Operating and regulatory environment (2020 Financial Statements Bulletin)
European power markets
According to preliminary statistics, electricity consumption in the Nordic countries was 104 (108) TWh during the fourth quarter of 2020. The lower power demand in the Nordics was mainly related to mild weather. Temperatures were somewhat above the long-term average and two degrees above the level in the fourth quarter of 2019. Lower industrial demand in Finland and Sweden also contributed to the decline in power demand.
Measures taken to prevent the spread of Covid-19 impacted power demand in various European countries, especially during the second quarter of 2020. However, the European power demand recovered significantly in the third quarter, according to preliminary statistics, demand in the fourth quarter in central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands) was 330 TWh, just 1% below the 2019 level. As a whole, consumption in 2020 in central western Europe saw a 4% decline year-on-year.
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 2020, the reservoirs were at 105 TWh, which is 21 TWh above the long-term average and 26 TWh higher than one year earlier.
In the fourth quarter of 2020, the average system spot price in Nord Pool was EUR 13.8 (38.6) per MWh. The decline in the Finnish and Swedish area prices was clearly less than in the Nordic system price. The average area price in Finland was EUR 32.7 (43.5) per MWh, in the SE3-area in Sweden (Stockholm) EUR 25.6 (38.5) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 15.1 (37.5) per MWh. During 2020, the average system spot price in Nord Pool was EUR 10.9 (38.9) per MWh. The average area price in Finland was EUR 28.0 (44.0) per MWh, in the SE3-area in Sweden (Stockholm) EUR 21.2 (38.4) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 14.4 (37.9) per MWh. The very large hydrological surplus in many hydro reservoirs was the main reason for the low Nordic spot prices during 2020.
In Germany, the average spot price in the fourth quarter was EUR 38.8 (36.6) per MWh, slightly above the level in the fourth quarter of 2019. The continuing recovery in power demand, the favourable development of CO2 and gas prices, and wind power generation below normal levels all contributed to the increase in the German spot price. In 2020, the average German spot price was EUR 30.5 (37.7) per MWh.
At the end of February 2021, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2021 was around EUR 26 per MWh and for 2022 equally around EUR 26 per MWh. The Nordic water reservoirs were about 9 TWh above the long-term average and 1 TWh lower than one year earlier. The German electricity forward price for the remainder of 2021 was around EUR 48 per MWh and for 2022 around EUR 52 per MWh.
Gas demand in central western Europe was 662 (664) TWh during the fourth quarter of 2020. The central western European gas storage levels decreased from 565 TWh at the beginning of the quarter to 439 TWh at the end of the quarter, which is 99 TWh lower than one year ago and 8 TWh higher than the five-year average (2015–2019).
The average gas spot price (TTF) during the fourth quarter was EUR 14.7 (12.7) per MWh. The 2021 forward price increased from EUR 13.4 per MWh at the beginning of the quarter to EUR 17.1 per MWh at the end of the quarter.
During the fourth quarter, European Emission Allowances (EUA) traded in the range of EUR 23-33 per tonne. The price increased from EUR 26.5 per tonne at the beginning of the quarter to EUR 32.7 per tonne at the end of the quarter, which is EUR 8.1 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2021 increased from USD 60.0 per tonne at the beginning of the quarter to USD 68.9 per tonne at the end of the quarter, which is USD 12.5 per tonne above the price one year earlier.
At the end of February 2021, the TTF forward price for gas for the remainder of 2021 was EUR 16.4 per MWh and for 2022 EUR 16.6 per MWh. The forward quotation for EUAs for 2021 was at the level of EUR 37 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2021 was USD 67 per tonne.
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 electricity consumption was 283 (286) TWh during the fourth quarter of 2020. The corresponding figure for the first price zone was 214 (217) TWh and for the second price zone 57 (58) TWh. The decline in consumption was caused by lower oil production in the fourth quarter of 2020. In 2020, Russian electricity consumption was 1,033 (1,059) TWh. The corresponding figure for the first price zone was 783 (807) TWh and for the second price zone 209 (211) TWh.
