EP205 · Economy · first published 2023-08-05

Power grids and financing in good shape | Jyrki Tammivuori | Negotiator 205

Caruna's chief executive Jyrki Tammivuori joins Sami Miettinen in August 2023. Two former counterparties — Stora Enso's treasurer and the banker who covered him — work through first the evolution of financing documentation and then the power grid: the weather-proofing requirements, two-way electricity, the bottlenecks in the network and the WACC framework in the Energy Authority's regulatory model. This write-up also sets out what the episode does not ask: the guest is the CEO of a regulated monopoly commenting on his own regulatory model weeks before decisions about it. The interests are disclosed.

Sami Miettinen · Sections: AI and the Economy

Power grids and financing in good shape | Jyrki Tammivuori | Negotiator 205

Summary: Caruna’s chief executive Jyrki Tammivuori joins Sami Miettinen in August 2023. Two former counterparties — Stora Enso’s treasurer and the banker who covered him — work through first the evolution of financing documentation and then the power grid: the weather-proofing requirements, two-way electricity, the bottlenecks in the network and the WACC framework in the Energy Authority’s regulatory model. This write-up also sets out what the episode does not ask: the guest is the CEO of a regulated monopoly commenting on his own regulatory model weeks before decisions about it. The interests are disclosed.

A note on reading this, and on interests

The recording is from 5 August 2023. The episode is unusually technical and unusually amicable, and both have the same cause: the participants know each other from an old client relationship.

• The host was the guest’s banker. Sami Miettinen covered the Stora Enso relationship from the large banks’ side (SEB, RBS, later Pöyry Capital) at the time Jyrki Tammivuori was the company’s treasurer. Together they executed the refinancing of the company’s revolving credit facility. The first third of the episode is a shared reminiscence, and it is a material interest because it sets the episode’s tone.
• The guest is the CEO of a regulated monopoly discussing his own regulatory model. Caruna is a regional monopoly whose pricing is supervised by the Energy Authority. At the time of recording, decisions on the reform of the regulatory model were due that same autumn, for the following eight years. When a chief executive says what worries him about the model, that is also advocacy — not wrong for that reason, but worth knowing. Nobody in the episode represents the consumer’s or the regulator’s point of view.
• The host has a second connection. Miettinen says he sat on the board of Tornator and sold a slice of the company; he uses Tornator as a comparison for Caruna’s ownership structure.
• The source. A MacWhisper transcript (Finnish, 367 cues). Proper nouns and financing terms were corrected separately; the personal and company names that remained uncertain were confirmed with the host afterwards.

1. The financing half: what covenants are and why they are sometimes left out

The first part of the episode is a practical lesson in corporate finance, and it is usable without any interest in power grids.

A covenant is a business constraint written into loan terms — for instance that debt must not exceed a certain multiple of EBITDA, or that interest cover stays at a decent level. In the Stora Enso refinancing, what mattered was that there were no financial covenants at all, and that the rating agencies’ rating grid was sensibly built.

Tammivuori’s formulation of why that can happen is the episode’s most durable general observation:

Whoever lends the money decides on what terms it is given. That is why it is so important that the lenders understand the company’s strategy and what matters to the company.

And immediately after it, the counter-example that stops the reader generalising wrongly: Caruna has covenants, and they suit it well. A covenant is therefore neither good nor bad but appropriate or inappropriate relative to the company’s strategy.

Three further observations from the same section:

• Finnish documentation internationalised. Domestic banks did not use covenants before — in Miettinen’s phrasing partly because nobody knew how to — while foreign banks did. When the two worlds were combined, hybrids emerged; Finland is now at the international level.
• Capital has to be competed for. There are more sources of money than before, but Finland is a small country and capital has to be attracted here. That makes the operating environment and trust in the society critical. Tammivuori names NATO membership as something that has clearly helped.
• A floating rate is a cyclical company’s natural buffer. When the economy does well rates are higher; when it does badly rates are low but earnings capacity is weaker. The same logic explains why many Finnish finance directors swapped fixed-rate bonds into floating.

The Euribor anecdote that is actually advice

Miettinen recounts putting his own mortgage out to tender and getting, half as a joke, a piece of advice from someone on the Stora Enso treasury side: take the one-month Euribor if you can get it. He did, and it turned out to be a good choice. He also describes playing the banks off against each other by promising to move his fund investments to whoever gave him the cheapest loan — applying the relationship manager framework to his own household.

Tammivuori adds two caveats, and they matter more than the anecdote: the advice was suited to its moment, and a short rate requires risk tolerance in case the one-month Euribor turns out to be considerably higher. This is not investment or financing advice.

2. Green financing: the question has flipped

The observation in this section is how quickly the burden of proof has shifted.

