart grid pilot project on the Swedish island of Gotland. Read more about this in the final chapter; Electricity Grids and Markets of the Future.
In 2011, Vattenfall invested a total of EUR 0.53 billion in
grid electricity operations to improve security of supply
and meet heightened regulatory requirements. One
result of these investments is the marked decrease
in the number of power outages due to storms and
snowfall.
Coal
43%
Total:
166.7 TWh
21%
Hydro
25%
Nuclear
Source: Vattenfall, 2011
Vattenfalls electricity sales

Vattenfall has many customers in several countries
and strong market positions primarly in Sweden and
the Netherlands. In addition to selling electricity, Vattenfall supplies a multitude of energy solutions to help
customers effectively manage their specific energy
needs. Vattenfall has a total of nearly 7.7 million private
electricity customers. In 2011, Vattenfall sold a total of
34 TWh of electricity to its private customers,
28.7 TWh to other electricity retailers and 74.8 TWh
to its corporate customers.
Energy efficiency has become an increasingly significant portion of energy companies product offerings,
and this also holds true for Vattenfall. In Sweden,
Finland and the Netherlands, Vattenfall offers online
energy guides where consumers can calculate their energy consumption, receive personalised energy advice
and find general information on household energy use.
In the Netherlands, Vattenfall offers add-on services
including energy consulting, home insulation and
installation of double-paned windows, efficient heating
systems and solar panels.
Energy Watch:
E-manager:
www.vattenfall.se/energywatch
www.nuon.nl/energie-besparen/
From energy source to consumer | Gas
Gas
How is gas distributed?
The efficient movement of gas from producer to consumers requires an extensive transportation system,
consisting of a complex network of pipelines. Transportation of natural gas is also closely linked to its storage:
should the natural gas being transported not be immediately required, it can be put into storage facilities
until it is needed.
The gas is transported from extraction site to distribution network via transmission lines. These pipelines are
usually around one metre in diameter and are placed
along the ocean floor or on land, in which case they
are most often buried. Pipeline overpressure, between
40 and 100 bar, transports the gas. Finally, the gas is
transported through a distribution network of smaller
pipelines to control centres where pressure is lowered
once again before being transported to consumers.
Pressure at this stage is approximately four bar, roughly
the same amount of pressure as in an inflated bicycle
tyre. If the gas is to be used by smaller consumers,
such as private households, the gas pressure is further
lowered.
If the gas deposit is too far away from the users, or if
it is difficult to build a piping system for other reasons,
the gas is converted to liquid form, LNG (Liquefied
Natural Gas), and is then transported by tanker. Tankers
sail to harbours that are connected to transmission and
distribution networks.
The EU centrally regulates the market for natural gas
trade and distribution. Just as with the electricity market, central regulation aims to create a European gas
market and favourable conditions for trade between
countries. And just as with the electricity grid, there is
free competition on the gas market between gas suppliers.
For practical reasons, however, the actual transport of

gas is owned by individual companies within each geographic region. This is a more cost-efficient alternative
than requiring each company to build its own pipelines,
and provides better conditions for maintenance and
development. The network owner within a geographic
region is responsible for ensuring that the gas reaches
the end user and that the network is safe, reliable and
efficient. The network company is also responsible for
measuring and reporting the levels of gas fed into and
withdrawn from the network and providing this information to gas suppliers, balance suppliers and system
administrators. This data is important to these groups in
calculating deliveries and regulating the balance within
the natural gas system.
How does the gas market work?

Natural gas was initially viewed as a by-product of
oil extraction. Due to its value for energy production,
however, extensive distribution pipeline networks have
been constructed in major markets including the USA,
Western European OECD countries, Russia and the
former Soviet Union and Asia.
The European gas market is likely to change due to
factors impacting both supply and demand, including a
reduced domestic gas supply and the effects of international environmental commitments. The development
of regional gas markets is an important step in achieving the goal of an integrated European gas market.
Focus issues include market barriers, so called secondary markets and investments. Transparency in terms
of pipeline infrastructure is also being reviewed on the
European level.
Natural gas is the dominant energy gas in Europe. The

biogas market has great potential, although efforts are
needed to better match biogas production with demand.
Improved efficiency in biogas production would allow
the Nordic transport sector which has a great need
for biogas to better meet its needs. Due to a lack of
resources among independent biogas market actors,
the main challenges lie in creating incentives for constructing infrastructure and filling stations.
In Germany, legislative changes have been made to

simplify biogas access to the natural gas grid. The
objective is to replace ten per cent of natural gas with
biogas by 2030.15 The law places great responsibility on
grid owners to connect biogas plants to the grid. This
is costly for grid owners and may serve to lower the
traditionally high entry barriers to the gas grid, which
have stifled competition. Similar problems are evident in
the Netherlands, a major gas producer and exporter to
much of Europe. Although the market has been liberalised since 2004, competition has not developed as well
on the gas market as on the electricity market.
The global natural gas market

(billion cubic metres)
154
Eurasia
11
OECD Europe
North America
Sou
ou
uth
u
th
Korea
K
or
ore
83
3
China
Middle
e Eas
ast
9
Japan
4
41
India
a
16
6
11
4
18
60
6
0
Africa
Africa
Other Asian
an
countries
Central
Cen
ntr and South
h America
A
Pacific
c region
Ten largest importing countries

(billion cubic metres)
114.4
USA
114.4
10.0
92.1
JAPAN
92.1
LNG
87.1
GERMANY
87.1
75.3
1.6
ITALY
76.9
36.7 12.6
FRANCE
49.3
10.9 28.7
SPAIN
39.6
32.3 5.3
36.6
TURKEY
37.6
SOUTH
KOREA
36.6
Pipeline
35.4 1.0
GREAT
BRITAIN
36.4
18.3 2.5
BELGIUM
20.8
How is the price of gas determined?

The price of gas is determined in much the same way
as the price of electricity: by the supply and demand of
gas as a commodity. Added to this price are costs for
processing, distribution and regulation. Companies purchase the gas as it flows from the well and pay a wellhead price. At this stage, the gas has not been processed or transported. Consumers, on the other hand,
pay for processed gas delivered directly to their homes
through an extensive distribution system. The consumer
price is determined by the cost of processing and delivery, metering, billing, distribution system maintenance
and other factors. As with electricity, different operators own different parts of the chain. While extraction
companies are responsible for the raw material, trading
companies are responsible for delivery to end users. The
price of gas is determined with free competition and,
under the Natural Gas Act, grid and network fees must
be fair, non-discriminatory and cost reflective. Network
companies are monitored by authorities to ensure compliance.
Although the consumer price of gas is set with free
competition on a spot market, many gas suppliers often
have long-term contracts with major gas producers
which index the price of gas to oil prices. When the spot
price of gas plummeted during the 2008-09 financial
crisis, many gas suppliers were forced to buy gas at
prices sometimes 50 per cent higher than the price at
which they could sell the gas on the spot market. This
situation resulted from the fact that there were only a
few major gas producers, including Norways Statoil and
Russias Gazprom.
The Swedish gas distribution network
The Dutch gas distribution network
The natural gas used in Sweden is transported to the country from Denmark via pipeline. The pipeline runs from Dragr, just south of Copenhagen, to Malm and has been in use since 1985. The Swedish National Grid
is the system administrator for the Swedish gas grid and thus monitors
the balance between gas input and withdrawal and guarantees that there
is such a balance. The Energy Markets Inspectorate supervises the Swedish natural gas market and is responsible for ensuring that natural gas is
transmitted efficiently.
In the Netherlands, GTS (Gas Transport

Service B.V.) is responsible for operating
the gas grid. The main supplier of natural
gas to the grid is the state-owned NAM
(Nederlandse Aardolie Maatschappij),
which operates a cluster of gas wells in
the Groningen gas field. The Dutch gas
grid is 11,000 kilometres in length.
The German gas distribution network

