Operating environment and market position

Operating and regulatory environment (Financial Statements 2018)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 108 (108) TWh during the fourth quarter of 2018. During 2018, electricity consumption in the Nordic countries was 399 (392) TWh. The higher consumption was mainly driven by colder weather during the first quarter of 2018 and the somewhat higher industrial consumption.

At the beginning of 2018, the Nordic water reservoirs were at 86 TWh, which is 3 TWh above the long-term average and 11 TWh higher than one year earlier. At the end of 2018, the reservoirs were at 74 TWh, which is 9 TWh below the long-term average and 12 TWh lower than one year earlier.

In the fourth quarter of 2018, the average system spot price in Nord Pool was EUR 47.6 (30.6) per MWh. The average area price in Finland was EUR 49.6 (33.0) per MWh and in Sweden (SE3, Stockholm) EUR 48.2 (31.1) per MWh. The dry hydrological situation combined with the clearly higher marginal cost for coal condense were the main reasons for the price increase. In 2018, the average system spot price in Nord Pool was EUR 44.0 (29.4) per MWh, the average area price in Finland was EUR 46.8 (33.2) per MWh and in Sweden SE3 (Stockholm) EUR 44.5 (31.2) per MWh.

In Germany, the average spot price increased to EUR 52.6 (33.0) per MWh in the fourth quarter of 2018. In 2018, the average spot price was EUR 44.5 (34.2) per MWh.

The market price of CO2 emission allowances (EUA) increased from EUR 8 per tonne at the beginning of the year to EUR 25 per tonne at the end of 2018.

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 286 (281) TWh during the fourth quarter of 2018. The corresponding figure for the First Price Zone was 219 (215) TWh. In 2018, Russian electricity consumption was 1,056 (1,035) TWh and the corresponding figure for the First Price Zone was 810 (799) TWh.

In the fourth quarter of 2018, the average electricity spot price, excluding capacity prices, increased by 7.2% to RUB 1,309 (1,221) per MWh in the First Price Zone. The spot price in the Urals hub increased by 5.9% and was RUB 1,099 (1,038) per MWh. In 2018, the average electricity spot price, excluding capacity price, increased by 3.6% to RUB 1,247 (1,204) per MWh in the First Price Zone and increased by 0.2% to RUB 1,043 (1,041) 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 74-76).

European regulatory environment

COP24 agreed on the operational rules of the Paris Agreement

On 15 December, the United Nations climate conference (COP24) in Poland approved the rules of the implementation of the Paris Agreement. The Agreement will come into force in 2020. The rules include monitoring and reporting of greenhouse gas emissions, reporting on climate finance, and the process for increasing the climate ambition in the future. However, rules on market mechanisms and global carbon markets are pending and will be negotiated in late 2019.

The Paris Agreement asks countries to submit their long-term climate strategies and revisions of the existing emission reduction commitments by early 2020. The current aggregated commitments are far from enough to meet the global goal of keeping the temperature increase below 1.5 °C. According to the International Panel on Climate Change (IPCC), this requires “rapid and far-reaching transitions” including carbon dioxide removal from the atmosphere. Global net carbon dioxide emissions have to decline by 45% from 2010 to 2030 and be net-zero by 2050. According to the IPCC, the power sector should reduce emissions by 100% well before 2050.

The EU 2050 climate strategy sets the long-term framework

On 28 November, the European Commission published the proposal "A Clean Planet for All", establishing a strategic vision for 2050. The Commission foresees a 30-50% decline in energy consumption and a significantly growing role of electricity by 50-200%. Concrete proposals for the EU targets and policies post-2030 are expected from the next Commission. 

Fortum considers the proposed strategy as ambitious and balanced. The carbon neutrality target for 2050 and the intermediate targets for 2030-2050 should be confirmed by the EU as soon as possible. In Fortum’s view, carbon pricing will be the key measure for reaching carbon neutrality, and the EU should develop a market mechanism to reward also the capture of CO2 directly from the air or from flue gases.

The German Coal Commission adopts its final report

The Coal Commission suggests in its report to the German Government that coal would be phased out from the German energy mix by 2038. In 2032, there will be an assessment on the option to phase-out coal already in 2035. The report suggests that after 2022 30 GW of coal capacity could be online meaning that 12.5 GW of coal capacity would have to be closed down compared to 2017. In 2030, only 17 GW of coal capacity would remain. Closing down nuclear and coal at the same time underlines the important role of gas in the energy mix.

The report proposes compensations for coal plant operators. A compensation to customers should be offered through lower grid fees or lowered electricity tax rates, as the Commission expects the power price to increase as a result of the closures. Also the regions suffering from the coal phase-out should receive compensation in order to mitigate the resulting negative structural effects on their economies. Furthermore, it is suggested that a consequent amount of CO2 allowances would be cancelled so that the national policy measure would not water down the operation of the EU Emission Trading Scheme (ETS).

Fortum hopes that the German Government will give its opinion on the report as soon as possible, and that the preparations for the respective laws and regulations will start swiftly. Detailed rules on compensations would be necessary for the operators to make decisions on their production capacities.

Sustainable financing rules affect the whole EU financing sector

In May 2018, the EU Commission presented the first set of legislative proposals based on the strategy and action plan of sustainable financing. This includes a proposal to develop an EU-wide taxonomy system to help investors assess the sustainability and impact of economic activities. In addition, the guidelines on non-financial reporting will be revised and EU labels for green financial products will be developed.

The risk related to the taxonomy development is, among other things, that it will take a negative view on certain low-carbon technologies (e.g. waste-to-energy and nuclear), which can increase the financing costs of future investments.

In Fortum's view, while supporting the overall objective of the Commission proposals, initiatives to promote sustainable investments in the energy sector have to be technology-neutral and aim for low-carbon fossil-free solutions. It is also essential to ensure that the planned taxonomy is developed in a transparent manner with a market-based approach.

EU waste package entered into force

The EU waste package, expected to effectively promote a circular economy, was officially published in June 2018 and member states are to implement the legislation by July 2020. The recycling targets for municipal solid waste and packaging waste will be increased and the landfilling of municipal waste will be further limited by 2030. Further, the quality and comparability of waste statistics will be improved, the calculation methods for recycling targets will be aligned, and e-registers for hazardous waste will be established.

Rules on sustainable plastics use

In January 2018, the EU Commission published a communication for an EU plastics strategy. The target is to transform the way plastic products are designed, produced, used, and recycled in the EU. Better design of plastic products, higher recycling rates, and better quality recyclates will help boost the markets for secondary raw material plastics with greater added value for a competitive European plastics industry. All Nordic countries have developed their own roadmaps on sustainable plastics use.

Fortum welcomes the initiative to boost the markets for recycled plastics. The plastics strategy is expected to result in business opportunities for Fortum's recycling and waste solutions.

Unexpected end-user price freeze in Poland

On 1 January 2019, the new Act on the Excise Tax and changes in other laws suddenly and unexpectedly came into effect in Poland, freezing end-user electricity prices at the level of 30 June 2018, with a proposed governmental mechanism to compensate suppliers for potential losses. The price freeze is a response to rapidly increased electricity prices, caused by the higher CO2 price. The law is expected to be challenged by the European Commission, as the planned compensation to power companies can be regarded as illegal state aid and the measure should have been notified to the Commission before implementing it. Fortum will continue to monitor the situation closely and will work jointly with the relevant bodies to seek improved understanding and clarification of the new legislation.

 

Market position (year end 2016)

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.

Power generation Electricity retail  

 

Largest producers