Operating and regulatory environment (Q3 2020 Interim Report)
European power markets
According to preliminary statistics, electricity consumption in the Nordic countries was 81 (82) TWh during the third quarter of 2020. The Nordic power demand showed a minor decline, while temperatures were somewhat above the long-term average and close to the level in the third quarter of 2019. In Finland and Sweden industrial demand was at about the same level. Demand declined mainly for paper production, but demand in other sectors increased to a certain extent, thereby offsetting this decline.
Measures taken to prevent the spread of Covid-19 impacted power demand in various European countries during the second quarter of 2020, with central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands) seeing a 9% decline compared to previous year. However, the European power demand recovered significantly in the third quarter and was realised close to levels in 2019.
According to preliminary statistics, electricity consumption in central western Europe was 284 (286) TWh in the third quarter of 2020.
In the long term, electricity is expected to continue to gain a higher share of total energy consumption. The growth rate, however, will largely be determined by the macroeconomic development in Europe and 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. The rainy and mild winter led to a rapid increase of the Nordic water reservoirs during the first quarter. Spring was fairly cold and the spring inflows were significantly delayed, but once melting started, the very large snow pack resulted in the spring inflows bringing water levels close to the historical maximum levels in most Nordic water reservoirs. At the end of the third quarter of 2020, the reservoirs were at 114 TWh, which is 13 TWh above the long-term average and 12 TWh higher than one year earlier.
In the third quarter of 2020, the average system spot price in Nord Pool was EUR 8.9 (34.7) per MWh. The decline in the Finnish and Swedish price areas was clearly less than in the Nordic system price. The average area price in Finland was EUR 32.8 (47.8) per MWh, in the SE3-area in Sweden (Stockholm) EUR 25.3 (35.6) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 18.6 (35.3) per MWh. During January-September 2020, the average system spot price in Nord Pool was EUR 10.0 (39.0) per MWh. The average area price in Finland was EUR 26.4 (44.2) per MWh, in the SE3-area in Sweden (Stockholm) EUR 19.7 (38.3) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 14.1 (38.1) per MWh. The very large hydrological surplus and the risk of spilling in many hydro reservoirs have been the main reasons for the low Nordic spot prices during 2020.
In Germany, the spot power price saw a strong recovery compared to the previous quarter. The average spot price for the third quarter was close to the level in the third quarter 2019 and was EUR 36.1 (37.4) per MWh. The recovery in power demand and the favourable development of the CO2 and gas prices together with the continued low power generation of the French nuclear fleet all supported the recovery of the German spot price. In January-September 2020, the average German spot price was EUR 27.7 (38.0) per MWh.
In mid-November 2020, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2020 was around EUR 10 per MWh and for 2021 around EUR 15 per MWh. The Nordic water reservoirs were about 18 TWh above the long-term average and 22 TWh higher than one year earlier. The German electricity forward price for the remainder of 2020 was around EUR 34 per MWh and for 2021 around EUR 39 per MWh.
Gas demand in central western Europe was 347 (338) TWh during the third quarter of 2020. The central western European gas storage levels increased from 500 TWh at the beginning of the quarter to 565 TWh at the end of the quarter, which is 18 TWh lower than one year ago and 38 TWh higher than the five-year average (2015–2019).
The average gas spot price (TTF) during the third quarter was EUR 7.8 (10.2) per MWh. The 2021 forward price increased from EUR 12.4 per MWh at the beginning of the quarter to EUR 13.6 per MWh at the end of the quarter.
During the third quarter, European Emission Allowances (EUA) traded in the range of EUR 25-30 per tonne. The price decreased from EUR 27.7 per tonne at the beginning of the quarter to EUR 26.9 per tonne at the end of the quarter, which is EUR 2.0 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2021 increased from USD 57.7 per tonne at the beginning of the quarter to USD 60.4 per tonne at the end of the quarter, which is USD 5.8 per tonne below the price one year earlier.
In mid-November 2020, the TTF forward price for gas for the remainder of 2020 was EUR 14 per MWh and for 2021 EUR 14 per MWh. The forward quotation for EUAs for 2020 was at the level of EUR 26 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2020 was USD 54 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, and Krasnoyarsk regions, as well as the Khanty-Mansiysk Autonomous District.