Germany has Europes most extensive gas distribution network, totalling 380,000 kilometres in length. The German gas
grid is divided into two networks for natural gas distribution, depending on degree of heating value.
The illustration gives an overview of the

import routes for natural gas to the EU. Onequarter of all energy consumed within the
EU is generated by gas, 60 per cent of which
is imported from locations such as Russia,
Norway and Algeria.16
Pipeline
existing
Import
routes for natural gas to the EU
Transport
of LNG
Pipeline
LNG terminal
existing
import
Transport
LNG-terminal
of LNG
export
LNG terminal
EU countries
import
LNG-terminal
Source: The European Natural Gas Network, 2009

export
http://ec.europa.eu/energy/
EU countries
Source: The European Natural Gas Network, 2009
http://ec.europa.eu/energy/
Norway
No
rd
St
re
am
N
or
dS
tre
am
Norway
St. Petersburg
Russia
St. Petersburg
Moscow
Russia
Moscow
Minsk
Minsk
Frankfurt
Paris
V
Vienna
Frankfurt
Paris
V
Vienna
M
Milan
Mila
M
Milan
Mila
Istanbul
t
idaadd
in
inid
m Tr eerriaia
m
o
o
r
r
F
F d Nig
ig
aannd
North Africa
North Africa
Istanbul
t
The gas grids political dimension

Natural gas sources are found at locations within and
outside Europe. Gas pipelines transport the gas from
source to end users. One such pipeline Nord Stream
has been the subject of extensive debate in the Nordic
region in recent years. Nord Stream will run through the
Baltic Sea and link Russian natural gas sources with
the European market, with the objective of stabilising
European energy supply and helping the EU achieve its
goal of reducing greenhouse gas emissions by replacing
coal. The project is actually comprised of two pipelines,
the first of which was completed in the autumn of 2011.
Both pipelines are expected to be operational by late
2012, and will then be capable of transporting 55 billion
cubic metres of gas per year for at least 50 years.17
But international pipelines are the subject of political

discussions. Russia, for instance, cut off gas supply to
Ukraine following the breakdown of price negotiations.
Since the discontinuation of gas supply through Ukraine
has consequences for large areas of the rest of Europe,
the gas issue is a priority within the EU.
The use of energy resources as a political instrument
is a growing threat to the world economy, at the same
time as energy requirements are growing, energy
resources are thinning out and demands for climateneutral solutions are on the rise.
Natural gas in Sweden
Natural gas in the Netherlands
Natural gas has been used as an energy source in Sweden since 1985. Even
so, natural gas represents a limited share of Swedish energy consumption and
accounted for a mere two per cent of the countrys total energy consumption
in 2009. The EU average is approximately 23 per cent of total energy consumption.18 In 2010 the consumption of natural gas in Sweden totalled 1.63 billion
cubic metres. The natural gas network is not nationwide, extending only from
Trelleborg to Stenungsund and branching off in the east towards Gnosj in
Smland. Consumption therefore varies widely between regions.
Natural gas is a significant

part of the Netherlands energy
supply representing a full
45 per cent of the countrys
total energy consumption.21
One key reason for this is the
fact that the Netherlands has
significant deposits of natural
gas. In 2010, 24.4 trillion cubic
metres of gas was extracted,22
and the Netherlands annually
exports more gas than it imports. Close to 96 per cent of
Dutch households are currently
heated through connection
to the natural gas network. In
other words, the market share
of natural gas as a heating
method is exceptionally high.
Natural gas in Germany

Germanys natural gas consumption was approximately 26 per cent of all energy
consumption in 2009.19 Natural gas consumption totalled 99.5 billion cubic
metres in 2010.20 Germany can only meet about 20 per cent of its gas needs
and imports a large amount of natural gas, chiefly from Russia, Norway and the
Netherlands. The German gas market is currently dominated by one major actor
which sells approximately 50 per cent of German gas and owns around 30 per
cent of the shares in regional operators.
Vattenfall and gas

Vattenfalls involvement in the gas market grew substantially through the acquisition of the Dutch energy
group N.V. Nuon Energy in 2009. Natural gas gives
Vattenfall a more balanced portfolio that better reflects
the European energy mix. Natural gas accounted for
eight per cent of Vattenfalls electricity production in
2011.
Vattenfall is active primarily in gas trading. Vattenfall
had 2.2 million gas customers and delivered 53.8 TWh
of gas in 2011. Gas operations are concentrated in
the Netherlands, where Vattenfall has a market leading
position.
Natural gas is a prioritised investment area for Vattenfall in the years ahead, partly because natural gas
emits less CO2 than other fossil fuels and is therefore a
transition fuel towards an environmentally sustainable
energy system. Close to 15 per cent of Vattenfalls total
investment programme for 2012-2016 will be invested
in natural gas. The investments deal primarily with
operations in the Netherlands, and will increase generation capacity and strengthen security of supply. Natural
gas is also a flexible fuel, suitable for use as a balancing
power to balance irregular electricity production from
renewable energy sources such as wind and solar.
A gas turbine is lifted into position at the Magnum power plant in the Netherlands.
Underground gas storage facilities

Through its Dutch operation, Nuon, Vattenfall is expanding the gas storage facilities in the German town of
Epe. The expansion provides greater flexibility in terms
of managing daily supply and demand fluctuations on
the gas market. The expansion was commissioned in
late 2011 and is expected to increase storage capacity
to 280 m3. The natural gas is stored in underground salt
caverns, which allows only small amounts of injected
natural gas to escape from the formation unless specifically extracted. Once a suitable salt dome or salt bed
deposit is discovered and deemed suitable for natural
gas storage, a salt cavern is developed within the
formation. Essentially, this consists of using water to
dissolve and extract a certain amount of salt from the
deposit, leaving a large empty space in the formation.
Underground gas storage
Compressed
CO2
0
Depth: approx.
1,200 m
Gas volume:
approx.
140,000,000 m3
200
600
800
1 00
0
Gas pipelines are

used to transport the
gas in and out of the
caves
1 20
0
1 40
0
400
600
m
LT
A
S
100200 m
400
ER
Y
LA
Compare
with:
Big Ben
(96 m)
50
100
m
From energy source to consumer | District Heating
District Heating
Combined Heat and Power plants

source of both electricity and heat
What is district heating?

District heating is a large-scale method for producing
and distributing heat. Heat is produced in one or several
central production facilities and distributed to various
buildings through underground pipelines. The temperature of district heating water varies between 65 and
120 degrees, depending on time of year and weather
conditions. It is called district heating because the
heat source is located at a distance rather than in each
individual building. A well-constructed district heating
network may have a life span of 100 years.
An additional development of the district heating plant

is the Combined Heat and Power (CHP) plant, used to
generate both electricity and heat. There are several
types of CHP plants, which can be powered by most
types of fuel, including natural gas, coal, oil, biomass
and waste. In the most common type of CHP plant,
electricity is produced by heated steam that passes a
turbine. The remaining steam then heats cold district
heating water and, rather than being wasted, the heat
is transferred to the district heating network.
This is how district heating works
Turbine generates
electric power
2. Steam conveyed to
and drives the turbine
Water is transported in well-insulated underground pipes

to a district heating centre in the building that is to be
heated. A heat exchanger conveys the heat (but not the
water) to the buildings own heating system of radiators
and hot tap water. The cooled district heating water is
returned to the district heating plant to be reheated and
pumped back into the district heating system.
Turbine
Heated water
3. Steam from the turbine is

condensed and conveyed to
district heating network
District heating network
Condenser
ser
District heating centre
Cooled water
1. Boiler can
be fired with
e.g. biomass
or natural gas
How does district heating work?

