I'd like to share a behind-the-scenes view of how we work within Storebrand's "Team Solutions", managing our Solutions funds. This time, we'll look at insights from my recent site visit to NKT, a Denmark-based power cable technology company, at its production facilities in Karlskrona, Sweden.
In Team Solutions, portfolio construction is an ongoing process. Existing companies and potential candidates are monitored continuously for their thematic strength, financial returns, and alignment with SDG targets. One of the tools to monitor a company is company visits. We use company visits as a tool in selecting potential holdings, monitoring existing holdings and gathering valuable industry insights. The visit also allows an opportunity to have a dialogue about the opportunities and challenges with people that are steering the company.
A site visit at a manufacturing facility like NKT's further contributes to a better understanding of the production process and end products of the company. Insights from visits like this can be used when comparing to and evaluating other companies.
This September, I had the opportunity to visit NKT. I share some of my impressions below but let us first get a grip on why power cable technology companies are important for transitioning to clean energy systems.
Fundamentals of clean energy and its requirements
The transition from fossil fuels to clean energy has accelerated in recent years and to deliver on the targets set by countries around the globe, we need more. Upcoming surge in demand and supply of electricity places power grids at the center of the transition.
The power grid is a complex, interconnected system bringing together generation, transmission, and distribution of electricity. And it is a critical part of the infrastructure. It needs to cope with both short- and long-term variability in production and consumption to ensure that the electricity supply is maintained.
The integration of distributed renewable sources into the power grid poses a challenge, as the grids were initially designed to accommodate large, centralised dispatchable power plants. We need substantial changes in our grid systems to ensure that renewable energy resources can be used with little loss of energy.
These changes require vast amounts of investments: According to Bloomberg NEF (BNEF), in 2022 USD 274 billion was invested in the power grid. However, this is not enough: BNEF forecasts that this annual expenditure needs to rise to nearly USD 1 trillion by 2050 to be able to follow a net-zero trajectory that supports more power generation capacity, serves new demand and replaces existing infrastructure. Hence, the challenges associated with the integration of renewable sources to the power grid pose great investment opportunities. (1)
One of the areas we find interesting is High-voltage direct current (HVDC) transmission. According to BNEF, an interconnected European power system is well underway, propelled by more renewable energy generation, particularly offshore wind, and greater interconnection between countries. The European Union (EU) has set interconnection target of at least 15% by 2030 to encourage EU countries to interconnect their installed electricity production capacity. (2) BNEF points to HVDC transmission as vital for realizing this future. (3)
Promising companies for greater grid efficiency
Three companies dominate the HVDC cable market in Europe: Prysmian Group, Nexans and NKT. All three companies are currently holdings in Storebrand Renewable Energy. While all three companies benefit from the trends outlined, they bring different qualities to the portfolio. Prysmian is more diversified with a product portfolio that also includes cables for the telecom industry, buildings and railways. While Nexans also has a diverse portfolio the company is on a journey to focus and become a pure electrification player. NKT offers a purer exposure to HVDC transmission.
NKT hosts Team Solutions
On September 4th 2023, Team Solutions had the opportunity to visit NKT at the company factory in Karlskrona, Sweden. During the visit, we were hosted by Claes Westerlind, the President and Chief Executive Officer (CEO); Darren Fennell, Executive Vice President and Head of HV Solutions Karlskrona; Louise Olausson, Head of Production Operations; and Michael Nass Nielsen, Head of Investor Relations.
The program included a luncheon and a company presentation followed by a factory tour. Many different topics were covered during the visit. We were given a brief history of Karlskrona and its historical importance in Sweden, efforts in concert with local actors towards attracting talent to the region and the company, Claes Westerlind's background in the company and on his recent role change as the CEO, as well as the company's productions capacity, product development and project management processes, and financial targets.
Amazing view from the top of NKT’s second extrusion tower, a key part of the company’s investments in the high-voltage power cable business. Extrusion towers are important in the production of high-voltage power cables. Source: Nader Hakimi Fard
One of the topics that struck me as important involves attracting talent. As the company invests in capacity to meet the demand in Karlskrona, talent acquisition also becomes key in a competitive environment. NKT has close collaboration with other industrial partners, the public sector and Blekinge Tekniska Högskola, the regional technical university. This partnership serves both the Blekinge region and the company well in giving the region a competitive edge in attracting talent.
Key takeaways from the visit
Producing HVDC cables is a complex process that takes time and where quality is key. The industry has high barriers to entry which explains the market concentration among the three companies mentioned. Demand is high and NKT has recently announced that the company will invest around EUR 1bn in its high-voltage power cable business to build a new factory including a third extrusion tower in Karlskrona, Sweden, and a new market-leading power cable vessel in order to deliver on order intake, prepare for the continued strong market outlook, and execute the record-high order backlog.
Based on what we observed on the ground, NKT has given us more confidence that it is a true solutions company, ensuring better connectivity, literally in the middle of the energy transition under way.
References
- BNEF "New Energy Outlook: Grids" published on 2 March 2023
- Electricity interconnection targets (europa.eu)
- BNEF "High-Voltage Transmission to Boost European Supergrid Mesh" published on 11 October 2022
