Lu sandoff


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  • Hello, Today we have heard a lot about how governments try hard to change the composition and capacity of the energy production The efforts and sums invested in these policy instruments are enormous, and need to be so Surprisingly enough very little is known about the entities that are calling the shots to invest or not. As a researcher working in the field of business administration I think there is a lot to be gained by policy makers, trade and industry agencies, corporate leaders and owner representatives by attaining a more advanced understanding of the conditions that is now shaping the future of the energy system. Hopefully we can take a little step in this direction right now. Today I would like to focus on the context that form investment decision in energy production. The control of the long term commitments that a company engages in, is very much in the hands of the owners. This is especially true for the power and heat industry, given it's concentrated ownership. In order for investments to come about, there has to be a congruence between the economic possibilities of an investment and the owners objectives for the company. There is a complex web of motives that shape an investment decision and it’s not enough only to consider economic arguments. Corporate governance is a way of framing this complexity.
  • For the last hundred years it has been popular to separate ownership from the actual running of the company. This construction is fine for spreading the risk among many investors. In short it is easier to make people want to invest if they don´t, at the same time, have to be managers. The down side to this arrangement, is that it gives the investors limited insight into the company. What can they do to protect their investment? Well, direct control of the corporation is upheld by the professionalization of management (socialization into code of conduct, culture, career long training, and by accountants etc. But it might not be enough, manager does not have the same attitude towards risk as the investor has. Typically the manager wants to keep his job and increase the size of the company (sales not profitabilty). By avoiding uncertain investments and preffering growth by acquisitions. To coop with this publicly traded companies utilize a fairly effective mechanism. Indirectly they control the company by the stock market valuation of the managements action. Market value is, in theory, the only interest an investor has in the ownership. By giving management the same economic incentives as themselves, such as a stock option program, an owner can in part safe guard his or her investment. This is the basic function and idea behind today's corporations. And this is why management compensation is an important part of the economic system One of the problems that we see today is that this mechanism is not functioning properly. In order to compensate for this there has been a lot of work in designing Codes of conduct. Other changes is following in its path, Greater focus on corporate responsibility and the role of the corporate board, and indirectly the owners. These changes have a strong bearing on the energy industry and the need for heavy investments. I have listed some of the circumstances that shape the situation 1. Partly other goals and rationales than ordinary corporations A lot of control ownership (>5 % of the total value or in voting power) 2. Give a warped picture of what to expect (bottle neck investments) 3. There are no room for mistakes Transparency and active involvement by the owners are key ingredients. 4. Shrinking power reserve capacity and a sustainable development of the energy system In short a complex situation and it´s not unique for Sweden. All Nordic countries have a very similar situation. So what can we learn from studying corporate governance in the energy industry? I will give you some findings from a study I'm currently conducting
  • Two slides of owner motives
  • Not only risk loving ceo but also chairman
  • Given identified challenges Poosible lesson Give clear incentives to leverage municipal ownership
  • CEOs opinon Many most likely reasons
  • Not only risk loving ceo but also chairman
  • First these investments must be in line with the goals of the company Second There has to be an agreement of the goals between owners and management Investments that support these goals will have a high acceptance and attractiveness. They make, so to speak, sense for everyone. Not so much focus on making money Several possible explanations other motives or makes enough already, Nr 1 most important change coming ten years: Expansion of district heating Means that DH is profitable as is.
  • Lu sandoff

    1. 1. <ul><li>Corporate Governance and Investments in Energy Production </li></ul><ul><li>Anders Sandoff, PhD </li></ul><ul><li>School of Business, Economics and Law, Göteborg University </li></ul><ul><li>[email_address] </li></ul>
    2. 2. <ul><li>Separation of ownership and control </li></ul><ul><ul><li>Different goals and attitudes towards risk </li></ul></ul><ul><li>Changes are taking place </li></ul><ul><ul><li>Increased focus on corporate responsibility </li></ul></ul><ul><ul><li>The role of the corporate board of directors </li></ul></ul><ul><li>The situation for the power and heat producers </li></ul><ul><ul><li>Heavy investment needs </li></ul></ul><ul><ul><li>Widespread State and municipal ownership </li></ul></ul><ul><ul><li>Potentially high profit margins </li></ul></ul><ul><ul><li>Low public trust and presence of externalities </li></ul></ul>The importance of corporate governance
    3. 3. <ul><li>Web survey </li></ul><ul><li>All municipally controlled energy companies in Sweden with power and heat production (approx 100) </li></ul><ul><li>Chairman of the municipal executive committee </li></ul><ul><li>Chairman of the board of directors </li></ul><ul><li>Chief Executive Officer (CEO) </li></ul><ul><li>Targeted question areas </li></ul><ul><ul><ul><li>Ownership motives and goals for the company </li></ul></ul></ul><ul><ul><ul><li>Constitution, operation, role and competence of the board </li></ul></ul></ul><ul><ul><ul><li>Capital budgeting practices </li></ul></ul></ul><ul><ul><ul><li>Attitudes towards investments in power and heat production </li></ul></ul></ul><ul><ul><ul><li>Boundaries of an utility </li></ul></ul></ul>How does this effect investments in energy production?
