Operating environment and market position

Information about Fortum's operating environment on ​​quarterly basis and market position

Operating and regulatory environment at the end of September 2021

European power markets

In the third quarter of 2021, European power prices saw an exceptional increase, driven especially by European gas prices. This, together with low precipitation and wind production, had a clear positive impact on the Nordic power prices. The price increases in the Nordics, however, were not in proportion to the increases seen in Continental Europe. Congestion in export interconnectors and the internal Nordic grid continued to cause a widening price difference between Continental Europe and Nordic price areas.

According to preliminary statistics, power consumption in the Nordic countries was 83 (81) TWh during the third quarter of 2021. The higher power demand in the Nordics, compared to the third quarter of 2020, was caused by increased consumption both in industrial and non-industrial sectors. Temperatures were half a degree above the long-term average and at the same level as in the third quarter of 2020. During January–September 2021, power consumption in the Nordic countries was 293 (280) TWh.

In central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), power consumption in the third quarter was 305 (303) TWh according to preliminary statistics, which is some 3% below the pre-Covid-19 level of power demand. During January–September 2021, power consumption in central western Europe was 998 (959) TWh.

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 in the Nordic countries. The rate of electrification of the industrial, transportation, and heating sectors is a key element determining the longer-term growth in electricity consumption.

At the beginning of the third quarter, the Nordic water reservoirs were at 87 TWh, which is 3 TWh above the long-term average and 6 TWh lower than one year earlier. Low precipitation during the summer has led to a significant deficit in water reservoirs. At the end of the third quarter of 2021, the reservoirs were at 83 TWh, which is 18 TWh below the long-term average and 31 TWh lower than one year earlier.

In the third quarter of 2021, power prices were at a clearly higher level compared to one year ago. The average system spot price in Nord Pool was EUR 68 (9) per MWh. The average area price in Finland was EUR 79 (33) per MWh, in the SE3 area in Sweden (Stockholm) EUR 71 (25) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 55 (19) per MWh. In Germany, the average spot price in the third quarter of 2021 was EUR 97 (36) per MWh.

In January–September 2021, the average system spot price in Nord Pool was EUR 51 (10) per MWh. The average area price in Finland was EUR 58 (26) per MWh, in the SE3 area in Sweden (Stockholm) EUR 52 (20) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 42 (14) per MWh. In Germany, the average spot price during January–September 2021 was EUR 69 (28) per MWh.

In early November 2021, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2021 was around EUR 60 per MWh and for 2022 at around EUR 35 per MWh. The Nordic water reservoirs were at 93 TWh, which is about 8 TWh below the long-term average and 21 TWh lower than one year earlier. The German electricity forward price for the remainder of 2021 was around EUR 160 per MWh and for 2022 around EUR 115 per MWh.

European commodity markets

In the third quarter of 2021, gas demand in central western Europe was 305 (347) TWh and 1633 (1508) TWh in January–September 2021. The central western European gas storage levels increased from 233 TWh at the beginning of the quarter to 413 TWh at the end of the quarter, which is 152 TWh lower than one year ago and 129 TWh lower than the five-year average (2016–2020).

Tightness in the gas market has lifted European gas prices to unprecedented levels. The average gas spot price (TTF) during the third quarter of 2021 was EUR 48 (8) per MWh and EUR 31 (8) per MWh during January–September 2021. The 2022 forward price increased from EUR 26 per MWh at the beginning of the quarter to EUR 54 per MWh at the end of the quarter, which is EUR 39 per MWh higher than one year earlier.

During the third quarter of 2021, the EUA market saw rather modest gains. The price increased from EUR 57 per tonne at the beginning of the quarter to EUR 62 per tonne at the end of the quarter, which is EUR 35 per tonne higher than one year earlier.

Similarly to the gas market, there have also been strong increases in coal prices. The forward quotation for coal (ICE Rotterdam) for 2022 increased from USD 87 per tonne at the beginning of the quarter to USD 157 per tonne at the end of the quarter, which is USD 94 per tonne above the price one year earlier.

In early November 2021, the TTF forward price for gas for the remainder of 2021 was EUR 75 per MWh and for 2022 EUR 50 per MWh. The forward quotation for EUA’s for 2021 was at the level of EUR 60 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2021 was USD 140 per tonne.

