Operating environment and market position

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

Operating and regulatory environment Q1 2022

European power markets

On 24 February 2022, Russia attacked Ukraine. Since then the global economy, commodity and raw material prices have been impacted by various sanctions or by the possibility of sanctions. During the first quarter of 2022, this was reflected in all-time high power prices in several countries. These record-high prices were reached despite a mild and windy winter both in the Nordics and in Continental Europe.

According to preliminary statistics, power consumption in the Nordic countries was 112 TWh (120) TWh during the first quarter of 2022. The lower power demand in the Nordics was mainly caused by milder weather, with temperatures two degrees above the long-term average compared to the first quarter of 2021.

In Central Western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), power consumption in the first quarter of 2022 was 361 (375) TWh, according to preliminary statistics. Power demand was impacted by the mild winter in Continental Europe.

In the long term, electricity is expected to continue to gain a significantly higher share of total energy consumption. The electricity demand growth rate will largely be determined by classic drivers, such as macroeconomic and demographic development, but also increasingly by decarbonisation of the industrial, transport and heating sectors through direct electrification and green hydrogen.

At the beginning of the first quarter of 2022, Nordic water reservoirs were at 73 TWh, which is 11 TWh below the long-term average and 32 TWh lower than in the previous year. The deficit in water reservoirs decreased, owing to below normal hydro power production. At the end of the first quarter, the reservoir levels were at 35 TWh, which is 6 TWh below the long-term average and 20 TWh lower than in the previous year.

In the first quarter of 2022, power prices were at exceptionally high levels. The average system spot price in Nord Pool was EUR 110.0 (42.1) per MWh. The average area price in Finland was EUR 91.8 (48.6) per MWh, in the SE3 area in Sweden (Stockholm) EUR 99.9 (45.7) per MWh. However in the SE2 area in Sweden (Sundsvall) the average area price was EUR 24.8 (37.5) per MWh due to high precipitation and wind production. In Germany, the average spot price in the first quarter of 2022 was EUR 184.6 (49.6) per MWh.

In early May 2022, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2022 was around EUR 97 per MWh and for 2023 around EUR 75 per MWh. The Nordic water reservoirs were at 29 TWh, which is about 7 TWh below the long-term average and 19 TWh lower than one year earlier. The German electricity forward price for the remainder of 2022 was around EUR 224 per MWh and for 2023 around EUR 203 per MWh.

European commodity markets

In the first quarter of 2022, gas demand in Central Western Europe was 699 (802) TWh. The Central Western European gas storage levels decreased significantly: from 293 TWh at the beginning of the quarter to 137 TWh at the end of the quarter, which is 14 TWh lower than one year ago and 60 TWh lower than the five-year average (2017–2021).

Continuing tightness in the gas market, combined with the overhanging risk of disruptions in Russian pipeline gas flows to Europe, lifted European gas prices to unprecedented levels amid high volatility. The average gas front month price (TTF) in the first quarter of 2022 was EUR 101 (18) per MWh. The 2023 forward price increased from EUR 41 per MWh at the beginning of the quarter to EUR 72 per MWh at the end of the quarter, which is EUR 55 per MWh higher than one year earlier.

The volatility was high also in the EUA (EU Allowance) market during the first quarter of 2022, despite the rather small price difference between the start and end of the quarter. The price decreased from EUR 81 per tonne at the beginning of the quarter to EUR 77 per tonne at the end of the quarter, after first climbing to EUR 97 per tonne and then dropping to EUR 58 per tonne during the quarter. The EUA market closed the quarter EUR 34 per tonne higher than one year earlier.

Coal prices increased even more than gas prices during the first quarter. The forward quotation for coal (ICE Rotterdam) for 2023 increased from USD 88 per tonne at the beginning of the quarter to USD 190 per tonne at the end of the quarter, which is USD 121 per tonne above the price one year earlier.

In early May 2022, the TTF forward price for gas for the remainder of 2022 was EUR 95 per MWh. The forward quotation for EUAs for 2022 was at the level of EUR 85 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2022 was USD 245 per tonne.

Russian power market

Fortum’s Russia segment 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 303 (297) TWh during the first quarter of 2022. The corresponding figure for the first price zone was 229 (224) TWh and for the second price zone 61 (59) TWh. The 2.2% increase in consumption was caused by a 5.5% increase in economic growth.