    4. 4. <ul><li>Based on approximately 40 % response rate </li></ul><ul><li>Multiple choice questions </li></ul><ul><li>Response scale based on literature studies and interviews </li></ul><ul><li>Work in progress </li></ul><ul><li>Only graphic display of frequency distributions </li></ul><ul><li>No non-response analysis </li></ul><ul><li>Answers are to a limited extent based on responses from the same companies </li></ul>Tentative results
    5. 5. Motives for municipalities to own an energy company CEO Chairman of the municipal executive committee Chairman of the board of directors <ul><li>Influence the local energy system </li></ul><ul><li>Influence local environment </li></ul><ul><li>Low price district heating </li></ul><ul><li>Lower price distribution </li></ul><ul><li>Increase regional attractiveness </li></ul><ul><li>Financing other municipal activities </li></ul><ul><li>Increases quality in other activities </li></ul><ul><li>More profitable than selling </li></ul><ul><li>Gives financial stability </li></ul><ul><li>Heritage/historical reasons </li></ul><ul><li>Unclear motives </li></ul><ul><li>Other than above </li></ul>
    6. 6. Importance of municipal owner for development last ten years / coming ten years <ul><li>Very little importance </li></ul><ul><li>Little importance </li></ul><ul><li>Some importance </li></ul><ul><li>Important </li></ul><ul><li>Very important </li></ul><ul><li>No opinion </li></ul>Chairman of the board of directors CEO
    7. 7. <ul><li>New connectable heat </li></ul><ul><li>Profits from power sale </li></ul><ul><li>Value of green certificates </li></ul><ul><li>Value of CO2 allowances </li></ul><ul><li>Need for added reserve capacity </li></ul><ul><li>Need for increased efficiency in existing production </li></ul>Most likely reasons for investing in energy production coming five years, according to CEO <ul><li>Need for exchanging existing production units </li></ul><ul><li>Environmental reasons </li></ul><ul><li>Increased flexibility </li></ul><ul><li>High financial solidity </li></ul><ul><li>Customer demands </li></ul><ul><li>Owner demand </li></ul>
    8. 8. <ul><li>Increased environmental focus </li></ul><ul><li>More power production </li></ul><ul><li>More wind power </li></ul><ul><li>More CHP </li></ul><ul><li>More heat production </li></ul><ul><li>More energy services </li></ul><ul><li>Expansion of district heating system </li></ul><ul><li>Expansion of gas grid </li></ul><ul><li>Reinforcement of power grid </li></ul><ul><li>Expansion of residential house district heating </li></ul><ul><li>Existing operations doesn't need to be changed </li></ul><ul><li>Other changes </li></ul>Most important changes of the company's current operations in the coming ten years Chairman of the board of directors CEO
    9. 9. <ul><li>Wide spread knowledge about owners motives </li></ul><ul><li>Influence the local energy system </li></ul><ul><li>Influence local environment </li></ul><ul><li>Low price in district heating </li></ul><ul><li>CEO acknowledge the significance of these motives </li></ul><ul><li>Municipalities is seen as important as owners </li></ul><ul><li>Expansion of district heating </li></ul><ul><li>New connectable heat is seen as the main driving force for investments </li></ul><ul><li>Important to expand residential house district heating </li></ul><ul><li>Large interest in CHP production </li></ul><ul><li>Many investments will be driven by aging equipment </li></ul>Early lessons
    10. 10. Possible lines of business, if economically attractive… <ul><li>Sales of heat pumps </li></ul><ul><li>Sales of heat exchangers </li></ul><ul><li>Drying of biomass </li></ul><ul><li>Sales of pellets </li></ul><ul><li>Manufacturing of pellets </li></ul><ul><li>Indoor climate solutions </li></ul><ul><li>Energy services </li></ul><ul><li>Energy system solutions </li></ul><ul><li>Owning production outside of municipally </li></ul><ul><li>Owning gas/oil production </li></ul><ul><li>Owning forests </li></ul><ul><li>Owning pellets manufacturer </li></ul><ul><li>Owning a broad band network </li></ul><ul><li>Sale of energy related network contents </li></ul><ul><li>Sale of non energy related network contents </li></ul><ul><li>Consultancy in environmental planning </li></ul><ul><li>Waste management </li></ul><ul><li>None of the above </li></ul>CEO Chairman of the board