* More than 140 firms operate regional, local grids
* Sector needs investment seen difficult for small firms
* Government-sponsored study suggests consolidation
* Government urged to remove investment caps
By Nerijus Adomaitis
OSLO, Oct 1 (Reuters) - Norway’s energy lobby on Wednesday offered its backing to government calls for consolidation among the country’s small grid operators but urged regulatory changes to help attract investors.
Plans to add more renewable power generation and bolster exports via new interconnectors will require investment in the grid, something the country’s more than 140 small regional operators are expected to struggle to fund.
A government-sponsored study led by former oil and energy minister Eivind Reiten published in May concluded consolidation would help the sector by creating larger firms better able to raise needed funding.
“In general, we support the direction the report is pointing to... but the government needs to provide more incentives for companies to merge,” Oluf Ulseth, head of Norway’s Energi Norge energy industry lobby, said on Wednesday.
“The (report‘s) recommendations... will most likely lead to a reduction of the number of network companies in the future,” he said.
The oil and energy ministry, which set Wednesday as a deadline for industry feedback to the study, was not immediately available for comment.
The report said there should be fewer grid operators to form larger companies better positioned to borrow in the bond market or attract investment from sources such as pension funds and insurance companies.
“A fragmented network structure limits the possibilities to realise economies of scale,” it said.
Norway has a transmission grid 90 percent owned by state-run Statnett and a number of regional and local grids owned mostly by municipalities and county governments.
The eight largest grid firms each have more than 100,000 customers and hold about 60 percent of the market, while the rest are owned by small companies, some with fewer than 10,000 customers in the country of five million.
“This (market fragmentation) has led us to the shortage of capital that our industry is facing as major investment needs are piling up,” said Thomas Nysen, chief executive of Agder Energi, a grid operator and power producer.
Norway plans to build power interconnections to Germany and Britain to export more of its emissions-free hydropower. It also aims to build more wind power farms, electrify offshore oil and gas platforms and get more electric cars on to its roads.
All of this requires a well-functioning domestic grid, something which will require an estimated investment of 60-80 billion crowns ($9.4-$12.5 bln) in transmission and distribution grids over the next 5-6 years, according to power market regulator NVE and consultancy THEMA.
“The biggest challenge on the grid side is how to get the required investments financed,” Tormod Hansen, the area manager for the Scandinavian power market at energy firm DNV GL, told Reuters.
Not only small, many operators run by local governments behave more like financial investors than strategic owners, focusing on delivering dividends rather than capital spending, the report said.
Pension funds and life insurance companies are seen as potential investors into power grids as they look for steady, low-risk returns, but there are currently legal limits on the size of stakes they can hold in energy companies.
Norway’s KLP pension fund, which has $68.5 billion under management, sought to buy 35 percent at Troender Energi, the country’s eighth largest grid company, for 750 million Norwegian krone ($116.4 million) in 2011, but was limited to taking just 15 percent.
“We are very keen on investing into energy companies because they have the same long-term perspective and provide stable return on investments, but there are limitations imposed on shareholding. We hope that the government will change that,” said KLP spokesman Ole Jacob Frich.
Reiten’s report suggested the government needed to remove the caps on shareholdings in grid companies. This view is backed by energy companies, Energi Norge’s Ulseth said.
“I do see a lot of fund managers from infrastructure funds looking at Norway... There was a lot of interest, when Fortum was selling its grid,” Ulseth said.
Oslo-listed Hafslund, Norway’s largest grid operator, bought a local grid from Finnish utility Fortum in April.
1 U.S. dollar = 6.4456 Norwegian krone Editing by Balazs Koranyi and Jason Neely