In the first quarter of 2022, the average electricity spot price, excluding capacity prices, increased by 6.6% to RUB 1,449 (1,360) per MWh in the first price zone and by 19.9% to RUB 1,100 (918) in the second price zone. The spot price in the Urals hub increased by 11% and was RUB 1,284 (1,158) per MWh.

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

In Russia, capacity payments based on Capacity Supply Agreements (CSA) are a key driver of earnings, 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 1,472 MW, including 70 MW of solar and wind capacity. These capacities do not include those related to the joint ventures. Correspondingly, Uniper’s CSA capacity amounts to 800 MW.

Thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning. In 2022, there is a decrease in CSA payments for four 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, a total of 3,199.7 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.

Due to the current geopolitical situation, the ongoing Russia-Ukraine war and consequent supply chain constraints, Fortum is monitoring and assessing potential delays and the ability to complete ongoing projects. Fortum has stopped all new investment projects in Russia.

Fortum’s Russian wind and solar portfolio (either in joint venture or direct ownership) comprises 1.2 GW of operational capacities and 0.3 GW under construction. However, as Fortum has stopped all new investment projects in Russia, the future of 1.9 GW of capacities under development is undecided.

In the June 2017 CSA auction, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity. 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 the June 2018 CSA auction, the Fortum-Rusnano wind investment fund won the right to build 823 MW of wind capacity. 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. The timeline for completion of the 0.8 GW projects originally planned to be commissioned in 2022 and 2023 is currently unclear.

In the June 2018 and 2019 CSA auctions, Fortum won the right to build 110 MW and 6 MW of solar capacity. On 2 March 2021, Fortum announced that Fortum and the Russian Direct Investment Fund (RDIF) will build the 116 MW solar power plant in Kalmykia in southern Russia. 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. In December 2021, 78 MW of the capacity was commissioned and the remaining part is planned to be commissioned in the third quarter of 2022.

Fortum holds the right of CSA-backed capacities corresponding to approximately 1.4 GW of new wind projects awarded in a wind auction held in September 2021 and which were originally planned to be commissioned in 2025-2027. As Fortum has stopped all new investment projects in Russia, these projects are not proceeding.

Regulatory environment

The European Commission plans to reduce energy dependency on Russia

As a response to Russia’s attack on Ukraine, the European Commission published the ‘REPowerEU’ Communication at the beginning of March with the objective to reduce EU demand for Russian gas by two-thirds by the end of the year. To reach the goal, the Commission is proposing to diversify gas supplies while simultaneously reducing the overall fossil fuel dependence. Diversification of gas supplies includes the use of liquefied natural gas (LNG) and higher production of biomethane and renewable hydrogen.

As part of a fast-track adoption process, the Commission issued a gas legislative proposal with the main goal to ensure that gas storage facilities are sufficiently filled by next winter, including a 90% gas storage filling obligation. In mid-May, this proposal will be followed by another proposal to optimise the electricity market design and a concrete plan to phase out Russian fossil fuels.

The European Parliament scrutinises the taxonomy rules on nuclear and natural gas

In mid-March, the Complementary Delegated Act, which sets the criteria for nuclear and gas under the EU taxonomy framework, was officially published by the Commission. This launched a scrutiny period during which both the Council and the European Parliament can reject the Act until mid-July 2022.

Even if parts of the Complementary Delegated Act require further clarification, it lays an important basis for the recognition of nuclear in achieving Europe’s objective of carbon neutrality. Thus, Fortum has been advocating in favour of the adoption of the Act. However, debate is still ongoing on the inclusion of nuclear and gas under EU Taxonomy in particular in the European Parliament with the possibility of a veto not to be ruled out.

Swedish electrification strategy published

In February 2022, the Swedish Government presented a national electrification strategy. The strategy aims at presenting a comprehensive view on what is needed in order for the energy sector to grow and provide sufficient power for the electrification of industrial and transport sectors. Electrification is crucial in order to reach Sweden’s goal of net zero greenhouse gas emissions by 2045. The strategy consists of 67 different assignments to be finalised during 2022-2024 in order to facilitate faster deployment of infrastructure, to provide for security of supply, to remove obstacles for new power production and to develop the electricity market.

