Key drivers and risks
results are exposed to a number of economic, strategic, political, financial
and operational risks.
One of the key factors
influencing Fortum's business performance is the wholesale price of electricity
in the Nordic region. The key drivers behind the wholesale price development in
the Nordic region are the supply-demand balance, the prices of fuel and CO2
emissions allowances, and the hydrological situation.
The continued uncertainty
in the global and European economies has kept the outlook for economic growth
unpredictable. The overall economic uncertainty impacts commodity and CO2
emissions allowance prices, and this could maintain downward pressure on the
Nordic wholesale price of electricity. In Fortum's Russian business, the key drivers
are economic growth, the rouble exchange rate, regulation around the heat
business, and further development of electricity and capacity markets. In all
regions, fuel prices and power plant availability also impact profitability. In
addition, increased volatility in exchange rates due to financial turbulence could
have both translation and transaction effects on Fortum's financials,
especially through the Russian rouble and Swedish krona.
In the Nordic
countries, the regulatory and fiscal environment for the energy sector has also
added risks for utility companies. The main strategic risk is that the
regulatory and market environment develops in a way that we have not been able
to foresee and prepare for. In response to these uncertainties, Fortum has
analysed and assessed a number of future energy market and regulation scenarios
including the impact of these on different generation forms and technologies.
As a result, Fortum’s strategy was renewed in 2016 to include broadening the
base of revenues and diversification into new businesses, technologies and
uncertainty, electricity is expected to continue to gain a higher share of
total energy consumption. Electricity demand in the Nordic countries is expected
to grow by approximately 0.5% on average, while the growth rate for the next
few years will largely be determined by macroeconomic developments in Europe,
and especially in the Nordic countries.
During 2016, oil and coal prices
increased, while the price of CO2 emission allowances (EUA) declined.
The price of electricity for the upcoming twelve months appreciated in the
Nordic area as well as in Germany, and both are now on higher levels than at
the end of 2015.
In mid-January 2017, the
quotation for coal (ICE Rotterdam) for the remainder of 2016 was around USD 74 per
tonne and for CO2 emission allowances for 2017 around EUR 5 per
tonne. The Nordic system electricity forward price in Nasdaq Commodities for the
rest of 2017 was around EUR 26 per MWh and for 2018 around EUR 23 per MWh. In
Germany, the electricity forward price for the rest of 2017 was around EUR 34 per
MWh and for 2018 around EUR 30 per MWh. Nordic water reservoirs were about 9 TWh
below the long-term average and 19 TWh below the corresponding level in 2016.
The Generation segment’s achieved
Nordic power price typically depends on such factors as the hedge ratios, hedge
prices, spot prices, availability and utilisation of Fortum's flexible
production portfolio, and currency fluctuations. Excluding the potential
effects from changes in the power generation mix, a 1 EUR/MWh change in the Generation
segment’s Nordic power sales achieved price will result in an approximately EUR
45 million change in Fortum's annual comparable operating profit. In addition,
the comparable operating profit of the Generation segment will be affected by
the possible thermal power generation volumes and its profits.
As a result of the nuclear
stress tests in the EU, the Swedish nuclear safety authority (SSM) has decided
to propose new regulations for Swedish nuclear reactors. The process is ongoing.
Fortum emphasises that maintaining a high level of nuclear safety is the highest
priority, but considers EU-level harmonisation of nuclear safety requirements
to be of continued importance.
The Swedish Government increased the
nuclear waste fund fee from approximately 0.022 to approximately 0.04 SEK/kWh
for the 2015-2017 period. The impact on Fortum is approximately EUR 25 million
annually. The process to review the Swedish nuclear waste fees is done in a
three-year cycle. The Swedish Nuclear Fuel and Waste Management Co (SKB) will
update the new technical plan in early 2017 for SSM to review. The final
decision on the new nuclear waste fees will be made by the Swedish Government
in December 2017. However, as a result of the decision on early closure of
nuclear power plants, the Swedish Radiation Safety Authority, SSM, recalculated
the waste fees for the Oskarshamn and Ringhals power plants.
In September 2016, the Swedish
government presented the budget proposal for the coming years; One of the key
elements was the proposal that taxation of different energy production forms
should be more equal and the tax burden of nuclear and hydro should be taken to
the level of other production technologies. The budget states that the nuclear
capacity tax will be reduced to 1,500 SEK/MW per month from 1 July 2017 and
abolished on 1 January 2018. In 2017, the tax is estimated to decrease by approximately
EUR 32 million to EUR 52 million due to the tax decrease and by another EUR 5
million due to the premature closure of Oskarshamn 1 in the middle of the year.
In 2018, there is no capacity tax.