The Russian market is divided into two price zones; 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 233 (240) TWh during the third quarter of 2020. The corresponding figure for the first price zone was 178 (185) TWh and for the second price zone 47 (47) TWh. The decline in consumption was caused by lower oil production and weaker general economic activity in the third quarter of 2020.
In the third quarter, the average electricity spot price, excluding capacity prices, increased by 1% to RUB 1,295 (1,280) per MWh in the first price zone and by 25% to RUB 856 (683) in the second price zone. The spot price in the Urals hub increased marginally and was RUB 1,109 (1,107) per MWh.
The Russian Government increased the gas price by 1.4% in July 2019 and by 3% in August 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 rate of return and the CPI, which were used to calculate the CSA price for 2020. The CSA payments were revised downwards to reflect the lower Government 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 annual CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 8,790 MW. The next CCS auction, for the year 2026, is expected to be held in the first quarter of 2021.
In June 2019, Fortum won the right to build 5.6 MW of solar capacity in a CSA auction, in addition to the 110 MW won in June 2018. The power plants will receive a guaranteed CSA price for a period of 15 years, corresponding to approximately RUB 14,000 per MWh and RUB 15,000 per MWh, respectively. The plants are to be commissioned during 2021-2022.
In June 2018, the Fortum-Rusnano wind investment fund (Fortum's ownership 50%) won the right to build 823 MW of wind capacity in a CSA auction. The wind parks were to be commissioned during 2019-2023 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-8,000 per MWh for a period of 15 years.
In June 2017, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity in a CSA auction. The wind parks were to be commissioned during 2018-2022 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-9,000 per MWh for a period of 15 years.
EU targets to raise the climate ambition for the year 2030
On 17 September, the European Commission published a proposal for a new 2030 climate target and related impact assessment. The target is to reduce greenhouse gas emissions by at least 55% from 1990, including carbon sinks. This is clearly more ambitious than the current target of 40%.
The Parliament is proposing to increase the emission reduction target to 60%. The member states are split regarding the target level but the German EU Presidency aims to reach a common agreement among member states by the end of the year. The new target is subject to an approval by the European Parliament and Council. The final adoption of the new target is expected latest during the first half of 2021. The legislative proposals to implement the new target are expected in mid-2021.
A key issue that potentially will have a large effect on the EU Emission Trading System (ETS) and carbon price is the allocation of the new target between the ETS and non-ETS sectors. In Fortum’s view, the ETS sector should take the main responsibility for the more ambitious target. In addition, it is important to ensure coherence of the climate target with other energy policy targets, such as renewable energy and energy efficiency.
The role of nuclear in the EU Taxonomy Regulation still pending
Following the adoption of the EU Taxonomy Regulation in June 2020, the European Commission aims to publish a series of key complementary delegated acts during the autumn. These acts are likely to address all renewable energy sources as taxonomy-aligned, whilst the status of natural gas as a transitional fuel is questioned as being above the threshold of 100 g CO2/kWh. Nuclear is proposed not to be part of these delegated acts, as its environmental assessment under the “no-harm principle” is still ongoing. The Commission has indicated its intent to publish a specific delegated act by the end of 2021 to include nuclear in case of a positive outcome of the environmental assessment. A final version of this set of delegated acts should be adopted by the Commission by the end of 2020 following consultation with stakeholders.
Fortum has called for an EU sustainable finance regulation that is well-designed and relies on a non-discriminatory approach towards climate-neutral energy sources (ranging from renewables, nuclear, storage, clean gases to carbon-negative technologies). Fortum will carefully assess the delegated act drafts to evaluate if they provide a genuine level-playing-field approach to sustainable finance.
Nordic countries’ budget proposals for 2021 focus on green recovery
The Finnish budget proposal from 16 September includes positive elements for the energy sector and electrification. The electricity tax applicable to energy-intensive industries will be lowered to the EU minimum as of 2021 (from EUR 7.0/MWh to EUR 0.5/MWh). Heat pumps connected to district heating networks as well as small data centres will be included in the industrial electricity tax category. Taxation of heating fuels will be increased by EUR 105 million as of 2021. This will increase the costs for district heating, hence risking the competitiveness of district heating compared to alternative means of heating.
