Operating environment and market position

Operating and regulatory environment (2019 Half-year Financial Report)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 88 (88) TWh during the second quarter of 2019. Temperatures were close to the long-term average and industrial demand was almost unchanged. During January-June 2019, electricity consumption in the Nordic countries was 204 (209) TWh, as milder weather during the winter months caused a decrease in the power demand.

At the beginning of 2019, the Nordic water reservoirs were at 74 TWh, which is 10 TWh lower than the long-term average and 8 TWh lower than one year earlier. At the end of the second quarter of 2019, the reservoirs were at 90 TWh, which is 6 TWh above the long-term average and 14 TWh higher than one year earlier. In April 2019, the Norwegian energy regulator (NVE) revised the Norwegian reservoir statistics. The reported reference levels and historical deviations have been updated accordingly.

In the second quarter of 2019, the average system spot price in Nord Pool was EUR 35.6 (39.0) per MWh. The average area price in Finland was EUR 37.4 (42.0) per MWh and in Sweden (SE3, Stockholm) EUR 33.0 (38.5) per MWh. The rainy and mild weather during the first half of 2019 led to rapidly increasing water reservoirs, which in turn caused downward pressure on the Nordic spot price. In addition, declining gas prices kept the Continental European spot market stable, despite the significant increase in the CO2 price. During January-June 2019, the average system spot price in Nord Pool was EUR 41.2 (38.8) per MWh. The average area price in Finland was EUR 42.4 (42.0) per MWh and in Sweden (SE3, Stockholm) EUR 39.7 (38.8) per MWh.

In Germany, the average spot price decreased marginally to EUR 35.8 (36.0) per MWh in the second quarter of 2019. In January-June 2019, the average German spot price was EUR 38.3 (35.7) per MWh.

The market price of CO2 emission allowances (EUA) increased from EUR 22 per tonne at the beginning of the second quarter to EUR 26 per tonne at the end of the second quarter of 2019.

Russia

Fortum operates mainly 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. The Russian market is divided into two price zones and Fortum operates in the First Price Zone (European and Urals part of Russia).

According to preliminary statistics, Russian electricity consumption was 244 (241) TWh during the second quarter of 2019. The corresponding figure for the First Price Zone was 186 (185) TWh. In January-June 2019, Russian electricity consumption was 523 (530) TWh and 406 (406) TWh in the First Price Zone.

In the second quarter of 2019, the average electricity spot price, excluding capacity prices, increased by 12% to RUB 1,334 (1,191) per MWh in the First Price Zone. The spot price in the Urals hub increased by 15% and was RUB 1,151 (1,004) per MWh. In January-June 2019, the average electricity spot price, excluding capacity prices, was RUB 1,321 (1,189) per MWh in the First Price Zone and RUB 1,140 (1,008) per MWh in the Urals hub.

More detailed information about the market fundamentals is included in the tables at the end of the report (pages 63-65).

Regulatory environment

Agreement on the EU long-term climate target postponed

The European Council failed to agree on the 2050 climate target in June 2019, but a large majority of member states back the 2050 climate neutrality target. Only Poland, Hungary, the Czech Republic, and Estonia are blocking an agreement. In line with the Paris Agreement, the EU has to submit its long-term strategy to the UNFCCC by early 2020. The issue will likely be on the agenda of an October summit of EU leaders. After the adoption of the 2050 target, proposals for the EU intermediary targets and policies for 2030-2050 are expected from the next Commission.

Fortum encourages the EU to adopt the net-zero emission target for 2050 as soon as possible. Following that, targets for 2030-2040 should be aligned with the new 2050 target. Strengthening and extending the EU Emission Trading Scheme (ETS) is important for a cost-efficient decarbonisation of the EU economy.

Taxonomy of sustainable finance progressing

In March 2019, the European Parliament adopted its position on the Commission's proposal for the taxonomy of sustainable finance. In the Parliament's position, non-renewable energy (including nuclear), gas pipelines, and waste incineration are not considered sustainable. The Council’s position is expected at the earliest in September 2019. The financing costs are likely to increase for investments not being classified as sustainable. Technologies classified as unsustainable would also be excluded from public financing.

As such, the objective of the sustainable finance initiative is in line with Fortum's strategy, but Fortum has advocated for an approach based on CO2 emissions and technology-neutrality taking into account compliance with the Paris Agreement.

Taxation in the Finnish governmental programme

The political programme of the new Finnish Government, published on 3 June 2019, contains several tax-related proposals. In order to support decarbonisation through electrification, the electricity tax applicable to energy-consuming industries will be lowered towards the EU minimum (to EUR 0.5 per MWh from the current EUR 7.03 per MWh). This proposed tax reduction would make the tax levels more aligned with Sweden. Heat pumps connected to a district heating network will be included in the same tax category as energy-consuming industries. The details of the tax reduction process, including the timetable, are still open but overall this is a very positive change and supports electrification.

In line with Finland's decarbonisation ambition to become carbon neutral by 2035, the Government will further increase the environmental taxes of heating fuels. EUR 100 million of tax revenues will be collected from heating fuels during the next four years. The estimated negative result impact for Fortum from the tax increases of heating fuels and lower electricity taxes is around EUR 7 million annually.

Impact of Swedish tax proposals on energy production

On 10 April 2019, the Swedish Government proposed new taxes on fossil fuels used for heat production in CHP plants. Without taking any actions the new tax would increase the costs for Stockholm Exergi by SEK 300 million annually for the period 2020-2022. Following the tax proposal, the Board of Stockholm Exergi decided to decommission one unit of the CHP6 in Stockholm and to keep the other one only as a reserve. Stockholm Exergi expects that these actions and optimisation of the district heat system will limit the costs to SEK 150 million annually. There is also a proposal for tax on waste incineration estimated at 100 SEK/tonne. If realised, the total annual costs for Stockholm Exergi would increase by SEK 100 million. A final decision on the new tax is expected during September 2019.

German Coal Commission's recommendations proceeding into legislation

In January 2019, the German Coal Commission proposed a step-wise phase-out of coal in energy production by 2038 at the latest. In May, the Government proposed, as a first implementation measure, draft legislation that offers financial support for the regions affected most by the coal and lignite phase-out. Other key elements, including the detailed timing and rules on selecting the plants to be closed, are expected in the autumn. In accordance with the recommendations by the Coal Commission, the Government is also expected to give a proposal for withdrawal of emission allowances from the market corresponding to the coal phase-out in order to avoid weakening the EU ETS.

Legislation on Polish electricity end-use prices into force

The Polish Parliament has approved legislation related to the electricity price freeze and it entered into force on 1 July 2019. According to the Ministry of Energy, this third amendment meets the requirements set by the European Commission. According to the law, electricity prices will remain unchanged in 2019 for households, small enterprises, state organisational units, local governments, and hospitals. The related secondary legislation concerning compensation methodology to compensate losses for electricity suppliers is still under preparation.

The law also changes legislation on energy efficiency and biofuels, and extends the validity of white certificates until 30 June 2021.

Market position (year end 2017)

Fortum is the 3rd largest power generator and the largest electricity retailer in the Nordic countries. Globally, we are one of the leading heat producers. As two thirds of our power production is hydro and nuclear, Fortum is also among the lowest-emitting generators in Europe.

Nordic power generation 2017

Nordic electricity retail 2017

Largest heat producers 2017

Largest power generators 2017