Germany is taking measures to ensure security of supply

In late February, the German Federal Ministry of Economics and Climate Protection suspended the certification process for Nord Stream 2 in the context of the geopolitical situation. Furthermore, sanctions have been issued that do not allow the pipeline to be operated. In the interest of security of supply, the ministry introduced comprehensive measures including a precautionary plan that safeguards oil, gas and coal stocks through mandatory minimum reserves. In addition, the first of three stages of an emergency plan was activated at the end of March in order to prepare for a possible delivery stop. With this, the government continues to monitor the gas markets, but will not intervene for the time being.

Like other countries, Germany is suffering from higher energy prices. Efforts are being made to minimise dependency on Russian energy imports as quickly as possible and to ensure security of supply. In order to meet these challenges, lifetime extensions of coal-fired power plants are being considered and there is increasing support for the expansion of renewable energy. Gas is still seen as a necessary transitional fuel, but it will be procured from new supplier countries. Accordingly, the development of the LNG infrastructure is also supported by the federal government.

Germany accelerates its energy transition with a legislative “Easter package”

In January 2022, the Federal Ministry for Economic Affairs and Climate Action presented the German energy policy path. It was stated that Germany needs to take significant measures to reach targets set out in the Climate Protection Act 2021 and to meet the goal of climate neutrality in 2045. Therefore an “Immediate Climate Action Programme” consisting of two legislative packages (“Easter” and “Summer”) was presented. The recently published “Easter package” consists of a series of proposals, such as the Renewable Energy Sources Act (EEG), the Amendment to the EEG as well as a reform of wind and solar expansion policies. The Easter package should be adopted before the summer.

Finnish climate and energy strategy published

The Finnish Government published the draft national climate and energy strategy and circulated it for comments on 14 April 2022. The strategy is a comprehensive programme of measures by which Finland will achieve the climate neutrality goal by 2035. In addition to the conventional emission reduction measures, the strategy discusses several specific themes: system integration and electrification, hydrogen and electric fuels, the heating system of the future, offshore wind power and evolving nuclear energy. The chapter on hydrogen also serves as a separate national hydrogen strategy and sets targets for the electrolysis capacity: 200 MW by 2025 and at least 1,000 MW by 2030. After the circulation for comments, the strategy will be passed to the parliament.

Appeals on the Finnish river basin management plans proceeding

Following the adoption of the river basin management plans (RBMP) by the Finnish Government in December 2021, Fortum made two appeals in January to the Supreme Administrative Court regarding the lower part of the Oulujoki water body and the Klobbfjärden water body which is the sea area around the Loviisa nuclear power plant. The main reason for the appeals was the inadequacy in the classification of water bodies. Relevant authorities have submitted their statements during the first half of 2022 and Fortum is preparing its written replies to these statements to be submitted during the second quarter of 2022. Court decisions are expected during 2022.

Government permit granted for the final repository for spent nuclear fuel in Sweden

In January 2022, the Swedish Government made a decision to give the go-ahead to the final repository for spent nuclear fuel in Forsmark in Östhammar municipality and to an encapsulation plant in Oskarshamn. The next step in the licensing process is for the Land and Environment Court to establish conditions for the facilities; a building and operation permit on the interim storage facility is expected in June/July 2022. The Swedish Radiation Safety Authority will also decide on permit conditions under the Swedish Nuclear Activities Act. Construction can start once all licences are in place, after which time, it will take about 10 years to build the spent fuel repository.

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 2020 (pro forma). Three largest are Vattenfall, united Fortum and Uniper and Statkraft. Total power generation 394 terwatt hours, over 350 companies.
Diagram of Nordic electricity retailers at the end of 2020 (pro forma). Three largest are Fortum, Vattenfall and Andel. 16 million customers and about 350 companies.
Illustration of the largest power generators in Europe and Russia at the end of 2020 (pro forma). Three largest are EDF, Rosenergoatom and Fortum and Uniper united.
Illustration of world's largest heat producers at the end of 2020 (pro forma). Three largest are Gazprom, T Plus and Sibgenco. Fortum and Uniper united are on the 9th place.
Illustration of the largest gas storage operators in Europe at the end of 2020 (pro forma). Three largest are STOGIT, Storengy and NAM. Uniper is the fourth largest.