Operating environment and market position

Operating and regulatory environment (January-March 2019 Interim Report)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 116 (121) TWh during the first quarter of 2019. The lower consumption was mainly driven by warmer weather during the first quarter of 2019 compared to the same period last year. Industrial demand was close to unchanged.

At the beginning of 2019, the Nordic water reservoirs were at 74 TWh, which is 9 TWh lower than the long-term average and 12 TWh lower than one year earlier. At the end of the first quarter of 2019, the reservoirs were at 39 TWh, which is 3 TWh below the long-term average and 5 TWh higher than one year earlier.

In the first quarter of 2019, the average system spot price in Nord Pool was EUR 46.9 (38.6) per MWh. The average area price in Finland was EUR 47.5 (42.0) per MWh and in Sweden (SE3, Stockholm) EUR 46.5 (39.0) per MWh. The clearly higher marginal cost for coal condense and low Nordic water reservoirs were the main reasons for the price increase and this impact overshadowed the mild and windy weather.

In Germany, the average spot price increased to EUR 40.9 (35.5) per MWh in the first quarter of 2019.

The market price of CO2 emission allowances (EUA) was volatile during the quarter and decreased from EUR 25 per tonne at the beginning of the year to EUR 22 per tonne at the end of the first quarter of 2019. The average price of CO2 emission allowances was EUR 22 (10) in the first quarter.

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 289 (289) TWh during the first quarter of 2019. The corresponding figure for the First Price Zone was 220 (220) TWh.

In the first quarter of 2019, the average electricity spot price, excluding capacity prices, increased by 10% to RUB 1,309 (1,187) per MWh in the First Price Zone. The spot price in the Urals hub increased by 12% and was RUB 1,128 (1,011) per MWh.

More detailed information about the market fundamentals is included in the tables at the end of the report (pages 59-61).

European regulatory environment

Taxonomy of sustainable finance progressing

On 28 March, the European Parliament adopted its resolution on the Commission's proposal for the taxonomy of sustainable finance. This regulation establishes the framework to gradually create a unified classification system on what can be considered an environmentally sustainable economic activity. In the Parliament's resolution, nuclear power, non-renewable energy, gas pipelines, and waste incineration are not considered sustainable.

Being classified non-sustainable could increase the financing costs of those investments and likely result in exclusion from public financing and cause reputational damage. There is also a risk that the taxonomy will be used as a reference for future EU legislation.

As such, the sustainable finance initiative is in line with Fortum’s strategy. However, initiatives to promote sustainable investments in the energy sector have to be technology-neutral and aim for low-carbon fossil-free solutions rather than generally promoting investments in certain types of renewables.

EU 2050 climate strategy not proceeding in the Council

The European Commission’s proposal for the EU 2050 climate strategy has recently encountered conflicting views among the member states. The European Council's conclusions on 22 March refer to carbon neutrality, but failed to specify any timeframe to reach it. The German position is pending due to the country's internal climate policy debate, and they have not been able to support any date for reaching the EU net-zero emissions. The EU leaders are expected to return to the subject in June, but further delays in the finalisation of the strategy are expected.

On 14 March, the European Parliament approved a non-binding resolution on the strategy including support for climate neutrality in 2050 and for increasing the 2030 climate target to 55% from the existing 40%.

Fortum is of the opinion that the target for 2050 and a cost-efficient emission reduction pathway for 2030-2050 should be confirmed as soon as possible. In Fortum’s view, carbon pricing will be the key measure for reaching carbon neutrality.

New taxes for fossil fuels proposed in Sweden

On 10 April, the Swedish government proposed new taxes on fossil fuels used for heat production in CHP plants. According to the Department of Finance, the annual tax revenues for Sweden from the CHP tax could amount to SEK 450 million. If approved, the new tax would have negative financial implications for Stockholm Exergi.

Reshaping of EU's hydropower legislation

The EU Water Framework Directive (WFD) is undergoing a fitness check by the EU Commission. In addition, the Commission released its fifth WFD implementation report on 26 February looking at the status of water bodies in each member state.

The Commission's recommendations for Finland and Sweden are demanding and may have a significant impact on hydropower, resulting in production losses and additional costs for environmental measures. If a revision is made without fully considering hydropower's valuable contribution to a carbon-free energy system, it will have an unintentional adverse effect on both the climate and the energy system.

Fortum believes that the current WFD as such is still reasonably fit for its purpose and doesn't need to be revised. However, the Common Implementation Strategy guidance documents should be reviewed and harmonised to make them consistent with the directive.

Nordic Ministerial Declaration on Carbon Neutrality

On 25 January, five Nordic countries agreed on closer cooperation to tackle climate change. In the Ministerial Declaration on Nordic Carbon Neutrality, the countries declared to follow the 1.5 oC goal in policymaking, to raise the level of climate ambitions by 2020, and to achieve carbon neutrality sooner than other countries. The role of the private sector and support for research, development, and innovation are highly visible in the declaration.

Fortum welcomes the declaration and looks forward to concrete proposals for cooperation.

Electricity end-user prices frozen in Poland

On 1 January, the amended law on the excise tax for electricity sales entered into force, but was amended again on 4 March following discussions with the European Commission and pressure from market participants. The related secondary legislation concerning compensation methodology to compensate losses for electricity suppliers is still under preparation. According to the Ministry of Energy, the lowered end-user electricity prices would be applicable only during 2019.

This intervention has made the regulatory environment more uncertain in Poland. This market intervention, including the planned compensation mechanism that can be regarded as illegal state aid, is expected to be challenged by the European Commission. Fortum is working jointly with the trade associations and other relevant bodies to clarify the new legislation.

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