An investor’s first question is no longer whether the debt is green. It is: if it is not green, why not. And after that about 80 per cent of the questions are about what it would look like if it were, and what work is being done to get there.

Caruna has issued green bonds, and about 99 per cent of the company’s use of funds fits the EU taxonomy’s definition of green financing. Tammivuori adds that the market is already moving on: green alone has “fallen behind”, and the talk is now of sustainable bonds, with more included.

Miettinen extends the mechanism to households with a question that is good precisely because it is concrete: should a bank ask a different margin of an oil-heated house than a geothermal one? Tammivuori’s answer leans yes — money has the power to steer — and he adds that geothermal has lower running costs in any case.

It is worth noticing what the episode does not cover: how applying the taxonomy affects the sectors for which a 99 per cent share is not possible. Tammivuori mentions it in a single sentence — “for some it will be a challenge” — and it is not returned to.

3. Caruna’s controversies: what they were actually about

The episode works through two controversies many people remember from the headlines but few from the mechanism. Here they are reported as the guest’s explanations.

Controversy 1: the change of ownership and interest costs. Foreign debt was used in the acquisition, and a picture formed in public of interest income leaking out of Finland. Tammivuori’s counter-argument has two parts:

1. Electricity distribution is extremely capital intensive — in his view significantly more so than the forest or mining industries. A great deal of capital is needed and it comes from many sources.
2. Capital is paid for. A shareholder loan is subordinated to the secured debt raised in the market, it has a different priority in, for example, a bankruptcy, and it therefore carries a higher rate. That, he says, is what the public debate did not grasp.

The structure as given in the episode: about 2.5 billion euros of external debt, an amount maximised within the constraints of the credit rating. The rating is BBB− (S&P), that is investment grade, and Tammivuori says BBB and BBB+ are the best places for an infrastructure company to sit. What the rating does not allow has been borrowed as a shareholder loan.

He also mentions that the previous government narrowed the deductibility of interest costs in Finland.

Controversy 2: storms and undergrounding. Trees fell on lines, power was out for days, and an obligation followed. Tammivuori’s most important correction is this:

The requirement is not that cables must go underground. The requirement is to build a weather-proof grid.

Weather-proofing means two concrete deadlines: in planned areas power must be restored within six hours after a storm, in sparsely populated areas within 36 hours. The requirements take effect in 2028, 2032 or 2036 depending on the company and the structure of its network.

From which follows why undergrounding has in many places ended up being the chosen means: with over 700,000 customers and a wide storm, not much can be repaired in six hours. Undergrounding is also the most cost-effective option over the lifecycle in many places. The work is on schedule, Tammivuori says, and was started in the areas that carry the most electricity and have been most fault-prone.

4. “How did all of this go so well”

The question is Mikael Jungner’s, and it is put in the episode in exactly that form: green electricity in abundance and the grids in good order. Tammivuori’s answer starts by conceding the point — the situation is good, Finland decoupled from Russian fossil energy quickly, and a lot of investment has been in the pipeline — but turns immediately into a warning, and that warning is the episode’s single most important idea.

The most dangerous thing right now is to be lulled by everything being fine today. In energy, ten years is a normal investment cycle from start to finish. If the capacity is not already on the drawing board, it will not be completed this decade.

In other words: what the situation looks like in the 2040s is decided now. And Tammivuori says outright that things are already late — things that should have been done a few years ago. The concrete proof is a bottleneck in the network: Fingrid has announced that no new wind power can be connected in Ostrobothnia for some years. Caruna has similar locations.

5. Two-way electricity and what is hard about it

• In the network area one in ten detached houses already has panels on the roof — ten per cent of detached houses are also electricity producers, and some of that power flows into the grid.
• Electricity used to travel one way from large coal and nuclear plants. Now it travels in every direction, and the grid company’s task — maintaining the quality and balance of the supply — is a different task from before. Electricity has to be produced at every moment in the same quantity as it is consumed.
• The speed of the change is what the industry is not used to. That is Tammivuori’s own self-criticism, not the interviewer’s observation.

Miettinen contributes two asides worth noting. The first is consultants’ observation that the Finnish habit of switching the saunas on all at once has hardened the system — a kind of desensitisation therapy for the variability of wind power. The second is Germany as a counter-example: a poor backbone network and a north–south problem precisely when the wind capacity is being built in the north.

Finland’s price area. Miettinen asks whether one price area is better than several. Tammivuori’s answer is technical rather than political: price areas exist where the network has bottlenecks. Finland currently has none, so one price area works. What the system needs more of is flexibility — both demand-side flexibility and good cross-border connections, so that power can be imported from Sweden when the wind is not blowing here.