District heating operations
The most modern, power efficient CHP plants use
natural gas as fuel. When generation is based on
natural gas, the steam turbine can be combined with
a gas turbine which further improves efficiency.
Another common type of CHP plant is smaller plants
located near landfills, where noxious methane gases are
combusted and converted into heat instead of being
diffused into the atmosphere and contributing to the
greenhouse effect.
CHP plants have very high efficiency levels; regardless of type of fuel used, approximately 90 per cent of
the energy is utilised.23 This has clear advantages over
condensing power plants, which use only the electricity
generated and thus utilise only around 35-50 per cent
of the energy content.24
According to the CHP Directive, European countries

shall work to increase the efficiency of the energy market by utilising CHP plants that generate both electricity and heat to the greatest extent possible.
As a rule, a district heating consumer may buy district
heat only from one supplier district heating is viewed
as a natural monopoly in most countries. Local district
heating markets are often state-regulated and district
heating companies are not allowed to make a profit.
Therefore, irrespective of actual price level, district heat
producers and suppliers are not suspected of earning an unreasonable amount of money. District heating companies in some countries are allowed to earn
a profit, although the amount of profit and the prices
charged must often be approved by a government
authority.
In parts of Northern and Eastern Europe, approximately

50 per cent of all households are currently heated by
district heating. District heating is the dominant heating
method in all Nordic countries (with the exception of
Norway). Where district heating is available on a local
heating market, it often has a market share of over 90
per cent.25
levels for new investments as compared to small-scale

alternatives. Consequently, the competitiveness of
district heating in the heating market remains relatively
weak. Competition from natural gas has also made it
difficult for district heating to expand.
District heating pricing

The position of district heating on the heating market
varies between countries, based on traditional differences and control instrument design. There are strong
municipal and government traditions in the Nordic
countries and Eastern Europe in favour of constructing
district heating networks. Consequently, district heating
has faced basically no competition in metro areas. The
Nordic countries are also the only European countries
to impose high taxes on small-scale CO2 emissions
(household gas and oil heating). Western continental
Europe lacks strong political management to promote
district heating expansion, while large-scale heat
production companies pay large-scale heat production
carbon fees via the EUs emissions trading scheme (EUETS) and generally receive significantly lower subsidies
The price of district heating can vary depending on a

number of factors. One important aspect is the networks scope the greater the delivery volume to many
consumers who live in close proximity to each other, the
more advantageous the cost structure. In an international perspective, Sweden stands out in this regard
due to its extensive network. Company-specific conditions also play an important role, particularly in relation
to the fuel primarily used in district heating production,
planned investments and the degree of maintenance
required for the network and facilities. Companies own
views on pricing also have an effect on the actual price
paid by consumers.
Third-party access (TPA)

In countries such as Sweden, Finland, Germany and Austria, district heating is not regulated other than through national
competition law. But possibilities of allowing third-party access are being investigated as another way to create competition. Whether or not TPA will succeed in strengthening competition and encouraging innovation in heating markets
depends on local conditions. In some countries, such as Sweden, district heating is clearly the dominant method of meeting heat demand, with large heat grids connecting multiple heat sources and competition occurring primarily between
different suppliers using the same infrastructure. In other markets, such as Germany and the Netherlands, the heating
infrastructure is not so clearly dominant in these markets, collective heat solutions compete mostly as an alternative
to other technologies and infrastructures, such as gas pipelines. Third-party access may be useful in terms of enhancing
competition in markets where competition occurs primarily within the same heating infrastructure. But in markets where
a particular infrastructure is not dominant in terms of competition, TPA actually discourages investment and therefore
hinders the further development of a competitive heating market.
The connection of third-party production to local district heating markets can be designed according to two fundamentally different approaches. The third-party producer is either provided access to deliver into the network but not given
access to end users (a single buyer model), or given access to both the network and the end users (sometimes referred
to as the full opening of the district heating network). The model discussed in the most recent Swedish government
inquiry deals with the full opening of the district heating network.
Free pricing has been used in Sweden since the electricity market was liberalised in 1996. A government inquiry was
conducted a few years ago (2003-05) on the role of district heating in the heating market. This resulted in a new district
heating law, effective as of 1 July 2008, to enhance the rights and improve the position of customers.
External factors also impact price. Fuel price trends,

taxes and economic control instruments such as
electricity certificates, emissions rights, feed-in tariffs and the regulatory burden on businesses are all
significant factors impacting the final price. District
heating producers are therefore largely dependent on
policy initiatives.
There are two primary pricing models for operators on
local district heating markets: alternative pricing and
cost based pricing. Alternative pricing is focused on
consumers alternative options with the aim of setting the price lower than competitors prices, while
still yielding a profit. Cost based pricing is intended to
match the district heating price with the costs involved.
Because district heating is local in nature, prices are
significantly affected by local conditions and thus vary
from place to place. This location-specific adaptation is
a major advantage of district heating, but also makes
it difficult to make a fair price comparison between
regions.
District heating production requires major fixed assets,
chiefly in the form of production facilities and district
heating networks. Plant and network maintenance also
call for large investments, particularly to keep pace with
technological advances, demands for renewable fuel
and the stepped up expansion of co-generation and
district heating. These investments have produced clear
results. From 1996-2008, for instance, the Swedish
district heating industry reduced its carbon emissions
by 4.5 million tonnes.26
In light of these regularly recurring major investments,
the district heating industry is very capital intensive.
The price per kilowatt hour is kept relatively low by
distributing the cost of these investments over a large
group of end users. District heating companies with
large delivery volumes (greater than 0.5 TWh/year)
therefore offer the lowest average prices.
Vattenfall and district heating

Vattenfall is the largest supplier of heat in Europe, and
sold a total of 41.6 TWh of heat in 2011. Heat sales
totalled 3.9 TWh in Sweden, 15.2 TWh in Germany,
4.5 TWh in the Netherlands and 5.8 TWh in Denmark.
With respect to heat, Vattenfall is mainly active in
district heating and, to a lesser extent, contract heating. Heat is delivered primarily to apartment buildings,
office buildings and small companies. An increased
focus on energy efficiency is expected to lead to a
slow decline in total heat demand in the future. In addition to district heating, Vattenfall has started to deliver
district cooling in Sweden. District cooling allows the
maintenance of a comfortable indoor climate without
excessive energy consumption during the summer
months and in environments where manufacturing or
similar processes cause high levels of heat generation.
To produce heat, Vattenfall uses natural gas, coal
(lignite and hard coal), biomass and waste and to a
very limited extent oil. Distribution varies between
different markets and is therefore a reflection of
varying conditions. In Sweden, 95 per cent of heat

production is based on biomass and waste; in the Netherlands this figure is 100 per cent natural gas, while
Germany uses 62 per cent coal, 33 per cent natural
gas and five per cent biomass and waste.
The use of biomass is growing steadily. Sixty per cent
of the biomass used by Vattenfall is comprised of
household and industrial waste that would not otherwise be made use of. By-products and residue from
the forest industry account for 30 per cent, while the
remainder is made up primarily of agricultural by-products.
Vattenfall has also started to co-combust biomass in
coal-fired power plants to reduce CO2 emissions. In
Germany, plans have been drawn up for biomass-fired
power plants in Berlin and Hamburg. In the Netherlands,
projects are planned to increase the amount of biomass co-fired with coal in power plants in Amsterdam
and Buggenum. Vattenfall uses over one million tonnes
of biomass each year.
Part of the district heating network in Berlin: connection between Mitte and Treptow heating plants .
Sourcing sustainable biomass rubber trees from Liberia

Vattenfall invests in the entire value chain to ensure
biomass supply. Vattenfall and Swedfund, a Swedish
state-owned development finance institution focused
on investment in developing countries, together acquired a 30 per cent stake in Buchanan Renewables
Fuel in Liberia. The company produces biomass from
waste rubber trees from rubber tree plantations.
Liberia is a country with a large resource of rubber
trees, with rubber export a key component in plans to
revitalize the economy. These cultivated trees typically produce latex between the ages of seven and 30
years, after which they are harvested and replaced by
newly planted trees. The practice has been to let these
harvested trees rot or to burn them on site, with some
of the wood used for charcoal production. By making wood chips out of the depleted trees, the farmers
receive payment and the waste trees are put to use.
Vattenfalls goal is to secure a long-term supply of
biomass.
Vattenfalls heat sales

