Operating environment and market position

Operating and regulatory environment (Q2 2018)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 88 (88) TWh during the second quarter of 2018. During January-June 2018, electricity consumption in the Nordic countries was 209 (201) 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 the second quarter of 2018, the reservoirs were at 76 TWh, which is 7 TWh below the long-term average and 5 TWh lower than one year earlier. Precipitation was clearly below the normal level in the second quarter of 2018.

In the second quarter of 2018, the average system spot price in Nord Pool was EUR 39.0 (27.4) per MWh. The average area price in Finland was EUR 42.0 (30.9) per MWh and in Sweden (SE3, Stockholm) EUR 38.5 (28.5) per MWh. The dry weather combined with the higher marginal cost for coal condense contributed to the price increase. In January-June 2018, the average system spot price in Nord Pool was EUR 38.8 (29.3) per MWh, the average area price in Finland was EUR 42.0 (31.9) per MWh and in Sweden SE3 (Stockholm) EUR 38.8 (30.1) per MWh.

In Germany, the average spot price increased to EUR 36.0 (29.8) per MWh in the second quarter of 2018.  In January-June 2018, the average spot price was EUR 35.7 (35.5) per MWh.

The market price of CO2 emission allowances (EUA) increased from EUR 13.3 per tonne at the beginning of the second quarter to EUR 15.0 per tonne at the end of the second quarter 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 241 (238) TWh during the second quarter of 2018. The corresponding figure for the First Price Zone was 185 (184) TWh. In January-June 2018, Russian electricity consumption was 530 (522) TWh and the corresponding figure for the First Price Zone was 406 (402) TWh.

In the second quarter of 2018, the average electricity spot price, excluding capacity prices, increased by 3.8% to RUB 1,191 (1,148) per MWh in the First Price Zone. The spot price in the Urals hub decreased by 0.8% and was RUB 1,004 (1,012) per MWh. In January-June 2018, the average electricity spot price, excluding capacity price, increased by 2.1% to RUB 1,189 (1,164) per MWh in the First price zone and decreased by 1.5% to RUB 1,008 (1,023) per MWh in the Urals hub.

European business environment and carbon market

Legislation on sustainable financing proposed

In May 2018, the EU Commission presented the first set of legislative proposals based on the strategy and action plan on 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. These types of rules will affect the whole financing sector in Europe. It is important to ensure that the planned taxonomy will be developed in a transparent manner with a market-based approach.

EU waste package published

The EU waste package, expected to effectively promote a circular economy, was officially published 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. In addition, 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.

German "Coal Commission" appointed

In June 2018, the Commission for Growth, Structural Change and Employment ("the Coal Commission") was appointed; it will present a strategy for the phase-out of coal-fired power generation in Germany. The focus is on mitigating regional impacts expected from the coal phase-out. As Germany is likely to miss its 40% emission reduction target for 2020, the Commission will also propose measures to reduce this gap.

The Coal Commission is scheduled to give its recommendations on mitigating regional impacts in October, on minimising the 2020 target gap in November, and to present its final report in December 2018. The time schedule is extremely tight given the magnitude and complicated nature of the task. In addition to the timing, the mandate is considered to miss a broader European context and the link to EU's Emissions Trading System (ETS) in particular. Furthermore, the mandate does not include any assessment of possible impacts of the coal phase-out on wholesale electricity prices. The power industry is represented in the Commission by the German Association of Energy and Water Industries (BDEW).

Norwegian parliament supported the financing of Fortum's CCS project

In June 2018, the Norwegian parliament approved the NOK 80 million financing to continue the pre-studies of Fortum's carbon capture and storage (CCS) project in Klemetsrud for the next 12 months.The Ministry of Petroleum and Energy will make the final decision on the pre-study within a few months based on the results from the ongoing quality assurance initiated by the Government earlier this year.

Finnish renewable electricity support scheme approved

In May 2018, the Finnish Parliament adopted legislation on the new support scheme for electricity from renewable energy sources for 2018-2020. The system is based on the tendering of 1.4 TWh of renewable electricity and will most likely be based on one tendering round, expected in late 2018.

The scheme is technology neutral, however, hydropower is excluded and there are certain special requirements for bio-based electricity. Only new installations can participate in the tendering. The premium will be based on bids and will be a combination of fixed and variable premiums. The projects are entitled to the support for a 12-year period.

Changes to Finnish energy taxation proposed

In May 2018, the Finnish Government announced several changes to energy taxation: elimination of the existing 50% reduction of the CO2 tax for CHP production and alignment of the CO2 taxation of heating fuels with the taxation of transport fuels, abolishing the double taxation of big electricity storages, as well as simplification of the taxation for work-place-related charging of electric vehicles. These changes will be applicable from 2019 onwards, but details have not been published yet. While Fortum considers the latter two proposals to be positive developments, the decision to further increase the tax burden of CHP production and district heating is seen as negative.

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.

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