6. Demand grows 50 per cent — and the network 100

The clearest pair of numbers in the episode. Electricity consumption was 82 terawatt hours, and in the scenario it rises by about 50 per cent by 2040 — on the order of 120 terawatt hours.

Where the growth comes from, in Tammivuori’s order:

1. Electrification of industry — clearly the largest item.
2. Green hydrogen, where his own emphasis matters: Finland is a favourable place to produce green electricity and hydrogen, but the downstream processing should also happen in Finland. Being only a seller of energy is not the role that sustains a standard of living and a welfare state.
3. Electrification of transport.
4. Electrification of heating — replacing coal- and gas-based district heating systems.

And here is the episode’s most counterintuitive figure, which Miettinen brings out: a 50 per cent increase in consumption requires about 100 per cent more network capacity, because consumption is not spread evenly in time. Capacity is dimensioned for the peak, not the average.

7. Flexibility, negative prices and the best battery in the house

• Night power in a new form. Charging an electric car at night, when the wind blows and consumption is low, is worthwhile from the system’s point of view. Tammivuori compares it to the way hot water tanks used to be heated on night electricity.
• Intelligence rather than the clock. The essential difference from the old system is that control should not be based on the time of day (one to six in the morning) but on when electricity is actually available and cheap.
• Negative prices. Miettinen says he means to invite the chief investment officer of Veritas, who has studied negative prices — and notes that a negative price is not peculiar to electricity: oil had one in 2020. Tammivuori’s explanation is simple: when there is not enough consumption relative to production, and shutting production down in the short term costs more than continuing it, the price goes below zero. There will be more such situations.
• Rising volatility is a feature. When the price is sometimes expensive and sometimes cheap, an incentive is created to invest in intelligence: automation, relays, control of freezers and heaters.
• The best battery in the house right now is the electric car. It is already a significant battery in households, and if charging can be timed well, there is a benefit at system level too.

8. The regulatory model, WACC and what is at stake in it

This is the hardest and, for the episode, the most central section — and this is where the interest disclosure weighs most (see the note above).

How the supervision works. The Energy Authority is an independent body that decides the regulatory model. The prices billed to the customer must be cost-based. Because the companies are regulated local monopolies, artificial competitive elements have been built into the model to reward efficient operation in both operating costs and investment.

WACC — the weighted average cost of capital — states what return a regulated entity may earn on invested capital. Miettinen adds two points that are the model’s real difficulty:

1. The capital base. A return percentage alone is not enough; the base to which the percentage applies must also be defined. The incentives have to produce a base that is large but not wasteful — that is, investments that are justified from the regulator’s and the consumer’s point of view.
2. Perfection is unattainable, because electricity prices and interest rates change.

The model’s most important property, according to Tammivuori, is that it is market-based: the Finnish model rests on the yield of the Finnish ten-year government bond, averaged annually, and the other parameters also come from the market. The company’s own room for manoeuvre lies in trying to finance itself more efficiently than the WACC allows.

What worries him. That the model should enable and encourage the necessary investment — so that the network does not become a bottleneck for the green transition. This is the clearest piece of advocacy in the episode and should be read as such: it is the industry’s position, and the counterweight would be the view that the price paid by the consumer must not rise unnecessarily. Nobody in the episode puts that view.

Miettinen mentions here his earlier guests, National Coalition MPs Heikki Vestman and Ville Valkonen, with whom the same subject has been covered.

9. Ownership, size and a listing

The owners. Elo (a Finnish pension insurer), AMF (Swedish pension money), the Ontario Teachers’ Pension Plan, and KKR, behind whose funds there is likewise pension money. Tammivuori’s reasoning is structural: the nature of the investment — a low but highly predictable return, as long as the operating environment stays stable — suits pension money specifically.

From which follows the answer to the listing question directly: unlikely. Miettinen compares the situation to Tornator, on whose board he sat — a capital-intensive holding requiring long-horizon ownership, where forest is the counterpart of the network.

The bonds mostly go outside the country’s borders; Tammivuori’s estimate is about 90 per cent. Finnish funds and institutions can invest in them.

Size. Caruna is not a large company: revenue of about half a billion euros. But about 1.5 million Finns use its service every day — nearly every third Finn, at home, at work or while travelling. Tammivuori’s own description of the job is understated and worth quoting:

We succeed best when the customers do not in practice notice that we are doing the work at all.

10. What an electricity bill is made of

The clearest consumer section in the episode, and worth reading carefully, because it contains two separate things.

The structure of the network. Fingrid is the transmission system operator and runs the high-voltage transmission grid (110–400 kV); Finland has one transmission grid. Distribution companies operate 110 kV plus the medium and low voltages that reach the home. The analogy is Tammivuori’s:

Fingrid is the motorways and trunk roads. We are the 80 roads and then the 60, the 50 and the 30 — the little trickles that come all the way home. If the road is cut, you do not get home.