Germany
5%
36%
15.2 TWh
33%
26%
Sweden
The Netherlands
4.5 TWh
The Netherlands
100%
Germany
Sweden
3%
2%
3.9 TWh
Biomass and waste
Natural gas
Lignite
Hard coal
Oil
95%
The diagram shows Vattenfalls heat sales in Sweden, Germany and the
Netherlands in 2011 and type of fuel used.
Source: Vattenfall, 2011
From energy source to consumer | Summary
Summary
Electricity
Global demand for energy has soared in recent decades, which also has made energy supply an important
political priority.
The production mix used in EU countries electricity production is dominated by fossil energy sources. Oil, coal
and natural gas together account for 53 per cent of the EUs electricity production.
The core of the electricity grid is divided into transmission grids and (regional and local) distribution networks.
The transmission grid is like a highway that transports electricity with high voltage over great distances.
Electricity is distributed from the transmission grid to large metro areas and energy-intensive industries via regional networks. Before the electricity arrives at ordinary residential properties and offices, the grid branches
off once again into local networks.
Each country has one or more system administrators also referred to as Transmission System Operators
(TSOs) which operate, maintain and develop the transmission grid in a geographically limited area.
In order for the electricity system to function, there must always be a balance between electricity production
and electricity consumption. Grids across Europe are undergoing extensive modernisation, both to improve
delivery quality and to facilitate connection to additional power plants.
Gas
Natural gas is a growing energy source within Europe and accounts for approximately 23 per cent of EUs
electricity generation.
The most economically advantageous way to transport natural gas from extraction site to distribution network
is via transmission lines. These pipelines are usually around one metre in diameter and are placed along the
ocean floor or on land, in which case they are most often buried.
An increasing share of natural gas is distributed in chilled form as Liquefied Natural Gas (LNG), conveyed via
tankers from gas fields that lack pipeline connections to major consumers.
The biogas market has great potential, although efforts are needed to better match biogas production with
demand.
District heating
District heating is a large-scale method for producing and distributing heat. A well-constructed district heating network may have a life span of 100 years.
Water is centrally heated in a district heating plant and transported through well-insulated pipes to the buildings that need to be heated. When the water arrives, it enters a heat exchanger that uses the water for
radiators and hot tap water.
As a rule, a district heating consumer can only buy district heat from one supplier district heating is viewed
as a natural monopoly in many countries.
In parts of Northern and Eastern Europe, approximately 50 per cent of all households are currently heated by
district heating. District heating is the dominant heating method in all Nordic countries (with the exception of
Norway).
Footnotes - From Energy Source to Consumer

IEA World Energy Outlook 2011
Ibid.
Ibid.
4
IEA, 2009. op.cit.
5
SETIS European Commission, to read more please visit setis.ec.europa.eu
6
World Nucelar Industry Status Report 2010-2011, World Watch Institute, 2011
7
IEA, 2010. op.cit.
8
EWEA, 2012
9
http://www.tennet.org/english/transmission_system_services/technical_publications/netkaart.aspx
10
Exchange rate used is 1 EUR = 9.554 SEK
11
Swedenergy, www.svenskenergi.se
12
Ibid.
13
Ibid.
14
Ibid.
15
DENA (2010): Biogaspartner - a joint initiative
16
Eurostat
17
Nord Stream, to read more please visit www.nord-stream.com
18
IEA, 2011. op.cit.
19
www.cfr.org
20
World CIA Factbook, 2010
21
www.iea.org
22
World CIA Factbook, 2010
23
Svensk Energigas, 2010
24
www.iea.org
25
Svensk Fjrrvrme
26
The Swedish District Association
1
2
3
Electricity Grids and

Markets of the Future
What will future solutions for the transmission and storage of electricity look like?
What problems can we solve by investing in
higher transmission capacity? And what
exactly are smart grids?
Electricity grids and markets of the future | Future Challenges for the Energy Market
Electricity Grids and

Markets of the Future
In this section we focus on a variety of short- and long-term challenges facing energy
market actors. In the short term, problems are often a matter of security of supply.
Can electricity consumers count on receiving the electricity they need? In the longer
term, the issue is identifying new solutions that meet societys expectations for the
different dimensions of the energy triangle.
Future Challenges for the Energy Market

The energy supplys central role in society has propelled energy issues to a prominent political position
throughout the world. Global demand for energy has
exploded in recent decades, and this trend will persist
with the current population growth rate of 80 million
people per year. There is a clear positive correlation
between economic development and energy consumption. And demand for electricity can be expected to
increase more rapidly than any other form of energy
one-quarter of the worlds population still lacks access
to electricity. Although the current financial turmoil is
slowing growth in the short term, economic development in combination with continued population growth
will be the dominant trend. Electricity consumption is
expected to increase by more than 63 per cent over
current levels by the year 2035.1 Fossil energy sources
will continue to play a key role in the EUs energy mix,
and one-half of the EUs electricity production is expected to be based on fossil energy sources by the
year 2030, with current policies.2
Nuclear power will most likely also play a significant

role in electricity production. Renewable electricity production will grow at a fast pace, albeit from low initial
levels.
The EUs 20-20-20 target is to reduce CO2 emissions
by 20 per cent over 1990 levels, increase the share of
renewable energy sources in the energy mix to 20 per
cent, and improve energy efficiency by 20 per cent. The
2050 target is to reduce CO2 emissions by 80 to 90
per cent. Several steps must be taken to achieve these
targets.
At the same time, many European power plants are
relatively old. A power deficit of 300,000 MW is therefore anticipated by around the year 2020 if no new
investments are made. The largest nuclear power plants
being built today have a capacity of 1,600 MW, meaning
that the capacity requirement is approximately 190 nuclear power plants of the largest size. Installed capacity
in EU countries is currently about 750,000 MW. Based

on the need for new capacity, many European market
actors have planned major construction projects.
A review by VGB PowerTech of European electricity
companies investment plans shows that investment
in new capacity is planned at 278,000 MW during
2007-2020, divided between renewable (33 per cent),
nuclear (16 per cent) and fossil fuels (51 per cent).3
The energy market faces major challenges going
forward. How do we convert to a more sustainable
energy supply? How do we safeguard and strengthen
energy security? How do we integrate and connect
different energy markets? And how do we strengthen
transmission grids and improve connections between
countries?
European electricity companies planned investments in new electricity production capacity,

2007-2020
1.3%
Biomass and waste, other renewables
Wind
The Energy Triangle

The European energy market is facing concrete challenges in terms of reducing greenhouse gas emissions and ensuring energy
supply with reduced import dependence, as
well as the competitiveness and implementation of a common energy market.
The EUs common energy policy is therefore
oriented towards Europes long-term energy
security, stemming climate change and creating the foundation of a competitive energy
sector. This is accomplished through, among
other things, harmonising the European
electricity market to facilitate trade between
countries trade that is currently complicated by different technical standards and
different market rules. A common European
electricity market is also a prerequisite for
the efficient utilisation of common production resources. Energy security is particularly important considering that Europe currently imports over half of its energy needs.
Climate and
environment
Natural gas
27.3%
32.7%
Total:
277,884 MW
Hydro
4.5%
0.2 %
Oil
16.3%
15%
Hard coal
Nuclear
2.7 %
Lignite and peat
Security
of
Supply
Competitiveness
Source: VGB POWERTECH, 2011
Conversion towards a sustainable energy system

Current European and national policy goals signify that
the production mix of Europes electricity market is
gradually changing. A significant increase in renewable energy sources in electricity production gives
rise to greater price fluctuations and the need for
reserve power and a general expansion of transmission
connections to manage a larger proportion of renewable electricity production.
Reduced climate impact affects design

Reducing the climate impact of the energy system will
lead to major changes throughout the system, from
producer to consumer. Alternatives such as efficient
energy consumption, renewable energy, nuclear power
and CCS (Carbon Capture and Storage) are at the centre of discussions on a climate-neutral energy system.
The energy system of the future may include a greater
degree of locally produced renewable energy, but also
new global flows of, for instance, bioenergy, solar-based
electricity and hydrogen gas. The conversion will transform existing energy dependence patterns on fossil fuel
and thus impact the foundation of a secure supply of
energy.
Increased import dependency

