Leppikoski power plant in Finland

Market development

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 107 (103) terawatt-hours (TWh) during the fourth quarter of 2016. In 2016, electricity consumption increased by 9 TWh to 390 (381) TWh, mainly due to closer-to-long-term average temperature compared to the warmer year in 2015, although modest demand growth was seen in the Nordic countries.

At the beginning of 2016, the Nordic water reservoirs were at 98 TWh, which is 15 TWh above the long-term average and 18 TWh higher than a year earlier. By the end of the year, reservoirs were 8 TWh below the long-term average and 23 TWh lower than at the end of 2015. Reservoir levels have decreased due to low precipitation in the Nordic area and high hydro production mainly in Norway during 2016.

In the fourth quarter of 2016, the Nord Pool average system spot price in Nord Pool was EUR 34.4 (21.9) per MWh. The average area price in Finland was EUR 37.5 (30.6) per MWh and in Sweden SE3 (Stockholm) EUR 36.7 (23.0) per MWh. The spot price realisation for the fourth quarter was clearly stronger than 2015 due to the deficit in the Nordic hydro reservoirs, colder weather than in 2015 and strong development in the commodity market.

In January-December 2016, the Nord Pool average system spot price was EUR 26.9 (21.0) per MWh, with the area price in Finland at EUR 32.4 (29.7) per MWh and in Sweden SE3 (Stockholm) at EUR 29.2 (22.0) per MWh. Nordic reservoirs turned from a 15 TWh surplus to an 8 TWh deficit during the year. 2016 was again warmer than normal, but less so than in 2015.

In Germany, the average spot price in the fourth quarter of 2016 was EUR 37.6 (33.2) per MWh, and in January-December 2016 EUR 29.0 (31.6) per MWh.

The market price of CO2 emission allowances (EUA) was EUR 8.1 per tonne at the beginning of the year. Throughout most of the fourth quarter and the whole calendar year the price fluctuated between EUR 4 and 6 per tonne and ended at EUR 6.5 per tonne at the end of 2016.

Russia

Fortum operates both in the Tyumen and Khanty-Mansiysk area of Western Siberia, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area of the Urals, which is dominated by the metal industry.

According to preliminary statistics, Russian electricity consumption was 287 (275) TWh in the fourth quarter of 2016. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 220 (211) TWh. In January-December 2016, Russian electricity consumption was 1,027 (1,007) TWh and the corresponding figure in Fortum’s operating area in the First price zone was 787 (772) TWh.

In the fourth quarter of 2016, the average electricity spot price, excluding capacity price, increased by 2.1% to RUB 1,203 (1,178) per MWh in the First price zone. In January-December 2016, the average electricity spot price, excluding capacity price, increased by 4.3% to RUB 1,204 (1,154) per MWh in the First price zone.

More detailed information about the market fundamentals is included in the tables at the end of the 2016 Financial Statement Bulletin.

European business environment and carbon market

Carbon pricing and emissions trading

The ratification of the global climate agreement adopted in Paris 2015, entered into force in November 2016. Preparation of implementation rules will take a couple of years, and the impact on the energy industry will become concrete only via legislation in different countries. The EU ratified the Agreement, but Russia’s ratification is not expected before 2020. Carbon pricing schemes are being planned in several countries. The start of the Chinese ETS in 2017 is expected to double the coverage of emissions subject to carbon pricing globally.

The EU Commission released an announcement on the implications of the Paris Agreement for the EU climate policy. The EU decided not to revise its climate target for 2030. Basically all EU climate regulation to implement the 2030 target was under review in 2016. The revision of the emissions trading directive (ETS) was under discussion in the Parliament and the Council, but adoption isn’t expected until late 2017 at the earliest or in 2018. Fortum and the electricity industry as a whole have highlighted the need to increase the ETS ambition and strengthen the market stability reserve mechanism.

Progress in implementation of the Energy Union

Year 2016 was the EU Energy Union's "year of delivery" with the release of three major legislative packages. The in early 2016 released "winter package" focused on security of supply and on heating and cooling (H&C). The new EU H&C strategy underlined the importance of decarbonisation of heating and cooling and the improvement of energy efficiency in the residential sector. The "summer package" contained a proposal for sharing the burden in the non-ETS sectors, i.e. binding national targets for member states to cut CO2 emissions in transport, buildings, agriculture and waste management in 2021-2030. The strategy has a strong focus on electrification of the transport sector while also recognising the role of biofuels. A broader "winter package" (Clean Energy for all Europeans) released in late 2016 completed to a large extent the legislative work in the field of energy. The winter package includes a renewal of the internal electricity market legislation, as well as energy efficiency and renewable energy directives with the intention to implement the related EU 2030 targets.

Swedish energy policy and taxation

The focus of the energy policy in 2016 was on the parliamentary energy commission’s work with the aim of developing a long-term energy policy for the period after 2030. In June, a broad parliamentary agreement for long-term Swedish energy policy was presented by the government and parts of the opposition. The agreement aims at a 100% renewable energy system by 2040, but with no actual limits regarding nuclear generation. The electricity certificate system will be prolonged providing for an additional 18 TWh of electricity from renewable energy sources during 2020-2030. The progress of the energy agreement will be followed-up every second year starting in 2018.

One of the key elements of the parliamentary agreement was the proposal that taxation of different energy production forms should be more equal, and that the tax burden of nuclear and hydro should be taken to the level of other production technologies. The tax on installed nuclear capacity will be reduced starting in July 2017 and totally abolished as of 2018. The regulatory framework for investment of the nuclear waste funds’ assets is suggested to be expanded to provide for a better long-term yield. The real-estate tax rate on hydro assets will be reduced from current 2.8% to the regular tax rate of 0.5% on real estate in four steps by 2020. In addition, a proposal for new hydro legislation is being prepared and is expected to be handed over to the parliament in autumn 2017.

Finnish energy policy and taxation

In late 2016 the Finnish Government published its energy and climate strategy in order to implement both the national energy and climate policy objectives of the Government’s strategic programme, as well as the EU 2030 energy and climate targets. The key elements are: increase the share of renewable energy to a minimum of 50% with a strong focus on bioenergy, launch of a limited support scheme for renewable electricity (2 TWh of electricity production is auctioned, based on technology neutral tendering, in 2018 - 2020), 30% biofuel blending obligation and some incentives for electric vehicles as well as a ban on the use of coal in energy production by 2030.

In addition, the Finnish Government decided to increase the tax on heating fuels from 2017 onwards. However, CHP continues to pay only 50% of the CO2 tax component, while the original aim was to increase it to 100%. The agreed tax model increases the tax on both the CO2 and the energy content components. The Government also decided to make an assessment during 2017 concerning the possibility to apply real estate tax rates applicable to power plants also to wind power. Currently windmills below 3 MW are in the scope of lower tax rates. The earlier announced mechanism to offset the indirect costs of the EU Emissions Trading System for energy intensive industries was also approved.

2/2/2017