Operating and regulatory environment (January-March 2020 Interim Report)
European power markets
According to preliminary statistics, electricity consumption in the Nordic countries was 112 (116) TWh during the first quarter of 2020. The decline in power consumption was caused by temperatures being clearly above the long-term average and higher than in the first quarter of 2019.
Measures taken against the spreading of Covid-19 have impacted power demand in various European countries during the latter part of the first quarter of 2020. The largest decline has been seen in Italy, France, and Spain, while the decrease in other European countries has been more moderate. In the Nordic countries, the decline in the first-quarter 2020 power demand has, to a large extent, been caused by the mild winter, while the impact of the Covid-19 pandemic has so far been negligible.
Electricity is expected to continue to gain a higher share of total energy consumption in the longer term. Over the next few years, electricity demand in the Nordic countries is expected to grow annually by approximately 0.5% on average. The growth rate, however, will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries. In the longer term, the rate of electrification of the industrial, transportation, and heating sectors is a key element determining the growth in electricity consumption.
At the beginning of 2020, the Nordic water reservoirs were at 79 TWh, which is 5 TWh lower than the long-term average and 5 TWh higher than one year earlier. At the end of the first quarter, the reservoirs were at 52 TWh, which is 11 TWh above the long-term average and 13 TWh higher than one year earlier.
In the first quarter, the average system spot price in Nord Pool decreased significantly to EUR 15.4 (46.9) per MWh. The average area price in Finland was EUR 24.0 (47.5) per MWh and in Sweden (SE3, Stockholm) EUR 18.7 (46.5) per MWh. Wet, windy, and warm weather was the main cause of very low spot prices during the first quarter of 2020.
According to preliminary statistics, electricity consumption in central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands) was 343 (354) TWh during the first quarter. The winter was mild also in central Europe and temperatures were above the long-term average and also higher compared to the first quarter of 2019. In Germany, the average spot price decreased significantly to EUR 26.6 (40.9) per MWh in the first quarter. Low gas prices together with the warm and windy winter also held the German spot prices at a low level during the first quarter.
In mid-May 2020, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2020 was around EUR 14 per MWh and for 2021 around EUR 22 per MWh. The Nordic water reservoirs were about 2 TWh above the long-term average and 6 TWh higher than one year earlier. The spring inflow period is expected to start later this year due to cold weather in May and therefore the surplus in the Nordic water reservoirs has declined strongly during the last weeks. The German electricity forward price for the remainder of 2020 was around EUR 29 per MWh and for 2021 around EUR 36 per MWh.
Gas demand in central western Europe was 730 (763) TWh during the first quarter. The central western European gas storage levels declined from 539 TWh at the beginning of the quarter to 337 TWh at the end of the quarter, which is 67 TWh higher than a year earlier and 175 TWh higher than the five-year average (2015-2019).
The average gas spot price (TTF) during the first quarter was EUR 9.8 (18.5) per MWh. The 2021 price decreased significantly from EUR 16.4 per MWh at the beginning of the quarter to EUR 12.1 per MWh at the end of the quarter.
During the first quarter, the price for European Emission Allowances (EUA) was volatile and declined from EUR 24.6 per tonne at the beginning of the quarter to EUR 17.7 per tonne at the end of the quarter, which is 4.2 below the price one year earlier. The EUA price developed sideways during the first quarter until dropping sharply in mid-March, followed by a partial recovery at the end of March and early April.
The forward quotation for coal (ICE Rotterdam) for 2021 decreased from USD 62 per tonne at the beginning of the quarter to USD 55 per tonne at the end of the quarter, which is USD 19 per tonne below the price one year earlier.
In mid-May 2020, the forward TTF price for gas for the remainder of 2020 was EUR 7.5 per MWh and for 2021 EUR 12.1 per MWh. The forward quotation for EUAs for 2020 was at the level of EUR 18.5 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2020 was USD 44 per tonne.
Fortum’s Russia division 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. Uniper’s Russian subsidiary Unipro PJSC operates in the Smolensk, Moscow, Sverdlovsk, Krasnoyarsk regions and the Khanty-Mansiysk Autonomous District.
The Russian market is divided into two price zones and Fortum’s Russia division operates in the first price zone (European and Urals part of Russia), while Uniper operates in both the first and second price zones.
According to preliminary statistics, Russian electricity consumption was 283 (289) TWh during the first quarter. The corresponding figure for the first price zone was 213 (220) TWh and for the second price zone 59 (57) TWh. The decline in consumption was caused by the higher temperatures than in the first quarter 2019.
In the first quarter, the average electricity spot price, excluding capacity prices, decreased by 7% to RUB 1,222 (1,308) per MWh in the first price zone and by 12% to RUB 907 (1,026) in the second price zone. The spot price in the Urals hub decreased by 5% and was RUB 1,068 (1,128) per MWh.
The Russian Government increased the gas price by 1.4% in July 2019. The gas price is expected to increase by 3% in July 2020.