Meanwhile, the long-term trend within the EU is towards a lower degree of energy self-sufficiency. For
example, the EUs import dependency on oil is expected
to exceed 90 per cent by 2030.4 Natural gas will play
a key role in Europes future energy mix as balancing
power in electricity production, as the share of intermittent (irregular) energy sources increases. Western
Europes import dependency on gas is predicted to rise
to about 70 per cent by 2030.5 Clear-cut strategies are
required in order to ensure a stable energy supply. Tools
for achieving this include diversification of imports,
stock-keeping and the use of forward contracts to
hedge deliveries on commodity exchanges. Energy efficiency measures and an increased use of renewable
energy sources are two other methods of strengthening energy security.
Efficient resource utilisation

One part of the efforts to achieve a climate-neutral
future and a secure energy supply is the efficient use
of energy and resources. Electricity itself is an efficient
energy carrier. Electricity generation also has fewer
emission sources than many other industries and is
thus easier to supervise. Provided that electricity is produced in a climate-neutral manner, the increased use
of electricity relative to other energy carriers is one
way to utilise resources more efficiently. Electricity may,
for instance, be used to reduce CO2 emissions from the
transport sector.
Prerequisites for reducing carbon dioxide

emissions
Europe already has powerful market-based incentives
for transitioning society towards reduced CO2 emissions. In the long term, there should be some form of
global CO2 price in order to ensure competitive neutrality between the worlds countries and markets. All
technological alternatives for electricity production
should also be allowed to compete on market terms.
Infrastructure needs to be improved grid connections
need to be expanded in pace with the growth of new
production in Europe and other countries, and existing bottlenecks must be eliminated. Licensing process
reform is therefore a crucial issue in many parts of
Europe. It is equally vital to promote research, development and demonstration of, e.g., electric vehicle infrastructure, CCS, and the development of new types of
power such as wave and solar energy.
Guaranteed energy security

The transition of the European energy system towards
increased utilisation of renewable sources is not merely
a climate issue. An important EU goal is to maintain
a safe and secure energy supply. Heightened import
requirements include an increased dependency on
natural gas. This increase stems from growing demand
combined with reduced production capacity. The largest sources of natural gas to the EU are Russia and
Norway, and the import proportion of these two countries will rise dramatically.6 Competition for raw material sources from the east will increase as high-growth
countries like China increase their energy consumption.
Natural gas imports must thus be complemented with
new energy sources.
Other dimensions of energy security are also important

from a European perspective and in view of the objective of a common market. As member states energy
markets develop and as transmission connections are
extended, countries that are energy islands today will
gain access to the internal energy market and thereby
reduce their dependency on imported fossil energy.
The expansion of renewable electricity production also
enhances energy security, as these energy sources are
not dependent on imported fuel.
Development of new types of power such as wave and solar energy is needed.
The development of electricity grids in Europe
The Nordics
Planned
Under construction
Existing
The illustration shows offshore

transmission connections
between various countries in
Europe. Countries are grouped
by synchronous frequency areas
- e.g., the Nordic region (excl. Iceland and Jylland, part of Denmark)
makes up one such area.
Baltic States
Continental
ental Europe
Ireland
Great Britain
The Nordics
Baltic States
Ireland
Great Britain
Sweden
Germany
Opened: 1994
Capacity: 600 MW
Length: 250 km
Great Britain
the Netherlands
Opened: 2011
Capacity: 1,000 MW
(capacity equivalent to one
nuclear power plant)
Length: 260 km
Continental Europe
Norway
the Netherlands
Opened: 2008
Capacity: 700 MW
Length: 580 km (worlds longest HVDC cable)
An integrated and interconnected market

The internal energy market is basically dependent on
cross-border energy trade within the EU. But trade
is often complicated, since countries have different
market rules.
Common wholesale power market

The development of a common European wholesale
power market is a requirement for achieving the vision
of a common end user market (a market that enables
electricity consumers to select their electricity suppliers from within the entire EU). Electricity producers
sell electricity to the market, and electricity retailers
and consumers buy at the price where supply meets
demand. Linking spot markets and integrating intraday
and balance markets are two measures to integrate national markets to larger regional markets, and in 2014
to a European market, in line with determined Europewide targets.
One basic requirement for creating a common European electricity market is the construction of new
transmission capacity. Market integration calls for the
rapid expansion of transmission infrastructure. It also
calls for effective co-operation between grid operators,
clear and stable regulations and good co-ordination
to increase link-up capacity. This will require substantial investments in transmission grids and extended
transmission capacity between, e.g., the Nordic region
and continental Europe and within Germany from north
to south.
Vattenfall is involved in the development of new transmission capacity through membership in Friends of
the Supergrid8 (to connect North Sea wind farms) and
through the NorthConnect initiative. An application for
an electricity interconnector between Great Britain and
Norway was submitted in spring 2011 by NorthConnect, an interconnector development company partly
owned by Vattenfall. If built, the interconnector will
be the first to connect Scotlands electricity network
directly to that of a mainland European country. NorthConnect which was established in February 2011
by its five shareholders submitted an application to
National Grid Transmission for the onshore connection
to the mainland network of a 570 kilometres, 1,400 MW
electricity interconnector between Great Britain and
Norway.
Clear rules needed

Complicated laws and regulations present other
problems that raise obstacles for a common energy
market. In order for more projects to be implemented,
building transmission capacity must be simpler. The EU
has recently proposed methods to shorten licensing
procedures and harmonise procedures for new energy
infrastructure.
Furthermore, the greatest growth in electricity production is taking place in areas far from consumption. A
large volume will be comprised of wind power, Southern
European solar power and Central and Eastern European biomass facilities. It is estimated that 12 per cent
of Europes renewable energy production by the year
2020 will come from offshore North Sea wind farms.7
A more integrated grid

In the future, the electricity grid must be equipped to
handle great flows of renewable energy both within
and between countries due to the EU goal of increasing the share of renewable energy and the development of a common European electricity market. This
requires the strengthening of grids within countries and
expanded connections between countries.
On the continent, the new power will replace coal
power and other fossil energy sources. In the Nordic region, renewable energy will to a greater extent serve as
a complement to existing nuclear and hydro power. The
Nordic region already produces a surplus of electricity, and this is likely to increase with new investments.
Calculations show that demand for electricity in Nordic
countries is unlikely to match the increased production.
The surplus can be distributed to other parts of Europe,
primarily the UK and Eastern Europe. This will reduce
the cost of carbon abatement, provided that there is
sufficient transmission capacity in place.
Renewable electricity from, e.g., wind power is produced
less regularly than traditional electricity from hydro or
nuclear power. This also places demands on the grid.
Wind- or solar-based electricity will be produced by
many small, widely-dispersed facilities at varying times.
Transmission capacity needs to be increased and integration improved to manage this. The grid will also need
to be monitored in more detail to distribute electricity from producer to consumer (see section on smart
grids). An expanded, more integrated grid can improve
the efficiency of the energy system.
Larger grids with greater transmission capacity
grids that can balance supply and demand over large
geographic regions are needed in order to create a
stable system that also offers opportunities for widespread expansion of renewable energy sources. It is not
a matter of transmitting electricity from, e.g., northern
Sweden to southern Germany, but rather of linking the

entire grid in between to allow different areas located
closer to each other to co-operate on several levels to
smooth out supply and demand.
Investments in this type of extension of capacity are
not problem-free, however. Investment costs are high
and the licensing processes are complicated. It is also
common that new lines threaten or are viewed as
threatening to the environmental values prevalent in
the areas where they are to be laid. Local protests from
environmental or conservation organisations and the
general public in the area are often one of the greatest
challenges faced by transmission capacity expansion.
How can we reduce transmission losses?