The reason for the voltage levels is losses: the higher the voltage, the smaller the proportional losses, so power is best carried at as high a voltage as possible as close to the customer as possible. Transformers handle the step down.

The thirds of the bill. When electricity costs roughly 4–5 cents a kilowatt hour, Tammivuori’s rule of thumb is:

And here is the part that most often confuses people: the electricity tax is collected with the distribution charge, even though it relates to consumption. That is why the bottom line of a distribution bill looks large. Tammivuori says he looked at his own spring distribution bill: 68 per cent of it was tax — and part of the remainder is Fingrid’s charges.

Transmission charges will rise. Because a great deal is being invested in the transmission grid, Fingrid’s charges will rise. The regulatory model works as a pass-through: what Fingrid bills the distribution company is billed to the customer. No margin is created along the way.

11. Who spot-priced electricity suits, and the message to the government

Tammivuori’s answer on spot pricing is precise and conditional, and it is not a recommendation for everyone:

Someone who can adjust their own consumption within the day — charge the car cheaply, automate the heating and the hot water — and who has the capacity to absorb a large bill, because sometimes the bill can be large.

The message to the government. Tammivuori: a predictable and stable operating environment. The reasoning is financial and it ties the episode’s two halves together — the greater the risk of surprises, the higher the cost of capital, and the cost of capital ends up in the customer’s bill. Miettinen adds his own message and marks it as his: lower taxes.

Why grid companies do not compete for customers. The closing question is a good one and the answer is clear: they are regulated regional monopolies — where you live determines your company. The competition is for capital, for skilled staff and for the contractors who carry out the investments. The reason is economic rather than legal:

Building networks is so extraordinarily expensive that it is not worth building a single one more in Finland than we have. Like building motorways side by side.

Claims presented as claims

• The assessment that electricity distribution is more capital intensive than the forest and mining industries.
• The assessment that Finnish distribution pricing is among the cheapest in Europe.
• The scenario of +50 per cent consumption and +100 per cent network capacity by 2040.
• The view on what the regulatory model should enable — stated from the perspective of the CEO of a regulated company.
• The assessment that a listing is unlikely.

What stays with you

1. A ten-year investment cycle means the 2040s are decided now. This is the episode’s most important sentence and it holds regardless of what one thinks of Caruna.
2. Weather-proofing is not an undergrounding mandate but a deadline mandate — six hours in planned areas, 36 outside, in force between 2028 and 2036.
3. +50 % of consumption needs +100 % of network, because dimensioning follows the peak and not the average.
4. A third of the electricity bill goes to the state — and because the electricity tax is collected with the distribution charge, the distribution company looks more expensive on the bill than it is.
5. Volatility is an incentive. Price variation is what makes home automation investment worthwhile.

How the episode runs

• 00:00 — Jyrki Tammivuori and an old banking relationship
• 00:55 — Stora Enso’s revolving credit facility without covenants
• 02:24 — What covenants are and why they suit Caruna
• 03:04 — Capital has to be competed for, NATO membership helps
• 04:11 — Green bonds and the EU taxonomy
• 06:06 — The one-month Euribor: good advice disguised as a joke
• 08:17 — A floating rate as a natural buffer
• 09:24 — Caruna’s change of ownership and the interest rate row
• 10:31 — Electricity distribution is extremely capital intensive
• 11:07 — 2.5 billion in debt and a BBB credit rating
• 12:13 — The storm controversy and the weather-proof grid
• 14:25 — How did all of this go so well
• 15:09 — The ten-year investment cycle
• 16:55 — Finnish electricity distribution is among the cheapest in Europe
• 17:54 — A two-way grid and panels on the roofs
• 19:06 — Grid bottlenecks and wind power in Ostrobothnia
• 19:57 — One price area, flexibility and cross-border transfers
• 21:17 — Electricity consumption grows by 50 per cent
• 22:58 — Electric cars, night power and smart consumption
• 24:24 — Negative prices and rising volatility
• 26:36 — The regulatory model and the WACC framework
• 28:00 — The regulatory decisions for the next eight years
• 30:39 — Pension money from Finland, Sweden and Canada as owners
• 32:20 — A listing is unlikely
• 34:11 — Caruna: half a billion in revenue, 1.5 million users
• 35:07 — Fingrid as the motorway, the distribution grid as the roads
• 37:17 — Passing transmission charges through
• 39:00 — The three thirds of the electricity bill
• 41:34 — Who spot-priced electricity suits
• 42:32 — A message to the government
• 43:38 — Why grid companies do not compete for customers
• 44:53 — Closing words and the Platinum continuation

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