Russian power market

Fortum’s Russia division operates thermal power plants 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 in 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 power consumption was 248 (233) TWh during the third quarter of 2021. The corresponding figure for the first price zone was 191 (178) TWh and for the second price zone 49 (47) TWh. The increase in consumption resulted from abnormally warm temperatures in the third quarter of 2021 and the economic recovery. In January–September 2021, Russian power consumption was 792 (748) TWh. The corresponding figure for the first price zone was 603 (567) TWh and for the second price zone 158 (153) TWh.

In the third quarter of 2021, the average electricity spot price, excluding capacity prices, increased by 19% to RUB 1,541 (1,295) per MWh in the first price zone and by 7% to RUB 914 (856) in the second price zone. The spot price in the Urals hub increased by 18 % and was RUB 1,304 (1,109) per MWh. In January–September 2021, the average electricity spot price, excluding capacity prices, was RUB 1,405 (1,226) per MWh in the first price zone, RUB 911 (888) in the second price zone, and RUB 1,206 (1,066) per MWh in the Urals hub.

The Russian Government increased the gas price by 3% in July 2021.

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 1,926 MW, including 70 MW of solar and wind capacity.

Thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning (see tables below). In 2021, there was an increase in CSA payments for three units of Fortum’s Russia segment’s generation fleet and for one unit of Fortum’s Uniper segment’s generation fleet. After the CSA period ends, the units can receive CCS payments from CCS auctions.

Fortum’s Russia segment’s generation capacity not receiving CSA payments, totalling 2,697 MW, is allowed to participate in the annual CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 10,445 MW. The next CCS auction, for the year 2027, is expected to be held in November 2023.

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.

In June 2018, the Fortum-Rusnano wind investment fund 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 2018 and 2019, Fortum won the right to build 110 MW and 6 MW of solar capacity in CSA auctions. The power plants will receive a guaranteed CSA price for a period of 15 years, corresponding to approximately RUB 15,000 per MWh and RUB 14,000 per MWh, respectively. 78 MW of the capacity is expected to be commissioned in the fourth quarter of 2021 and the remaining part in the second half of 2022.

In September 2021, Fortum announced that the Fortum-Rusnano wind investment fund was awarded annual CSA (Capacity Supply Agreement) remuneration in the range of RUB 16.9–23.8 billion for new wind power generation in the latest Russian renewables’ auction. This corresponds to wind capacity of approximately 430–530 MW per annum (a total of 1.3–1.6 GW); to be commissioned during years 2025–2027. The number of gigawatts ultimately to be constructed is subject to separate investment decisions. The projects will be covered by CSAs for a period of 15 years from commissioning. The average nominal price is expected to be in the range RUB 2,600–4,200 per MWh during the CSA period. The estimated prices are inflation adjusted. These numbers do not include additional potential revenues for bilateral green energy sales, where Fortum and its joint ventures are the market leader in Russia.

In addition to this, Fortum’s joint ventures for renewable power generation have a total of 3,339 MW of wind and solar capacity, 670 MW of which is operational, 778 MW is under construction, and 1,891 MW is under development. Correspondingly, Uniper’s CSA capacity amounts to 800 MW.

Regulatory environment

Status of nuclear and gas under the EU taxonomy still unclear

The status of nuclear and gas in the context of the EU sustainable finance taxonomy is still pending. Despite the conclusions by the Commission’s Joint Research Centre that nuclear does not pose more harm than other technologies covered under the EU taxonomy, there has been limited progress in the preparation of the complementary delegated act to address the sustainability criteria of both nuclear and gas. According to the latest information from the Commission, they aim to issue the act by the end of the year. This topic is dividing the views of the member states and it is likely that there will not be clarification until Germany has formed a new government, expected by Christmas.

Fortum continues to advocate for a science-based and technology-neutral EU taxonomy and has called the European Commission to swiftly table the complementary delegated act.

‘Fit for 55’ negotiations expected to proceed in 2022

EU institutions have started to process the legislative files of the ‘Fit for 55’ package that was published in July. The actual negotiations in the Council are expected to start during the first half of 2022. In the European Parliament, the legislative work on the files has started by allocating the files between political parties.

The most controversial and political files will be the carbon border adjustment, energy taxation and the new Emission Trading System (ETS) for transport and heating of buildings. The ongoing public debate on energy prices may also impact the approval of the ‘Fit for 55’ package.

