Operating environment and market position

Operating and regulatory environment (Q3 2019 Interim Report)

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 82 (82) TWh during the third quarter of 2019. Temperatures were close to the long-term average and industrial demand was almost unchanged. During January-September 2019, electricity consumption in the Nordic countries was 285 (291) TWh, as milder weather during the winter months caused a decrease in the power demand.

At the beginning of 2019, the Nordic water reservoirs were at 74 TWh, which is 10 TWh lower than the long-term average and 8 TWh lower than one year earlier. At the end of the third quarter of 2019, the reservoirs were at 102 TWh, which is 1 TWh above the long-term average and 13 TWh higher than one year earlier. In April 2019, the Norwegian energy regulator (NVE) revised the Norwegian reservoir statistics. The reported reference levels and historical deviations have been updated accordingly.

In the third quarter of 2019, the average system spot price in Nord Pool was EUR 34.7 (50.5) per MWh. The average area price in Finland was EUR 47.8 (53.5) per MWh and in Sweden (SE3, Stockholm) EUR 35.6 (52.2) per MWh. Low gas prices kept the Continental European spot prices at a low level during the third quarter. This, in combination with the increasing Nordic water reservoirs, caused the Nordic spot prices to decline, compared to the previous year. During January-September 2019, the average system spot price in Nord Pool was EUR 39.0 (42.8) per MWh. The average area price in Finland was EUR 44.2 (45.9) per MWh and in Sweden (SE3, Stockholm) EUR 38.3 (43.3) per MWh.

In Germany, the average spot price decreased significantly to EUR 37.4 (53.5) per MWh in the third quarter of 2019. In January-September 2019, the average German spot price was EUR 38.0 (41.7) per MWh.

The market price of CO2 emission allowances (EUA) decreased from EUR 26 per tonne at the beginning of the third quarter to EUR 25 per tonne at the end of the third quarter of 2019.

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 240 (238) TWh during the third quarter of 2019. The corresponding figure for the First Price Zone was 185 (184) TWh. In January-September 2019, Russian electricity consumption was 773 (770) TWh and 590 (591) TWh in the First Price Zone.

In the third quarter of 2019, the average electricity spot price, excluding capacity prices, decreased by 2% to RUB 1,280 (1,302) per MWh in the First Price Zone. The spot price in the Urals hub increased by 5% and was RUB 1,107 (1,059) per MWh. In January-September 2019, the average electricity spot price, excluding capacity prices, was RUB 1,307 (1,227) per MWh in the First Price Zone and RUB 1,129 (1,025) per MWh in the Urals hub.

More detailed information about the market fundamentals is included in the tables at the end of the report (pages 66-68).

Regulatory environment

The new EU Commission to launch the European Green Deal

The new EU Commission chaired by President Ursula von der Leyen is set to start officially from 1 December 2019. The climate and energy portfolio has been split into two, with climate placed under the responsibility of executive Vice-President Timmermans and energy under Commissioner Simson. The Commission will have a major task to set the EU on an economy-wide decarbonisation path. Timmermans has been appointed to issue a new European Green Deal, including the European Climate Act, within the first 100 days in office and to be complemented by further related EU climate legislation, e.g. revision of the 2030 target to 50-55% and a proposal to extend the EU Emission Trading Scheme (ETS) to new sectors.

The new Commission's high climate ambition fits well with Fortum's strategy, providing a good opportunity for Fortum to push forward our clean energy strategy and promote carbon pricing as a basis for the European decarbonisation roadmap.

Taxonomy of sustainable finance progressing

The EU Council’s position on taxonomy of sustainable finance was approved on 25 September 2019. The taxonomy creates a unified classification system for investments that can be called sustainable and covers a large range of technologies critical to Fortum: nuclear, hydro, wind, solar, storage, carbon capture and storage, Power-to-X, treatment of hazardous waste, and waste-to-energy. In the European Parliament’s view, adopted in March, non-renewable energy, gas pipelines, and waste incineration are not considered sustainable. The taxonomy file is now subject to the trilogue negotiations where the Commission, Parliament, and the Council are expected to reach a compromise by the end of the year.

Work on the technology-specific criteria has progressed in parallel with the taxonomy. The Commission’s technical expert group has preliminarily recommended limiting taxonomy-eligible energy generation to renewables. The final recommendations are expected by the end of this year.

The financing costs are likely to increase for investments not being classified as sustainable. Technologies not classified as sustainable could also be excluded from public financing.

As such, the objective of the sustainable finance initiative is in line with Fortum's strategy, but Fortum has advocated for an approach based on CO2 emissions and technology-neutrality taking into account compliance with the Paris Agreement.

German climate strategy proposal

In September, the German Government released an extensive climate and energy package in order to meet the 2030 emission reduction target of 55% and carbon-neutrality by 2050. The main focus of the new measures lies in the building and transport sectors with an aim to introduce a national CO2-trading scheme for those sectors. In the energy sector, the 65% target for renewable electricity by 2030 remains. The Government adopted a legislative proposal at the beginning of October, where it introduces legally binding climate targets for the energy, industry, building, transport, agriculture, and waste sectors in order to ensure the achievement of the targets.

In addition, the Government confirmed its ambition to propose legislation by the end of 2019 on the coal phase-out plan in line with the recommendations of the Coal Commission, and to publish a gas strategy including hydrogen.

In Fortum’s opinion, it would be necessary to have the respective legislation in force as soon as possible, because the first auctions for hard coal plants are planned already for the summer 2020 and the first plants are to be closed in 2022.

The Nordic countries’ budget proposals 2020 – key topics for Fortum

The Finnish Government presented its budget proposal on 17 September. All key energy tax decisions are postponed until 2020. The Government will start a broader energy tax reform in early 2020, taking effect in 2021. The reform will include an electricity tax reduction for industrial consumers (including datacentres and heat pumps that are connected to a district heating network and provide waste heat to the network), the tax treatment of peat and a CO2 emission-based tax for waste incineration.

In line with a broad political agreement of January 2019, containing new green taxes of EUR 1.5 billion, the Swedish budget proposal for 2020 contains a tax on waste incineration: starting at SEK 75/tonne in 2020 and increasing up to SEK 125/tonne by 2022. Based on Stockholm Exergi’s annual waste volume and a tax of SEK 100/tonne, the impact on Exergi’s cost level would be SEK 100 million annually. The result impact will depend on the final legal framework of the tax and the waste supply contract structure. The increased tax on fossil-fuelled CHPs entered into force on 1 August. Consequently, the board of Stockholm Exergi has for the time being decided to decommission one of two units in CHP6 in Stockholm and to keep another unit only as a reserve to support security of supply.

The Norwegian Government submitted its budget proposal for 2020 on 7 October. It includes a proposal for a carbon capture and storage grant for Fortum Oslo Varme amounting to NOK 38.5 million until the end of 2020. The final investment decision could be made by the Parliament in late 2020 or early 2021. Fortum considers the financing by the Norwegian State or the EU Innovation Fund to be a prerequisite for the full-scale carbon capture and storage project development and investment.

Swedish electrification commission

The Government will form an electrification commission in order to speed up the electrification of the transport sector. The objective is to speed up investments in electrified roads, charging stations, and other possible solutions. It will also cover financing issues, how quickly grids can be built, and the effects on the electricity system as a whole when the transport sector electrifies.

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