23.09.2020 | Axpo CEO Christoph Brand in an interview with the NZZ
This is the first major interview with Axpo CEO Christoph Brand since he took up his position in April. In an NZZ interview, he talks about investments in the energy turnaround, Axpo's growth potential, future power demand in Switzerland, the advantages of market liberalisation and the future of photovoltaics.
Mr. Brand, after being a manager in the telecom sector for eight years you moved to the media industry, and now you've landed in an energy company. Do you have a flair for industries that are having an especially difficult time?
Calm waters bore me after a time. I find it exciting when things change in a company, when it is in transition and facing challenging tasks. Questioning the meaning of work is justified. At Axpo, I know why I get up in the morning because we are a part of the solution to a big problem.
With Jens Alder, Thomas Sieber and yourself, former telecom managers hold key positions in Swiss energy companies. Just a coincidence?
Ultimately, the focus is on the individual who holds the position. But, of course, there are certain parallels. I experienced the entire phase of telecom market liberalisation and saw how enormously beneficial market liberalisation can be for all the participants. It is certainly helpful when one has already gone through this process. It’s seldom that one can experience several liberalisation processes during one's professional career. In addition, new technologies were introduced early on in the telecom business. When it comes to data topics the media sector is a step ahead. And I can now benefit from the experience gained during my time in the software industry.
How important is full power market liberalisation for the industry and Axpo?
Market liberalisation is fundamentally positive, called for and advisable. I am an economist by trade so you don't have to convince me of the advantages offered by a liberalised market. It's less important for Axpo than many might think because we are already fully exposed to the market with the greater part of our business. The private and very small business customers of our subsidiary CKW are the exception. As a Swiss citizen, I see it as urgently necessary to finally complete the liberalisation process.
How do you assess current partial market liberalisation that only offers large consumers a free choice?
In Switzerland there are still many power companies that have captive customers but procure their power on the liberalised market. That leads to inequality among the various providers. From a competitive perspective this is not a good situation. Apart from that, it's also displeasing to the customers who are paying prices that are too high.
What are the chances of achieving full market liberalisation?
I cannot imagine that Switzerland can remain a semi-monopoly in the European environment. We are too networked with Europe and networking in the power area will only increase. Partial isolation will not be possible. In addition, customers' demand for free choice will get louder, and rightly so, even if ultimately only a minority of customers will end up changing power providers as was the case in the telecom industry. I’m optimistic that liberalisation will come. It must be done right so that it does not become another half-hearted affair.
"Switzerland cannot remain a semi-monopoly in the European environment. We are too networked."
Your predecessor had to restructure Axpo. The annual costs were reduced by CHF 730 million in five years. Just the same, the company was living of its substance. Your task is to bring Axpo back on a growth path. What expectations have the owners set for you?
A company wants to grow of course. That also has to be the aspiration in a world where power demand will grow by 30 to 75 per cent by 2050.
Except for in Switzerland, where, according to the Energy Strategy 2050, power demand will decrease.
I'm not sure that anyone would go along with that today. We have to shape the transformation into a society that relies more and more on electricity. For us that also means focussing. The Axpo Group is very diversified, which could be an advantage. But management awareness is also a rare commodity. We can't be present everywhere and still do everything in the necessary quality. And finally, cultural evolution is important to me and I consciously say evolution. I was very positively surprised how dynamic and agile the company already is. The external image that certain people have is not at all in line with the reality I experience.
You talk about focussing. What areas do you want to divest and according to what criteria?
Activities that do not generate income in the long term must be fundamentally questioned. However, we are not free in all respects here. For example, we can't sell a nuclear power plant, even if we wanted to. We have hydropower plants that are deep in the red, but that cannot be realistically sold for various reasons. However, there are also areas that are not profitable today, but that have great growth potential. A good example is hydrogen, a field in which we are hardly doing anything at all today. We can't ignore this area. We still have to develop a strategy as to what we could actually do in this area. And ultimately we must set priorities for resource allocation.
How has Axpo been affected by the corona crisis?
Fortunately and in contrast to many other industries, we are doing well. However in Italy, we felt the declining energy demand in the industrial sector strongly. The wave of bankruptcies is yet to come. We will have to expect payment defaults.
Axpo is fully owned by the cantons of Northeastern Switzerland. However, strategic decisions are made from a purely entrepreneurial perspective, for example to only invest in new renewables abroad. Political considerations for the realisation of the Energy Strategy 2050 are secondary. Will that remain so?