Fortum supports the Commission’s EU ‘Fit for 55’ package that is largely in line with our priorities, in particular regarding EU ETS and carbon pricing. However, on selected topics in the package, it is crucial to take a more cost-efficient and technology-neutral approach. New incentives - like carbon contracts for difference (CCfD) - should be discussed in the context of the EU ETS in order to facilitate hydrogen economy development.

Fortum calls for a swift adoption of the ‘Fit for 55’ legislation in order to increase predictability for investments and the energy market.

Norwegian Government stays committed to carbon capture and storage

Norway’s parliamentary elections held in September shifted political power from the conservatives to the left-wing parties and in October the new Labour (AP) and Centre Party (SP) Government took office.

The new Government programme has a strong focus on developing new green industries, such as carbon capture and storage (CCS), hydrogen, offshore wind and batteries, while securing a fair green transition. CCS is considered an important tool both for reaching Norway’s climate targets and transitioning away from its dependence on fossil fuels. The Government is committed to continue the work to finance Fortum Oslo Varme’s CCS project. Clarification concerning the EU and national financing of Fortum’s CCS project are expected towards the end of this year.

Finnish Government’s budget decisions

In September, the Finnish Government agreed on the state budget for 2022, including decisions on additional measures to reach the national 2035 carbon neutrality target. The Government’s decisions include several positive elements for the energy industry, in particular for district heating, waste management, and incineration. The electricity tax for data centres, heat pumps, and electricity boilers connected to the district heating network will be decreased to the EU minimum level from 2022 (subject to EU notification). The tax base for the waste tax will be broadened from 2023. From 2022, the recycling industry will apply the same (lower) electricity tax category as other industrial activities.

Fortum welcomes the Government’s tax decisions, as they further incentivise electrification and the decarbonisation of district heating. Policy actions on waste management and incineration contribute positively to Fortum’s recycling and waste solutions business.

Possible further delay in decision on the final nuclear waste repository in Sweden

In August 2021, the Swedish Government decided to extract the interim storage decision from SKB’s (Svensk Kärnbränslehantering AB) comprehensive final repository system application. Only the permission for increased storage at the interim storage facility was approved. In line with the licensing process, the case is now to be decided by the Swedish Land and Environmental Court, and a decision on the interim storage facility is expected in June/July 2022. The Government decision made in August creates uncertainty with regards to the process to have a legally enforced permit for the interim storage facility in place by the end of 2023, when maximum capacity under the currently license will be reached. If a legally enforced permit is not in force by the end of 2023, nuclear operators will not be able to store more spent fuel, and therefore the risk for electricity supply disruptions still remains in the spring of 2024.

The Swedish Government has commented in the media that it aims to make a decision on the final repository for spent fuel within a few months, however, the actual timing of such a decision still remains open. SKB’s additional annual cost estimate for delay of the programme would be allocated to, and shared by the nuclear operators, in due course. This would impact Fortum’s provision for spent fuel and nuclear waste going forward. Any cash flow impact from revised annual waste fund fees would likely affect the nuclear plant owners starting from January 2024. Due to the uncertainty related to the revision of the time plan, the impact on Fortum’s provisions and cash flows cannot be estimated at this point of time.

Market position

Fortum is the second largest power generator and the largest electricity retailer in the Nordic countries. Globally, we are one of the leading heat producers. Our investment in Uniper increased the CO2-free power generation by approximately 60%, making us the third largest CO2-free generator in Europe. The consolidation of Uniper increased Fortum’s power generation capacity by 36.2 GW and heat and steam production capacity by 4.9 GW. Uniper has power generation mainly in Germany, Russia, the United Kingdom, Sweden, and the Netherlands, as well as heat and steam production mainly in Germany, the Netherlands, and Russia.

Illustration of Nordic power generation at the end of 2019. Three largest are Vattenfall, united Fortum and Uniper  and Statkraft. Total power generation 394 terwatt hours. 16 million customers and about 350 companies.
Diagram of Nordic electricity retailers at the end of 2019. Three largest are Fortum, Vattenfall and Andel. 16 million customers and about 350 companies.
Illustration of the largest power producers in Europe and Russia at the end of 2019. Three largest are  EDF, Rosenergoatom and Fortum and Uniper united.
Illustration of world's largest heat producers at the end of 2019. Three largest are Gazprom, T Plus and Sibgenco. Fortum and Uniper united are on the 9th place.