In the fourth quarter of 2020, the average electricity spot price, excluding capacity prices, decreased by 2.3% to RUB 1,204 (1,232) per MWh in the first price zone and increased by 1.1% to RUB 825 (817) in the second price zone. The spot price in the Urals hub decreased marginally and was RUB 1,074 (1,081) per MWh. In 2020, the average electricity spot price, excluding capacity prices, was RUB 1,220 (1,289) per MWh in the first price zone and RUB 873 (892) in the second price zone. The spot price in the Urals hub was RUB 1,068 (1,117) 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, including 70 MW of solar and wind capacity. In addition to this, Fortum’s joint ventures for renewable power generation have 600 MW of operational wind capacity, as well as 495 MW under construction and 728 MW under development. Correspondingly, Uniper’s CSA capacity amounts to 2,455 MW.
In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning (see tables below). In 2021, an increase in CSA payments is expected for three units of Fortum’s Russia segment’s generation fleet and one unit of Fortum’s Uniper 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 2027, is expected to be held in November 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. These plants are to be commissioned during 2021-2022.
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 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.
More detailed information about the market fundamentals is included in the tables at the end of the report.
EU legislation under preparation to implement the revised 2030 climate target
On 11 December, the European Council adopted conclusions on the new 2030 climate target. The Council’s decision is in line with the Commission’s original proposal to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 level, increasing the ambition level from the current reduction target of 40%.
The new target is expected to be officially approved as part of the adoption of the European Climate Law during the first quarter of 2021 in the negotiations between the Council, the Parliament, and the Commission. The Parliament has called for a 60% emission reduction target.
Legislative proposals to implement the new target are under preparation and expected to be published in mid-2021. Revisions will be made e.g. to the directives on Emissions Trading, Renewable Energy, and Energy Efficiency. In early 2021, public consultations on the various legislative files were carried out, and Fortum has responded to all of them. The Commission is also working on extensive impact assessments for each legislative file.
The key issue that will potentially have a large effect on the 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.
EU Commission’s delegated act on EU taxonomy regulation delayed
The consultation on the Commission’s draft delegated act on climate adaptation and mitigation ended in December, with an unprecedented bulk of 46,000 responses. The act has turned even more technology-oriented than expected, raising challenges for essential power technologies, such as hydro, nuclear, natural gas, and also hydrogen. The proposed criteria are of significant concern for the largely CO2-free Nordic power generation, as hydro and nuclear might not be taxonomy-aligned.
Based on a coalition of like-minded companies and associations, Fortum has placed significant pressure on the Commission to review the delegated act to comply with the principle of technology neutrality and EU sectorial legislation.
According to the EU taxonomy regulation, the final climate change delegated acts should have been adopted by the end of 2020, but the adoption is now due during the second half of April 2021. The separate environmental assessment of nuclear should be finalised mid of this year and supporting member states stressed the need to include nuclear in the second wave of delegated acts due for adoption by year end.
Fortum firmly supports the objective of transitioning the European economy towards carbon neutrality by mid-century. However, we caution against arbitrarily ruling out 40% of European net electricity generation and two thirds of European CO2-free electricity generation by excluding hydro and nuclear from taxonomy-aligned operations.
Last minute Brexit deal secured
On 24 December, the EU and the UK agreed on a broad trade and cooperation agreement only one week before the end of the Brexit transition period. The agreement provisionally entered into force on 1 January, and the ratification process is to be concluded during the first quarter of 2021.
The scope of the agreement is more limited compared to the EU internal market, but it goes beyond several other EU trade agreements. Provisions in the Energy Chapter aim to enable energy trading and investments between the parties as well as to support security of supply and ecological sustainability. The terminology and definitions are aligned with the EU legislation. The UK will maintain its earlier commitment to the energy and climate targets.
From the beginning of 2021, the UK needs to establish its own carbon pricing system covering emissions from energy production, industry, and air traffic. The aim is to assess the possibilities to link the UK trading system to the EU ETS while maintaining the integrity of both systems.
Most importantly, a hard Brexit was avoided and there is a deal, but Fortum regrets losing a firm supporter of the strong climate policy and the free market. No major changes in the energy market are envisaged, but the linkage of the UK to the EU ETS is still open.