In Sweden, the budget proposal from 21 September provides support for electrification, hydrogen, negative emissions, and circular economy. The proposed fiscal policy stimulus measures and reforms for 2021 amount to more than SEK 105 billion. In addition, there will be annual solar subsidies of SEK 260 million for companies and municipalities. However, also negative impacts for utility-scale power generation are foreseen as, e.g., the limit for the tax exemption for self-consumed solar is doubled to 500 kW. The budget proposal includes SEK 10 billion for technology-neutral green credit guarantees aimed at large industrial projects that support the climate target. For the years 2022 and 2023, a total of SEK 250 million is proposed for bio-based carbon capture and storage reverse auctioning in order to facilitate the development of negative emissions, which is an opportunity for Stockholm Exergi, as the company is evaluating a project for capturing CO2 from its bio-based combined heat and power (CHP) plant.
The Norwegian state budget proposal from 7 October includes an additional cost burden for waste incineration in the proposal of a CO2 tax of NOK 149 per tonne of waste. Fortum opposes this tax, as it provides no climate benefits. Earlier in September, as part of the funding proposal for carbon capture and storage projects, the Government proposed a partial conditional grant of NOK 3 billion for Fortum Oslo Varme’s carbon capture and storage project, provided that additional financing is received from other sources. Fortum welcomes the proposed grant, but notes that the possibilities to secure additional grants are limited and the proposed grant alone is insufficient to make the project financially viable. Fortum Oslo Varme is currently analysing the options for securing sufficient funding for the project and submitted an application for the EU Innovation Fund in October 2020. Fortum continues the dialogue with the Norwegian state aiming at securing a feasible solution to realise the project.
EU Recovery and Resilience Facility taking shape
On 9 October, the European Council agreed on its position on the EUR 673 billion Recovery and Resilience Facility, which is a new tool for the member states to step up public investments and reforms in order to recover from the impact of the Covid-19 crisis. Agreed on by the EU leaders in July 2020, this facility forms the majority of the EUR 750 billion plan (Next Generation EU). It consists of grants (EUR 313 billion) and loans (EUR 360 billion) to the member states and is a short-term oriented instrument where all funds should be committed by 2026.
The facility offers significant opportunities for the energy sector for the funding of, e.g., renewable energy and energy infrastructure projects. In Finland, Fortum has projects that could be applicable to the recovery funding.
Hydrogen strategies developing in the EU
On 8 July, the EU Commission presented its Hydrogen Strategy to lay the foundation for hydrogen development across the EU. The EU is setting a political target to gradually install 6 GW of electrolysers by 2024 and 40 GW by 2030, reaching 1 million tonnes and 10 million tonnes of renewable hydrogen production, respectively. The strategy also foresees hydrogen imports from an additional 40 GW capacity in countries outside the EU. The strategy has a strong focus on renewables-based hydrogen, but hydrogen produced from fossil fuels with carbon capture, storage and utilisation technologies is also recognised as an important enabler in meeting the decarbonisation needs of industry. The Commission is looking forward to the EU’s green recovery financing and carbon pricing as main instruments to promote the hydrogen economy.
The German EU Presidency is planning to draft the Council conclusions on the strategy during December. Legislative proposals to implement the strategy, e.g. review of the EU internal gas market legislation and revision of the Renewable Energy Directive, are expected by mid-2021. During 2020, the Commission will also issue an Offshore Renewable Energy Strategy that is considered to be an important enabler in the development of hydrogen. The Commission has also established the European Clean Hydrogen Alliance – a platform open to all entities with activities for renewable or low-carbon hydrogen that are ready to contribute to the deployment of hydrogen technologies by 2030.
Several EU member states have also prepared a national hydrogen strategy with targets, including Germany, France, the Netherlands, Portugal, and Spain. Combining the targets of those five countries amounts to 22 GW of capacity by 2030, which is half of the EU target. Strategies are under preparation also in the UK and the Nordic countries.
Fortum welcomes the EU Hydrogen Strategy as an essential enabler to decarbonise the EU economy in line with the European Green Deal. It is important to ensure that all CO2-free electricity, both from new built and existing power plants, including nuclear can contribute to clean hydrogen. In addition, natural gas reforming should be able to provide clean hydrogen provided that the CO2 is captured. The development of a hydrogen market should be based on a CO2 emission threshold and EU-wide certification instead of defining various “colour codes” for hydrogen. Fortum is a member in both Hydrogen Europe and the European Clean Hydrogen Alliance.