In Russia, capacity payments based on CSA contracts are a key driver for earnings growth, as CSA payments are considerably higher than for capacities selected in Competitive Capacity Selection (CCS) auctions. Currently, Fortum’s Russia segment’s CSA capacity amounts to 2,368 MW. Correspondingly, Uniper’s CSA capacity amounts to 2,455 MW. In February 2020, the System Administrator of the wholesale market published data from 2019 regarding the WACC and the CPI, which were used to calculate the CSA price for 2020. The CSA payments were revised downwards to reflect the lower bond rates and higher earnings from the electricity-only market.
In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning. In 2020, an increase in CSA payments is expected for one unit of Fortum’s Uniper segment, but none for Fortum’s Russia segment’s generation fleet. After the CSA period ends units can receive CCS payments from CCS auctions.
Fortum’s Russia division’s generation capacity not receiving CSA payments, totalling 2,560 MW, is allowed to participate in the CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 8,790 MW.
The CCS auction for 2025 was held in February 2020.
European Climate Law proposed
On 4 March, the European Commission published a proposal for the European Climate Law. The law sets a binding EU-wide climate neutrality target for 2050 (previously 80-95%) and will be supplemented by a revised 2030 target expected to be 50-55% (previously 40%) later on. The aim is to adopt the European Climate Law by the end of 2020.
Fortum supports the proposal, as it is expected to increase the stability and predictability of the EU climate policy. The key challenge going forward is the allocation of additional emission reduction efforts between sectors included in the ETS and non-ETS sectors. All relevant policy instruments to implement the targets, including the EU’s ETS, will be subject to revision in 2021. This entails a regulatory risk, but also gives opportunities to include new elements, like carbon removals, in the legislation.
A step forward in EU Sustainable Finance Regulation
Following the adoption of the Taxonomy Regulation in the end of 2019, the Technical Expert Group (TEG), acting as an advisory body to the European Commission, issued its final report on sustainable finance on 9 March. The TEG proposes to regard coal and natural gas as ineligible, whilst nuclear is left for further investigation. The Commission is expected to adopt the proposal and to decide on the status of natural gas and nuclear by the end of 2020.
Fortum has consistently called for a European taxonomy that is well-aligned with EU’s 2050 climate neutrality goal and that takes duly into account the complementing role of technologies aimed at reducing or removing greenhouse gas emissions (e.g. renewables, nuclear, carbon capture and storage, clean gases, and storage).
National Covid-19 pandemic rules have a significant impact on the energy sector
The European energy sector is significantly affected by the Covid-19 pandemic. Depending on individual European countries, the degree of impact on power demand varies. Measures are being taken in order to safeguard the personnel at the different corporates and to ensure normal business operations to ensure security of supply through reliable energy production.
Covid-19 restrictions and especially the closing of national borders may have severe consequences on certain parts of the sector, such as procurement and logistics: ongoing and planned projects may suffer from delays due to lack of manpower and necessary equipment. E.g. wind power projects are strongly dependent on global supply chains. Although there are no restrictions for international trade, logistical challenges can be expected due to other restrictions. Member states are aiming to secure access to foreign experts for indispensable repair and maintenance work.
German coal phase-out legislation still pending
The draft legislation on the coal phase-out proposed by the German Government in February 2020 is still in the parliamentary process. Currently, the adoption of the law is scheduled for July, but delays are likely.
The legislation is heavily criticised by some operators of hard-coal power plants because of low compensations and the foreseen statutory closures of plants from 2027 onwards. Some companies are considering taking the issue to court, which would delay the final decisions by several years.
In Fortum’s view, as long as coal is needed in energy production to ensure security of supply, it is better to use the most modern and efficient power plants rather than older ones.
Russian low-carbon strategy published
On 23 March, the Russian Ministry of Economic Development published its first draft of the low-carbon strategy including two main scenarios. Under the ‘basic scenario’, which is considered the main scenario, the carbon intensity of the Russian GDP would decline by 9% by 2030 and 48% by 2050 from 2017. Compared to 1990, this would correspond to an approximate 40% decrease of CO2 emissions by 2050. The ’intensive scenario’ would enable Russia to achieve carbon neutrality in the second half of the 21st century.
Measures to reach the ‘intensive scenario’ targets include, e.g., a large-scale increase in energy efficiency, the introduction of carbon pricing, an increase of nuclear and renewable energy, electrification and digitalisation of transport and industry, the use of carbon capture and storage/utilisation technologies, and measures in the forestry sector.
The extension of the renewables support program for 2025-2035 is under discussion. Approximately two thirds of the investments are targeting wind projects and one third is targeting solar projects. New localisation requirements are being discussed.
In Fortum’s view the requirements should not be prohibitive, but rather should provide an investor premium on localisation for certain components or a higher capacity tariff for renewables.
Changes in Swedish waste incineration tax
On 1 April, the new tax on waste incineration became effective. The SEK 75/tonne tax will increase to SEK 125/tonne in 2022. Several questions related to implementation of the tax have raised concerns within the industry. The Swedish Tax Agency views that all non-hazardous waste entering a waste treatment facility with an incinerator is subject to the tax, regardless if the waste is incinerated or not. The consequent risk is that waste would be transported to locations not subject to the tax, which would distort the competitive situation, and the benefits of having combined waste treatment options at the same location would be lost. This interpretation would have negative consequences on, among others, Fortum’s waste treatment plant in Kumla, Sweden. Fortum is assessing potential legal means to rectify the situation.