Corporate Governance and Investments in Energy Production

Anders Sandoff, PhDSchool of Business, Economics and Law, Göteborg University

anders@handels.gu.se

Separation of ownership and control– Different goals and attitudes towards risk

Changes are taking place– Increased focus on corporate responsibility

– The role of the corporate board of directors

The situation for the power and heat producers1. Heavy investment needs

2. Widespread State and municipal ownership

3. Potentially high profit margins

4. Low public trust and presence of externalities

The importance of corporate governance

Web survey

All municipally controlled energy companies in Sweden with power and heat production (approx 100)

Chairman of the municipal executive committee

Chairman of the board of directors

Chief Executive Officer (CEO)

Targeted question areas1. Ownership motives and goals for the company

2. Constitution, operation, role and competence of the board

3. Capital budgeting practices

4. Attitudes towards investments in power and heat production

5. Boundaries of an utility

How does this effect investments in energy production?

Based on approximately 40 % response rate

Multiple choice questionsResponse scale based on literature studies and interviews

Work in progress• Only graphic display of frequency distributions • No non-response analysis• Answers are to a limited extent based on responses from the

same companies

Tentative results

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CEO

Motives for municipalities to own an energy company

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Chairman of the municipal executive committee

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Chairman of the board of directors

1. Influence the local energy system2. Influence local environment3. Low price district heating4. Lower price distribution 5. Increase regional attractiveness6. Financing other municipal activities7. Increases quality in other activities8. More profitable than selling9. Gives financial stability 10. Heritage/historical reasons11. Unclear motives12. Other than above

Importance of municipal owner for developmentlast ten years / coming ten years

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Chairman of the board of directors

CEO

1. Very little importance

2. Little importance

3. Some importance

4. Important

5. Very important

6. No opinion

1. New connectable heat2. Profits from power sale3. Value of green certificates4. Value of CO2 allowances5. Need for added reserve capacity6. Need for increased efficiency in

existing production

Most likely reasons for investing in energy production coming five years, according to CEO

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7. Need for exchanging existing production units

8. Environmental reasons9. Increased flexibility10. High financial solidity11. Customer demands12. Owner demand

1. Increased environmental focus2. More power production3. More wind power4. More CHP5. More heat production6. More energy services7. Expansion of district heating

system8. Expansion of gas grid9. Reinforcement of power grid10. Expansion of residential house

district heating11. Existing operations doesn't need

to be changed12. Other changes

Most important changes of the company's current operations in the coming ten years

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Chairman of the board of directors

CEO

Wide spread knowledge about owners motivesInfluence the local energy system

Influence local environment Low price in district heating

CEO acknowledge the significance of these motives

Municipalities is seen as important as owners

Expansion of district heating

New connectable heat is seen as the main driving force for investmentsImportant to expand residential house district heatingLarge interest in CHP productionMany investments will be driven by aging equipment

Early lessons

Possible lines of business, if economically attractive…

1. Sales of heat pumps2. Sales of heat exchangers3. Drying of biomass4. Sales of pellets5. Manufacturing of pellets6. Indoor climate solutions7. Energy services8. Energy system solutions9. Owning production outside of

municipally10. Owning gas/oil production11. Owning forests12. Owning pellets manufacturer13. Owning a broad band network14. Sale of energy related

network contents15. Sale of non energy related

network contents16. Consultancy in environmental

planning17. Waste management18. None of the above

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CEO

Chairman of the board