Losses occur during the transmission of electricity
five per cent of produced electric power disappears in
the grid. Factors that influence amount of loss include:

Thickness - the thicker the line, the less the loss

Material - certain materials have better conductivity than others
Temperature - the lower the temperature, the less
the loss
Voltage level - higher voltage levels lead to lower
currents and loss
Direct current - direct current lines have lower
loss
Of course, one way of reducing losses is to lessen the

distance between generation and consumption, through
distributed generation. Economic programming during
the grid design phase includes the consideration of grid
losses. One example is grid transformers, developed in
recent years to prevent losses.
Net export of electricity

TWh
2
0
-2
NL
5.4
NL
1.5
NOR
2.0
DE
2.0
NOR
1.5
DE
5.4
Germany
The Netherlands
14
13.
0
-4
-6
Germany
The Nordics
The Netherlands
1361
.6 M W
464.7
MW
MW
The Nordics
Graph shows total net electricity exports between

Germany, the Netherlands and the Nordics. The
amount shown for each country is the actual amount
of electricity exchanged between the countries in
2009. If exports exceed imports, net exports will be
positive. If imports exceed exports, net exports will be
negative.
Map shows electricity flow between the Nordic region,

Germany and the Netherlands and total 2009 electricity imports and exports in these areas.
Source: ENTSO-E, 2009
Source: ENTSO-E, 2009
Modern transformers generate less heat and are less

sensitive to no-load losses. Since the transformers are
always in operation, losses occur when they are not
fully utilised.
Another method for reducing loss is to shorten the
distance between electricity production and consumption e.g., by having a small wind turbine or solar
panel near the house. This is, however, quite an expensive method of reducing grid losses as compared to
grid reinforcements and upgrades.
Yet another way to reduce losses is to use HVDC (high
voltage direct current) links. This technology transmits
electric power over long distances via submarine cables or aerial lines. Direct current produces less transmission loss than the traditional alternating current.
Electricity grids and markets of the future | Smart Grids
Smart grids - the distribution network of the future

Micro-generation
Any remaining selfproduced electricity
can be sold
Solar cells
Refuel electric car
Changed electricity production

As electricity production from e.g.
wind power increases, it is balanced
by reductions in other production,
increased consumption or storage
Wind
power
Hydro
power
Other
energy
sources
Smart electric meter
Smart appliances
Electronic equipment that
can switch off in response
to frequency fluctuations
Renewable energy sources

Main energy source
Grid manager
Oversees the grid to ensure
stability and efficiency
Communication
network
Disturbance in the grid

The Grid Manager can isolate areas
if a disturbance in the grid is
detected. The grid uses advanced
technology to execute special
protection schemes in microseconds
Communication network
Transformer stations
Able to communicate
with each other
Storage
Energy generated at off-peak
times can be stored for later use
Reserve power station

Produces electricity
when needed
Smart Grids
As a greater proportion of electricity comes from
renewable and other small-scale energy sources, the
number of electricity-producing units will grow significantly. The future energy system will be based to a
greater extent on the principle of many drops make
an ocean. In order to be equipped to gather up all this
production and transfer it to consumers, the grid needs
to have a different structure.
Developments within the energy area are actually comparable with IT development. In the 1960s, many people
believed that the future would be dominated by a limited number of mainframe computers. Instead, it turned
out that millions of small units linked by a large network
the internet came to characterise the future of IT.
As we all know today, this development was driven by
the falling cost of microchips and the improved power
of small computers. This same type of development is
now gaining momentum in the energy area.
What are smart grids?

There is currently no clear, universally accepted definition of smart grids, and different people and organisations use different definitions. In general, though, we
can identify two types of smart grids.
The first type of definition describes the technology
that is considered to be a Smart Grid power electronics (including FACTS Flexible AC Transmission
System and HVDC), energy storage, advanced grid
automation and protective systems and the ability to
place operating reserves on the consumption side and
with smaller production units, to name just a few. The
other type of definition is based on problems in need
of solutions facilitating the increased introduction of
renewable electricity production, reducing peak loads,
improving incentives for efficient energy consumption,
creating favourable conditions for more active electricity consumers. By incorporating IT-based control and
communication systems into the electricity system and

then linking these together, we can manage and make
decisions about production and consumption based
on real-time supply and demand data. This information
may also be used to make forecasts and improve planning. In this way, we can improve on current methods
of dealing with electricity supply and demand, and this
will result in more efficient electricity consumption. The
smart element refers to the improved use of technologies and solutions to better plan and operate existing
electricity grids. This allows for the intelligent control of
production, enabling new energy services and energy
efficiency.
The realisation of a more advanced power transmission and distribution system in the form of smart grids
is a prioritised topic on both the European and national
levels. But the electricity grid is complex and affects
a multitude of operators. Smart grids present many
knotty problems including legal, technological and
economic challenges. There is great need for a systems
view and a shared alignment.
The EU Commission has developed a policy in this area
and has proposed activities for taking smart grids from
innovative demonstration phases to commercial application. First, the Commission proposes the development of a common EU-wide technical standard to allow
different systems to work with each other. Everyone
who is connected to the grid should be able to exchange and interpret data to optimise consumption and
production. Secondly, the Commission proposes the
adjustment of existing EU regulations to create incentives for grid investors and increase the pace of energy
efficiency and quality improvements to their services.
Technical options for storing electricity would also help
bridge the gap between electricity consumption and
production, for producers and consumers alike.
Energy storage future possibilities

The supply of energy is virtually unlimited. The challenge is that it must be available in the right place and
at the right time. One of electricitys typical characteristics is that the amount of electricity produced at a
certain time must be consumed at basically the same
time, while demand for electricity varies during the day
and over the course of the year.
Climate change concerns and the consequent demand
for renewable but intermittent electricity production
have generated increased interest in large-scale energy
storage, as well as short-term storage in the grid itself.
The latter includes batteries connected to wind farms
that help level out wind peaks. If the share of renewable electricity production continues to increase,
the improvement of energy storage options is more or
less essential. According to Boston Consulting Group
estimates, Europe requires 150 TWh of extra storage
capacity by the year 2025 to counter grid imbalances
caused by a larger share of solar- and wind-generated
electricity.9 Electrical energy storage is defined as the

conversion of electrical energy from a grid into a form
in which it can be stored until it is reconverted into
electrical energy. One initial problem is that grids operate with alternating current, while batteries require direct current. This problem can be bridged with modern
technology. The industry is working on making batteries
lighter and less expensive, but there is much to suggest
that weight and cost will continue to be disadvantages
for battery technology for many years to come.
The problem is that each technology has inherent limitations and drawbacks, and this makes it a practically
and economically advantageous to use individual storage only under special circumstances. Currently, only
hydro pumped storage power offers fully-developed
technology in this area. Battery technology has been
developing over many years, but further research is
needed to improve efficiency and lower costs. Flywheels and super capacitors are other short-term
Some storage options

Pumped storage power Water is pumped up from a dam to a higher-situated water reservoir. This is done when the
electricity price is low. When the price is high, the water flows back and passes a turbine. This technology is well-established and used in many places throughout Europe.
Batteries Several different types are available. Types of flow batteries include polysulphide bromide, vanadium redox
and zinc bromide batteries. More conventional types of batteries include sodium sulphide, lithium-ion, lead-acid and
metal-air batteries. Storage technology is a hot topic in the automotive industry, where there is great demand for alternative fuels. This is mainly a matter of lithium-ion batteries, the same type as is currently used in mobile phones and
laptop computers.
Hydrogen gas Manufactured by wind turbines through electrolysis. Hydrogen gas can be converted to kinetic energy
in an internal combustion engine.
Compressed air energy storage Electric current from, e.g., wind or coal power plant powers pumps that compress air
in layers underground. This air can then be pressed upward as it passes a turbine.
Flywheel energy storage Surplus energy in the grid is used with an electric motor to rotate small cylinders in a frictionfree vacuum. This rotation can then be converted into electrical energy by powering a generator.
End user energy storage Many attempts are being made to store electricity with the end user, since it is currently difficult for producers to efficiently store energy. One variant is to store electricity in the form of heating or cooling. When
the electricity price is low, more energy is stored e.g., by allowing the temperature to fall below the level of that required
for a cold-storage room and is used later on when the electricity price rises.
storage technologies, but the amount of energy that

can be stored is and will continue to be rather small.
Compressed air energy storage technology also needs
to be developed due to high losses and is currently
expensive and requires specific geographic conditions.
How are consumers affected?

