Operating environment and market position

Operating and regulatory environment (Financial Statements Bulletin 2019)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 108 (108) TWh during the fourth quarter of 2019. Temperatures were close to the long-term average and industrial demand was somewhat lower than in the fourth quarter of 2018. During 2019, electricity consumption in the Nordic countries was 392 (399) TWh, as milder weather during the first quarter and slightly lower industrial demand caused a slight 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 year, the reservoirs were at 79 TWh, which is 5 TWh below the long-term average and 5 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 fourth quarter of 2019, the average system spot price in Nord Pool clearly decreased and was EUR 38.6 (47.6) per MWh. The average area price in Finland was EUR 43.5 (49.6) per MWh and in Sweden (SE3, Stockholm) EUR 38.5 (48.2) per MWh. Low gas prices kept the Continental European spot power prices at a low level during the fourth quarter, which also had a negative impact on the Nordic spot prices. During 2019, the average system spot price in Nord Pool was EUR 38.9 (44.0) per MWh. The average area price in Finland was EUR 44.0 (46.8) per MWh and in Sweden (SE3, Stockholm) EUR 38.4 (44.5) per MWh.

In Germany, the average spot price decreased significantly to EUR 36.6 (52.6) per MWh in the fourth quarter of 2019. In 2019, the average German spot price was EUR 37.7 (44.5) per MWh.

The market price of CO2 emission allowances (EUA) showed some volatility during the year, but ended the year at the same price level as in the beginning of the year, at EUR 25 per tonne.

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 (286) TWh during the fourth quarter of 2019. The corresponding figure for the First Price Zone was 217 (219) TWh. In 2019, Russian electricity consumption was 1,059 (1,056) TWh and 807 (810) TWh in the First Price Zone.

In the fourth quarter of 2019, the average electricity spot price, excluding capacity prices, decreased by 6% to RUB 1,232 (1,309) per MWh in the First Price Zone. The spot price in the Urals hub decreased by 2% and was RUB 1,081 (1,099) per MWh. In 2019, the average electricity spot price, excluding capacity prices, was RUB 1,289 (1,247) per MWh in the First Price Zone and RUB 1,117 (1,043) 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 70-71).

Regulatory environment

New EU institutions with a strong focus on climate

Following the EU elections in May, the new Parliament took office. The Commission headed by President Ursula von der Leyen started at the beginning of December and, without delay, issued the first outline of its Green Deal.

The European Council, except Poland, endorsed the target of reaching EU economy-wide climate neutrality by 2050. Meanwhile, the Commission announced its intention to triple the budget of the Just Transition Fund to EUR 100 billion, with the target to ease the transformation in heavily fossil-reliant countries. Polish adherence will be reconsidered in the European Council in June 2020, whilst the 2050 EU economy-wide target will be part of the Climate Law due in February 2020. Fortum welcomes the firm climate orientation of the new EU institutions.

The European Green Deal emerging

In December, the European Commission published a Communication on the European Green Deal. It will be the new Commission’s bold political initiative, aiming at EU economy-wide climate neutrality by 2050. The Commission is expected to launch up to 50 related initiatives during the next two years.

While, the Green Deal will not be solely about climate ambition, it is expected to deliver extensive growth for Europe, bundling all EU policy areas and all sectors of society. The Green Deal comprises, among other things, energy supply, circular economy, ecosystems, biodiversity, and mainstreaming of sustainability in all EU policies.

Practically all energy and climate targets and policies will be subject to revision and, consequently, entail a regulatory risk. The Commission will present a Green Financing Strategy in autumn 2020 in order to enable the private sector to contribute to the financing of a green transition. Fortum welcomes the Green Deal and considers sector integration and electrification as offering significant solutions and business opportunities to meet the ambitious goals of the Green Deal.

Sustainable finance regulation adopted

In December, the European Council and Parliament reached an agreement on the taxonomy regulation of sustainable finance. The taxonomy creates a unified classification system for what can be considered sustainable investments. The regulation still needs to be formally approved by the Council and Parliament and is expected to enter into force by the end of 2022.