A decision was also made to
decrease the hydropower real-estate tax over a four-year period beginning in
2017, from todays 2.8% to 0.5%. The real-estate tax on hydro will, as stated in
the government’s budget, be reduced in four steps: in January 2017 to 2.2%; in
January 2018 to 1.6%; in January 2019 to 1.0%; and in January 2020 to 0.5%. In 2017,
the tax is estimated to decrease by approximately EUR 20 million to
approximately EUR 95 million.
In addition to the decrease in
the tax rate, the hydropower real-estate tax values, which are linked to
electricity prices, will be updated starting in 2019. The real-estate tax
values are updated every six years. With the current low electricity prices the
tax values in 2019 will be clearly lower than today. The process for renewing
existing hydro permits will also be reformed.
The tax reductions will be financed through a higher
electricity consumption tax that will mainly affect households. Electricity-intensive
industries will be exempt.
In October 2016, the Swedish Energy Agency presented a concrete proposal
on how to increase the production of renewable electricity by 18 TWh in
2020-2030 within the electricity certificate system, as part of the Energy
Agreement. The government is expected to decide on the proposal in late March
In 2015, OKG AB decided to
permanently discontinue electricity production at Oskarshamn unit 1 and to start
decommissioning after the permission for service operation has been granted by
the relevant Swedish authorities. The date for discontinued production and the
start of decommissioning has been set to 30 June 2017. Oskarshamn unit 2, which
has been out of operation since June 2013 due to an extensive safety
modernisation, will stay out of operation. The closing processes are estimated
to take several years.
In May, the Finnish Government
decided to increase the tax on heating fuels by EUR 90 million annually from
2017 onwards. The negative impact on Fortum is estimated to be approximately
EUR 5 million per year.
The Russia segment's new capacity
generation built after 2007 under the Russian Capacity Supply Agreement (CSA)
is a key driver for earnings growth in Russia, as it is expected to bring
income from new volumes sold and also to receive considerably higher capacity
payments than the old capacity. Fortum will receive guaranteed capacity payments
for a period of 10 years from the commissioning of a plant. The received CSA
payment will vary depending on the age, location, size and type of the plants,
as well as on seasonality and availability. CSA payments can
vary somewhat annually because they are linked to Russian Government long-term
bonds with 8 to 10 years maturity. In addition, the regulator will review the earnings from
the electricity-only market three years and six years after the commissioning
of a unit and could revise the CSA payments accordingly.
The Competitive Capacity Selection for
generation built prior to 2008 (CCS) takes place annually. The long-term CCS
for 2017-2019 was held at the end of 2015, and the long-term CCS for 2020 was
held in September 2016. The majority of Fortum’s plants were selected. The
volume of Fortum’s installed "old" capacity not selected in the
auction totalled 175 MW (out of 2,214 MW), for which Fortum has obtained forced
mode status, i.e. it will receive payments for the capacity.
In December 2016, a bill draft
containing the main principles of the heat reform, approved by the Russian
Government in 2014, passed its first reading in the Russian Parliament. The
draft contradicts the Roadmap in some crucial points, e.g. it does not include
the requirement of the price liberalisation across the whole country. Instead
it requires the consent of both the regional and the local authorities before
starting the reform in certain pilot regions. If implemented, the reform should
provide heat market liberalisation in 5 or 10 years, depending on the
The targeted operating profit
(EBIT) level of RUB 18.2 billion in the Russia segment is expected to be
reached during 2017-2018. The segment’s profits are impacted by changes in
power demand, gas prices and other regulatory developments. Economic sanctions,
the currency crisis, oil prices and the inflation have impacted overall demand.
As a result, gas prices and electricity prices have not developed favourably as
expected. The Russian annual average gas price growth was 3.6% in 2016. Fortum
estimates the Russian annual average gas price growth to be 2.0% in 2017.
result level will be volatile due to the translation effect. The income
statements of non-euro subsidiaries are translated into the Group reporting
currency using average exchange rates. The Russia segment's result is also impacted
by seasonal volatility caused by the nature of the heat business, with the
first and last quarter being clearly the strongest.
expenditure and divestments
Fortum currently expects its capital
expenditure, excluding acquisitions, to be approximately EUR 800 million
in 2017. The annual maintenance capital expenditure is estimated to be below EUR
300 million in 2017, well below the level of depreciation.
The effective corporate income tax
rate for Fortum in 2017 is estimated to be 19-21%, excluding the impact of the
share of profits of associated companies and joint ventures, non-taxable
capital gains and non-recurring items.
At the end
of 2016, approximately 60% of Generation's estimated Nordic power sales volume
was hedged at EUR 30 per MWh for the 2017 calendar year and approximately 35%
at EUR 26 per MWh for the 2018 calendar year.
The reported hedge ratios may vary significantly,
depending on Fortum's actions on the electricity derivatives markets. Hedges
are mainly financial contracts, most of them Nasdaq Commodities forwards.
(Text from Fortum's 2016 Financial Statements Bulletin)