One of the features of smart grids is that electricity
consumers are expected to be more active and involved
in their real-time energy consumption. In the same way
that people can plan their car trips around traffic conditions, electricity consumers should be able to control
their consumption to avoid congestion and higher
costs in the grid.
Smart meters will provide end users with clear incentives to conserve energy and thereby save money.
Active houses with solutions for controlling heating,
ventilation and lighting can reduce electricity costs up
to 50 per cent electricity consumption is managed
based on times of the day when the price is lower. Dishwashers and washing machines, for instance, can be
run at night, when wind power normally generates more
electricity. Another example is electric cars which, for
the same reason, can be charged at night. Smart grids
also allow traditional electricity consumers to transition
into full or partial net producers of electricity by installing solar panels on their roofs, for instance.
Read more about:

The development of the European energy market on the European Commissions website
www.ec.europa.eu/news
Energy sources in Vattenfalls book Six Sources of Energy One Energy System, available at
www.vattenfall.com.
The One Tonne Life project and what it takes to reduce CO2 emissions in daily life at
www.onetonnelife.com
Electricity grids and markets of the future | One Tonne Life

2. Solar cells and solar panels Solar panels on the roof and the
southern faade of the house. Solar
cells included in the house design
generate the energy needed for
supplemental heating, ventilation,
electricity for refrigeration, etc.
Surplus power is used to charge
the familys electric-powered Volvo.
Solar panels on the carport roof
provide hot water and the small
amount of heat needed there.
What does a person really need to do to reduce

CO2 emissions and live a climateneutral life?
1. Volvo C30 Electric Family car is as safe, comfortable and roomy as a standard
car. The difference is that the
Volvo C30 Electric is powered
entirely by electricity. The car
gets its power from a lithiumion battery which is charged
via an ordinary household wall
socket. It takes around
8 hours to fully charge the
battery. The car can drive
approximately 150 kilometres
on a fully-charged battery.
3
4
5
6
.o
w
o
at .c
e fe
or li
m ne
ad on
Re net
w
m
7. Entry porch - Serves the same function

as the classic small vestibules built onto
Swedish cottages in earlier times. The
double doors prevent household heat from
escaping and cold air from entering.
Everyday Energy Efficiency One Tonne Life

Energy efficiency is a key facet in the achievement of
climate neutrality. Currently, every person contributes
between six and eight tonnes of CO2 (carbon dioxide)
to the greenhouse gas effect each year. According to
experts, this figure needs to be cut to one tonne per
person per year - otherwise, the greenhouse gas effect
will increase the worlds average temperature by over
two degrees Celsius. But what does a person actually
have to do to reduce his or her CO2 emissions and live a
climate-smart life?
was to test whether or not it is possible for a family to

live in such a way that emissions per person come into
line with long-term climate stability roughly one tonne
of carbon dioxide equivalent per person per year.
With the One Tonne Life project, Vattenfall teamed up

with A-hus, Volvo Car Corporation, ICA and Siemens
to create a climate-smart home. The aim of the project
During the project, the household was divided into the

areas Transport, Food, Housing and Other. To ensure
reliable measurement of the familys CO2 emissions,
The companies contributed the latest innovations in

their respective fields with the goal of reducing normal
household CO2 emissions. Much of the technology and
many of the solutions used by the family are now available or will be in the near future.
Electricity grids and markets of the future | One Tonne Life

3. Climate shell - Thanks to the wellinsulated, leak-tight climate shell,
the house wastes very little energy.
The climate shell is comprised of the
houses windows, doors, walls, floor
and roof. Energy consumption can be
minimised with improved insulation
in walls, roof and foundation and by
installing energy-efficient windows
and doors.
5. Solar boxes - The

characteristic cubes
framing the windows give
the house an interesting appearance, but
also serve an important
function. They shut out
high-standing summer
sun and let in low-lying
winter sun.
4. Windows - U value (i.e., insulation capacity)

of as low as 0.7 for fixed windows and 0.8 for
openable windows, as compared to value of
1.2 for conventional windows.
Indoors - To ensure that the well-insulated house gets enough fresh air indoors, a
ventilation system draws air out from the bathrooms, closets and kitchen and blows
in fresh, heated air to bedrooms, living room and other common areas. Heat in the
drawn-out air is recycled. The houses heating needs are met by the heated incoming
air, body heat and kitchen appliances. Under-floor heating is installed downstairs.
6. Walls - The house walls are built in

three layers with unique insulation
capacity and minimum air leakage.
Plastic sheeting keeps the climate
shell intact and is carefully positioned
to further reduce air leakage.
experts from the Chalmers University

of Technology in Gothenburg were
involved in the project. Over a six-month
period in the One Tonne Life house, a
Swedish family - the Lindells - successfully reduced its CO2 emissions to a
low of 1.5 tonnes. Although the target
of one tonne was not met, this was
an amazing achievement and demonstrates that it is possible for normal
families to have a major impact on the
climate.
The familys emissions from private consumption prior to the project

were estimated at approximately seven tonnes of CO2 per person
per year. To this was added nearly two additional tonnes from public
consumption that the family was unable to influence. By category, the
family reduced its transport emissions by 90 per cent, food emissions
by 80 per cent, housing emissions by 60 per cent and other emissions by 50 per cent.
In total, the Lindell family reduced its emissions by 75 per cent in
just six months. Even when public emissions (emissions over which
the family has no control) are included in the calculation, the familys
emissions were reduced to 3.3 tonnes of CO2 per person per year a
total reduction of 60 per cent.
Tonnes CO 2equivalent/person and year

2.5
1.5
0.5
0
Food
Housing & Energy
Before project
Transport
Other
Comfort level (week 12) Minimum level (week 20)
Electricity grids and markets of the future | Summary
Summary
There is a clear positive correlation between economic development and energy consumption.
Global demand for energy has exploded in recent decades, and this trend will persist with the current
population growth rate of 80 million people per year.
Demand for electricity can be expected to increase more rapidly than any other form of energy one-quarter
of the worlds population still lacks access to electricity. Electricity consumption is expected to increase more
than 63 per cent over current levels by the year 2035.
Fossil energy sources will continue to play a key role in the EUs energy mix, and one-half of the EUs electricity production is expected to be based on fossil energy sources by the year 2035, with current policies.
The EUs 20-20-20 target is to reduce CO2 emissions by 20 per cent over 1990 levels, increase the share of
renewable energy sources in the energy mix to 20 per cent, and improve energy efficiency by 20 per cent.
Many European power plants are relatively old. A power deficit of 300,000 MW is therefore anticipated by
around the year 2020 if no new investments are made.
A review of European electricity companies investment plans shows that investment in new capacity is
planned at 278,000 MW during 2007 and 2020, divided between renewable (33 per cent), nuclear (16 per
cent) and fossil fuels (51 per cent).
Alternatives such as efficient energy consumption, renewable energy, nuclear power and carbon capture and
storage (CCS) are at the centre of discussions on a climate-neutral energy system.
The energy system of the future may include a greater degree of locally produced renewable energy, but also
new global flows of, for instance, bioenergy, solar-based electricity and hydrogen gas.
Footnotes - Electricity Grids and Markets for the Future