The regulation strongly leans towards renewable energy technologies. Nuclear and gas may qualify as ‘transitional activities’, depending on the outcome of the assessment that will be carried out by the Commission during 2020.The status of waste-to-energy is still open, whilst the treatment of hazardous waste has been classified as sustainable.

As such, the objective of the sustainable finance initiative is in line with Fortum's strategy. Fortum has, however, strongly advocated for an approach based on CO2 emissions and technology-neutrality in compliance with the Paris Agreement. There is a risk that if the taxonomy discriminates against some low-carbon technologies, the financing costs of such investments will increase in the future and result in unduly expensive decarbonisation.

EIB’s new energy lending policy approved

In November, the European Investment Bank (EIB) agreed on a new energy lending policy and confirmed the EIB’s increased ambition in climate action and environmental sustainability. EIB will align all financing activities with the goals of the Paris Agreement from the end of 2020 and end financing for fossil fuel energy projects from the end of 2021.

The Sustainable Europe Investment Plan launched by the new Commission targets to unlock EUR 1 trillion of climate action and environmentally sustainable investments by 2030. The EIB will play a key role in this and will gradually turn into a climate bank. EIB will no longer consider new financing for, fossil fuel energy projects, including gas. In addition, EIB set a new Emissions Performance Standard of 250g of CO2/kWh for power and heat projects. This will replace the current 550g of CO2/kWh standard. Nuclear and renewable energy projects continue to be eligible for funding. If in line with the EU waste hierarchy and national waste management plans, waste-to-energy projects are also eligible. The new EIB lending policy is well in line with Fortum’s strategy.

German climate and coal phase-out legislation

In September 2019, the German Government released an extensive climate and energy package in order to meet the 2030 emission reduction target of 55% and carbon-neutrality by 2050. In December, the German Parliament approved the climate package. The package includes a national emissions trading system for the transport and building sectors with carbon prices of EUR 25 in 2021 and EUR 55 in 2025. To offset the higher costs for consumers and companies, the climate package includes subsidies for electric cars and tax incentives for greener heating, electricity, and housing.

The climate protection law ("Klimaschutzgesetz") sets annual CO2 emission reduction targets for the period 2020-2030 for six sectors: energy, industry, transport, buildings, agriculture, waste management, and others.

In addition, the Government decided on a coal phase-out plan, based on the earlier proposal, and is committed to propose legislation in line with the recommendations of the Coal Commission and to publish a gas strategy including hydrogen. The coal phase-out legislation was approved by the federal cabinet on 29 January 2020 and is expected to be completed in the first half of 2020. In the years 2026 and 2029, the Government plans to carry out large-scale reviews of how the coal phase-out is progressing. The review will inform the decision on whether the phase-out can be brought forward by three years, i.e. that Germany could phase out coal as early as 2035. With regards to the new coal-fired plant Datteln 4, owned by Uniper, the Government announced its interest to allow the commissioning of the plant while, at the same time, old and less-efficient plants would be closed.

In Fortum’s opinion, it would be essential to have the respective legislation become effective as soon as possible, as the first auctions for the closure of hard coal plants are planned already for summer 2020 and the first plants are to be closed in 2022.

Changed Swedish taxation resulted in new CHP and waste-to-energy taxes

In line with a broad political agreement made in January 2019, containing new taxes of up to EUR 1.5 billion, legislation on the taxation of waste incineration was approved by the Swedish Government on 4 December 2019. The tax level was set at SEK 75/tonne in 2020 and will increase to SEK 125/tonne by 2022.

As part of the tax change, the Government also passed a law to increase the tax for fossil-fuelled CHP plants, effective from August 2019. The Government has not specified the definition of a green tax, and additional taxes are likely to be presented during the spring of 2020.

Swedish energy agreement collapses

In December, the Conservatives and Christian Democrats left the Swedish broad energy agreement made in 2016. The main reason was the ongoing disagreement on nuclear power, with the opposition wanting to update the agreement with more nuclear friendly wording. The collapse of the agreement will not have any major financial implications for Fortum, as key elements in the original agreement, mainly tax reductions for hydro and nuclear power, have already been implemented. However, it will most likely result in increasing regulatory uncertainty, especially for nuclear power.

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