Operating environment and market position
Operating and regulatory environment (Q1 2018)
According to preliminary statistics, electricity consumption in the Nordic countries was 121 (113) TWh during the first quarter of 2018. The increase was mainly due to lower temperatures and increased industrial demand.
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 a year earlier. At the end of the first quarter of 2018, the reservoirs were at 34 TWh, which is 7 TWh below the long-term average and 4 TWh lower than a year earlier. Precipitation in the Nordics was clearly below the normal level in the first quarter of 2018.
In the first quarter of 2018, the average system spot price in Nord Pool was EUR 38.6 (31.1) per MWh. The average area price in Finland was EUR 42.0 (32.9) per MWh and EUR 39.0 (31.8) per MWh in Sweden (SE3, Stockholm). The cold and dry weather combined with the higher marginal cost for coal condense contributed to the higher price.
In Germany, the average spot price fell to EUR 35.5 (41.3) per MWh in the first quarter of 2018.
The market price of CO2 emission allowances (EUA) increased from EUR 8.1 per tonne at the beginning of the year to EUR 13.3 per tonne at the end of the first quarter of 2018.
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.
According to preliminary statistics, Russian electricity consumption was 289 (283) TWh during the first quarter of 2018. The corresponding figure for the First Price Zone (European and Urals part of Russia), was 220 (217) TWh.
In the first quarter of 2018, the average electricity spot price, excluding capacity prices, increased by 0.6% to RUB 1,187 (1,180) per MWh in the First Price Zone.
More detailed information about the market fundamentals is included in the tables at the end of the report (pages 57-59).
European business environment and carbon market
Finnish coal phase-out
On 10 April 2018, the Finnish Government decided that a coal phase-out will be done by law from 1 May 2029. There will be a EUR 90 million incentive package for those district heating companies that commit to stop using coal already in 2025 to compensate for bio-CHP and other coal-replacement investments. In parallel, the planned renewables (RES) subsidy scheme will be reduced from 2 TWh to 1.4 TWh. A legal proposal to ban coal will be presented during the first half of 2018.
The Finnish Government plans to increase the CO2 tax for heating fuels to improve the competitiveness of gas against coal. This would be implemented by abolishing the current 50% CO2 tax reduction for CHP production. However, a combination of increased CO2 tax and lower energy content tax is not expected to enable a fuel switch from coal to gas, but it will increase the production costs of district heating.
Implementation of the EU Anti-Tax Avoidance Directive in Finland
The Finnish Government has proposed to implement the Anti-Tax Avoidance Directive (ATAD) by substantially limiting the possibilities to deduct interest expenses when the interest expenses exceed EUR 3 million. The ATAD provides various flexibilities, but the Finnish Government has decided to go above what is required by the directive. The public consultation has now been closed and the Government is expected to present a new proposal in the coming months. The proposed limitations to interest deductions are challenging for the capital-intensive energy sector and international companies including Fortum.
Revised hydro-power legislation in Sweden
The revision of the Swedish hydro-power legislation is part of the energy agreement of June 2016. It aims at fulfilling the requirements of the EU Water Framework Directive and at facilitating modernisation and better utilisation of hydro-power. Most environmental permits will be updated during a 20-year period and, in general, will be valid for a period of 40 years. Fortum's main concerns with earlier proposals are well addressed in the final proposal. According to the plan, the legislation will be adopted before summer 2018 and will enter into force in 2019.
The energy agreement requires hydro-power companies to carry the full cost of environmental improvements. The largest hydro-power companies are planning a joint fund in order to secure financing for the improvements. The fund is expected to be established from July 2018, provided that the revision of hydro legislation has been completed.
EU Plastics strategy
In January 2018, the EU Commission published a communication for an EU plastics strategy as part of Europe´s transition towards a circular economy. The target is to transform the way plastic products are designed, produced, used and recycled in the EU. The better design of plastic products, higher recycling rates, and better quality recyclates will help in boosting the markets for secondary raw material plastics with greater added value for a competitive European plastics industry.
Fortum welcomes the initiative to boost the markets for recycled plastics. The plastics strategy is expected to result in business opportunities for Fortum's recycling and waste solutions.
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.