In the past ten years Axpo has invested several billion francs in Switzerland, nota bene in infrastructure that is extremely important for Switzerland's security of supply. The bulk of investments were made in Switzerland. Of course, it's unfortunate that a return on these investments is somewhat of a tragedy, for example our Linth-Limmern pumped storage plant that everyone says we are using as a battery. However, this has to put into context: The power volume generated by full drainage of the Linth-Limmern reservoir corresponds to the amount that the Gösgen nuclear power plant generates in thirty hours. That alone will not fill the winter power gap.
"It's a sad reality that it is not worthwhile investing in the energy turnaround in Switzerland."
So there won't be a change in the strategic direction?
Axpo is a business oriented company from which the shareholders rightly expect a dividend. The dividend comes from earnings that are the outcome of the right business decisions. It's a sad reality that it is not worthwhile investing in the energy turnaround in Switzerland. Wind energy is a no-go because nobody wants the turbines nearby and because the topographical prerequisites are unfavourable. Hydropower is declining. We expect 3 to 7 TWh less than the amount set down in the Energy Strategy 2050. And hydropower suffers from increasingly difficult conditions, such as water rates that make up one third of the costs. No other country burdens a renewable resource to such an extent. Nuclear energy will be phased out, which means an additional 25 TWh will be lost. Sector coupling and the electrification of transport will require an additional 13 to 20 TWh depending on the estimates. In the end we have a discrepancy of about 40 TWh in 2050. Realistically, the largest contribution in Switzerland must come from photovoltaics.
How large is the potential of photovoltaics here?
In Switzerland we can likely forget large-scale ground-mounted systems. There were plans for such projects and they failed owing to objections and the decisions of authorities. We have to accept that photovoltaic systems might be located in alpine zones. But will we? That primarily leaves smaller, private plants. There are enough examples from abroad as to how a subsidy programme should be designed so that plants can be built without self-consumption. At the moment this is by far too unattractive here in Switzerland.
So simply more subsidies?
As an economist it is certainly painful to me that we even have to talk about such subsidy schemes. We've already known for a long time how inefficient it is to subsidise and let the government decide which technologies will be promoted. Instead, we should do what makes the most economic sense: A CO2 tax that is fully reimbursed to the general public. The second-best solution is trading with emission certificates with sufficiently low maximum quantities. But we see what happens: Not enough renewables are being developed. At the same time demand is increasing. So this is not working. However, that's not a problem for Axpo. We have no mandate to ensure security of supply in Switzerland, nor are we compensated for this.
How do you deal with this dilemma?
We have to openly and honestly discuss it. It's not about being right, it's just a rational look at the facts. I think the whole energy discussion is tremendously ideological, and there's absolutely no reason for it: Climate change is real, man-made and a problem, period. We can start from that premise. In terms of technology we would be able to achieve the energy turnaround. Therefore, it is also clear that the future lies in renewable energies, and that it does not make sense a priori to build gas-fired power plants on a massive scale in Europe.
Is the investment environment abroad so much more attractive than in Switzerland?
Definitely. Other countries have tough auctions for floating market premiums where we have to compete against investors that have much lower capital costs than we do. As a result, we have to enter into a substantial entrepreneurial risk, because the base price we offer is not enough. In addition, up to now I have never met anyone that expects long-term, increasing power prices. Overall, lateral movement is expected because so much generation capacity is being developed in Europe. The constant negative wholesale prices in Germany are the result of political decisions. The producers would only be able to carry the full price risk if the market were completely liberalised without any political interference. But unfortunately it's not like that in our industry because the government is constantly doing something that is not predictable. Politics primarily decide how power prices in Switzerland will develop in the long term. And Swiss power prices are made in Germany, whether we like it or not.
Energy companies complain that they no longer have enough money to maintain hydropower if it is not supported.
We're not complaining, we are just being honest. Yes, under low power prices and the regulatory environment, large investments in upgrading are less and less worthwhile. With the consequence, that substance will unfortunately dwindle in the long term. This, although hydropower is the backbone of Swiss power supply. That is why we are also investing in digital competence in the hydro area – although too reluctantly with a factor of ten. For example, we can be significantly more efficient with predictive maintenance than in the past. In terms of data acquisition from the plants I am told that the entire sector is not very far along, but in comparison Axpo is doing OK. But there are still some very old computers running in many of the plants if data is being collected at all. The hydropower income situation will not improve much as long as a third of the costs are attributed to water rates independent of where power prices stand or how much power is produced.