IEA World Energy Outlook 2011
Ibid.
3
VGB Powertecch (2011), Electricity Generation 2011/2012
4
www.euractiv.com
5
Ibid.
6
Belkin, P. (2008), The European Unions Energy Security Challenges, CRS
7
www.ewea.org
8
To read more please visit www.friendsofthesupergrid.eu/
9
BCG. (2003), Keeping the Lights On Navigating Choices in European Power Generation
1
2
Glossary
Word
Definition
AC
Alternating Current - an electric charge that constantly oscillates in direction
APX
Anglo-Dutch Energy Exchange
Baseload energy
Energy sources (e.g., nuclear energy) used to secure the supply of energy from intermittent energy sources
Bioenergy
Renewable energy made from organic material
Biomass
Products, waste and residues from agriculture, forestry and related industries, and the biogenic fraction of industrial and municipal waste
Bottleneck
Occurs when a system's capacity is limited by having too few resources
Capacity
Maximum capability of, e.g., a power plant to generate electricity or a distribution grid to transmit electricity
Carbon dioxide (CO2)
A colourless, non-flammable gaseous substance. A greenhouse gas; taken up by plants during photosynthesis
CCS
Carbon Capture and Storage - emissions-reducing technology for capturing CO2 from coal-fired power plants, compressing it to a liquid and permanently storing it deep underground
CHP
Combined Heat and Power (co-generation) - a power plant that simultaneously produces heat and electricty
DC
Direct Current - an electric charge that flows in one direction
DH
District Heating - a method for distributing heat energy for heating a number of buildings from a central location. Hot water is circulated through a
system of pipes, usually underground
DSO
Distribution System Operators - responsible for operating, ensuring the maintenance of and developing the distribution system in a given area
EEX
European Energy Exchange
Efficiency
The efficiency of a power plant denotes the percentage of the input energy that is converted into electricity and/or heat
Electricity certificate
Special subsidy for renewable energy production. A certificate fee is paid by consumers to electricity supplier
Electricity retail company
Buys electricity on the power exchange from electricity producer for resale to end users
Emissions trading
Market-based policy mechanism that promotes the reduction of CO2 emissions by providing economic incentives
Energy carrier
System or substance used to transfer energy from one place to another
Energy mix
The range of energy sources of a region, either renewable or non-renewable
EPEX
European Power Exchange - The exchange for the power spot markets in France, Germany, Austria and Switzerland.
EREC
European Renewable Energy Council
FACTS
Flexible AC Transmission System - increases the controllability, quality and efficiency of AC power transmission
Feed-in tariff
Policy mechanism aimed at promoting renewable energy technologies by reducing price per kilowatt hour (kWh) or offering a higher retail price
Fossil fuels
Oil, hard coal, lignite, natural gas and peat
Fracking
Method used for extracting shale gas
Frequency
Measurement of electric current fluctuations per second. Measured in hertz (Hz); standard European AC frequency is 50 Hz
Generation
Generation of electricity. (Usage: generation of electricity; production of heat)
Greenhouse gas
Gas in an atmosphere that absorbs and emits radiation within the thermal infrared range
Grid manager
TSO or network company. Can isolate areas if a disturbance in the grid is detected
Glossary
Word
Definition
HVDC
High Voltage Direct Current - transmission system that uses direct current to transmit electrical power. For long-distance transmissions, is less
expensive and entails fewer losses than AC systems
Hydro power
Hydro power plants use the gravitational force of running water to generate electricity
IEA
International Energy Agency - an organisation that works to reduce dependency on oil via energy conservation and the development of renewable
energy systems
Intermittent energy sources
Energy sources that are generated irregularly, such as wind power
kWh
Kilowatt hours - measurement of the number of kilowatts consumed per hour
Liberalisation
Abolishment of monopolies in order to open up for competition.
LNG
Liquified Natural Gas - natural gas that has been cooled to - 162 C and transformed into a liquid form
Micro-generation
Surplus self-produced electricity that can be sold
MW
Megawatt - unit for measuring power, equivalent to one million watts
MWh
Megawatt hours - measurement of the number of megawatts consumed per hour
Network company
Owns a specific local low and medium voltage network and is responsible for the distribution of electricity from producer to end user
Nord Pool
Nordic Power Exchange
Nuclear power
In nuclear reactors, uranium is used to heat water to generate electricity. Used as a baseload power in many energy systems
OECD
Organisation for Economic Co-operation and Development
Power
Same as energy per time unit; i.e, the power needed to perform something during a certain amount of time. Measured in watts
Power exchange
Electricity market where retail companies trade electricity, buying from electricity producers and selling to end users
Regional and local networks
The transmission grid branches off into regional (70 - 150 kV) in Sweden, Germany and the Netherlands and local (less than 50 kV) networks which
distribute electricity to end users
Renewable energy source
Nonfinite energy sources such as wind, solar, geothermal, wave, tidal and hydropower, biofuels
Retail electricity market
Power exchange market where retail companies buy electricity from electricity producers and sell to end users
Shale gas
A type of natural gas, extracted from shale; often referred to as unconventional gas
Smart grids
Term for future electricity networks which will be capable of storing more energy and will include technology to control and adjust electricity consumption to fluctuations in electricity generation
Spot market
Shortterm physical trading in electricity on an exchange
Synchronised grids
Electricity grids that use the same frequency at all times
Transmission grid
Large volumes of electricity are distributed through the high voltage transmission grid (220 400kV) over long distances
TSO
Transmission System Operator -responsible for transporting energy on a national or regional level
TWh
Terawatt hour - measures the number of terawatts consumed per hour. One terawatt is equivalent to 1,000 watts
Volt - the unit for electric potential
Watt - measures the rate of energy conversion. 1 watt = 1 joule per second
Wholesale marketplace
A marketplace for generators, suppliers and consumers, where pricing is transparent and based on supply and demand
Wind power
Electricity generated by wind turbines
Vattenfall AB (publ)
162 87 Stockholm, Sweden
Visiting address: Sturegatan 10
Telephone +46 8 739 50 00
info@vattenfall.com
www.vattenfall.com

Common European Energy Market 2011

Caricato da

Informazioni sul documento

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Common European Energy Market 2011

Caricato da

Copyright:

Formati disponibili

The Common

Key facts and figures 2011

Net sales: 20.25 billion EURi

Exchange rate used is 1 EUR = 9.554 SEK

A key element is the ongoing integration process of

Our aim is to give readers an overall understanding of

I hope you find this book interesting. Please visit our

CEO and President, Vattenfall

From Energy Source to Consumer

The Energy Triangle....................................................................9

Energy Sources ........................................................................48

The Energy System Electricity, Gas and Heat

Historical Background Electricity, Gas and

Electricity Grids and Markets of the Future

The Common European

THE COMMON EUROPEAN ENERGY MARKET

Introduction | The Energy Triangle

The Energy Triangle

Climate and environment

Fuel shortages and unreliable energy supplies create major problems

Energy is fundamental for all economic activity, and thus to human

THE COMMON EUROPEAN ENERGY MARKET

Introduction | The Energy Triangle

10 THE COMMON EUROPEAN ENERGY MARKET

many public services, such as health care facilities

Introduction | The Energy Triangle

Ongoing research projects are studying ways to

Security of supply thus entails guaranteeing both the

THE COMMON EUROPEAN ENERGY MARKET 11

Introduction | The Energy Triangle

Climate and environment

12 THE COMMON EUROPEAN ENERGY MARKET

energy (e.g., wind power, certain types of hydro power

Introduction | The Energy Triangle

An energy system in balance

Functioning energy markets also create conditions for

THE COMMON EUROPEAN ENERGY MARKET 13

Footnotes - The Energy Triangle

To read more about EU policies please visit http://ec.europa.eu/clima/policies/

14 THE COMMON EUROPEAN ENERGY MARKET

Introduction | The Energy Triangle

THE COMMON EUROPEAN ENERGY MARKET 15

The Energy System

16 THE COMMON EUROPEAN ENERGY MARKET

THE COMMON EUROPEAN ENERGY MARKET 17

The Energy System

The Energy System

supplied by energy sources at the beginning of the

From energy source to end user - EUs energy system

18 THE COMMON EUROPEAN ENERGY MARKET

The Energy System

Electricity, gas and heat usage

The illustration shows final energy

The Nordics (TWh)

The Netherlands (TWh)

THE COMMON EUROPEAN ENERGY MARKET 19

The Energy System | The Electricity Market

The Electricity Market

20 THE COMMON EUROPEAN ENERGY MARKET

done reliably and as efficiently as possible. Electricity

The Energy System | The Electricity Market

Overview of the electricity market

The upper arm of the illustration shows the contract

THE COMMON EUROPEAN ENERGY MARKET 21