European power markets
In the first quarter of 2021, European power prices recovered strongly after a weak 2020. It was a combination of drivers that made the price recovery possible: the cold winter across the Northern hemisphere, initial economic recovery post Covid-19, and low wind power generation in Continental Europe and the Nordics. Additionally, the EU emission allowance (EUA) price increased quickly on the back of a higher 2030 emissions reduction target. At the same time, European energy commodities were supported by the same drivers, leading to clear price gains in power, EUA, and gas prices during the first quarter.
According to preliminary statistics, electricity consumption in the Nordic countries was 120 (112) TWh during the first quarter of 2021. The higher power demand in the Nordics, compared to the first quarter of 2020, was caused by colder weather. Temperatures were one degree below the long-term average and four degrees below the level in the first quarter of 2020. In central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), the electricity consumption in the first quarter was 356 (348) TWh according to preliminary statistics. The central western European power demand was also impacted by colder temperatures.
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. 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 2021, the Nordic water reservoirs were at 105 TWh, which is 21 TWh above the long-term average and 26 TWh higher than one year earlier. The below normal winter temperatures and wind power generation led to abundant hydropower generation and utilisation of water reservoirs. In addition, Nordic precipitation was clearly below normal during the first quarter. At the end of the first quarter of 2021, the reservoirs were consequently reduced to 55 TWh, which is 14 TWh above the long-term average and 3 TWh higher than one year earlier.
In the first 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 42.1 (15.4) per MWh. The average area price in Finland was EUR 48.6 (24.0) per MWh, in the SE3-area in Sweden (Stockholm) EUR 45.7 (18.7) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 37.5 (15.6) per MWh. In Germany, the average spot price in the first quarter of 2021 was EUR 49.6 (26.6) per MWh.
In early May 2021, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2021 was around EUR 36 per MWh and for 2022 somewhat lower at around EUR 32 per MWh. The Nordic water reservoirs were about 9 TWh above the long-term average and 3 TWh higher than one year earlier. The German electricity forward price for the remainder of 2021 was around EUR 54 per MWh and for 2022 around EUR 63 per MWh.
European commodity markets
Gas demand in central western Europe was 802 (722) TWh during the first quarter of 2021. The central western European gas storage levels decreased from 439 TWh at the beginning of the quarter to 144 TWh at the end of the quarter, which is 193 TWh lower than one year ago and 58 TWh lower than the five-year average (2016–2020).
The average gas spot price (TTF) during the first quarter of 2021 was EUR 18.5 (9.7) per MWh. The 2022 forward price increased from EUR 16.1 per MWh at the beginning of the quarter to EUR 18.1 per MWh at the end of the quarter.
During the first quarter of 2021, the market sentiment in EUAs was exceptionally strong. The price increased from EUR 32.7 per tonne at the beginning of the quarter to EUR 42.6 per tonne at the end of the quarter, which is EUR 24.9 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2022 first decreased from USD 72.4 per tonne at the beginning of the quarter to close to USD 64 per tonne. It then increased back to USD 72.4 per tonne at the end of the quarter, which is USD 12.2 per tonne above the price one year earlier.
In early May 2021, the TTF forward price for gas for the remainder of 2021 was EUR 24 per MWh and for 2022 EUR 21 per MWh. The forward quotation for EUAs for 2021 was at the level of EUR 51 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2021 was USD 82 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 electricity consumption was 297 (283) TWh during the first quarter of 2021. The corresponding figure for the first price zone was 224 (213) TWh and for the second price zone 59 (59) TWh. The increase in consumption was caused by the cold temperatures in the first quarter of 2021, compared to the warmer weather in the first quarter of 2020.
In the first quarter of 2021, the average electricity spot price, excluding capacity prices, increased by 11% to RUB 1,360 (1,222) per MWh in the first price zone and by 1% to RUB 918 (907) in the second price zone. The spot price in the Urals hub increased and was RUB 1,158 (1,068) per MWh.
The Russian Government increased the gas price by 3% in August 2020. Fortum estimates the gas price to be increased by 4% 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. In addition to this, Fortum’s joint ventures for renewable power generation have a total of 1,939 MW of wind and solar capacity, 600 MW of which is operational, 611 MW is under construction, and 728 MW is under development. Correspondingly, Uniper’s CSA capacity amounts to 1,607 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, the units can receive CCS payments from CCS auctions.
Fortum’s Russia segment’s generation capacity not receiving CSA payments, totalling 2,953 MW, is allowed to participate in the annual CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 9,638 MW. The next CCS auction, for the year 2027, is expected to be held in November 2021.
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 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.
Delegated act on the EU Taxonomy published
On 21 April, the Commission published the first delegated act on climate change mitigation and adaptation in the framework of the EU Taxonomy. The act covers energy technologies, such as wind, solar, hydro, bioenergy, and hydrogen. Other technologies and areas – mainly gas, nuclear, and agriculture – will be dealt with in a complementary act to be published in the summer. Two expert groups are currently reviewing the environmental assessment of nuclear by the Commission’s Joint Research Centre (JRC).
Improvements on the criteria for the generation assets essential to the Nordic decarbonised power mix have been achieved, in particular with the eligibility of hydro as ‘sustainable activities’ and a positive nuclear assessment from the JRC. However, these improvements do not ensure full alignment with existing EU legislation and technology neutrality.
Fortum has consistently supported a thorough and science-based evaluation of the power technologies and asked to include all of them in one single delegated act. Fortum, however, respects the decision taken by the Commission as well as notes the changes made to the criteria of core technologies. Fortum invites the banking and financial sector to develop an inclusive approach when implementing the EU Taxonomy.
EU Innovation Fund shortlisted four Fortum projects
On 25 March, the European Commission published a list of 70 projects shortlisted for the second evaluation round in the EU Innovation Fund. The Innovation Fund is one of the world’s largest funding programmes for demonstrating and co-financing innovative low-carbon, renewable energy, energy storage, and circular economy technologies for the next 10 years. The first call of the Fund amounts to EUR 1 billion. The maximum size of support per project is 60% of the capital expenditure.
Four Fortum projects are included on the shortlist: Fortum Oslo Varme’s carbon capture and storage project in connection to waste incineration, Stockholm Exergi’s carbon capture and storage project in biomass combustion, a project by City Solutions’ Recycling and Waste business on sustainable battery chemicals from secondary raw materials, and the joint project by Fortum, Uniper, and Perstorp to produce hydrogen for sustainable methanol on a large scale.
The next step for the shortlisted projects is to submit a full application by 23 June for the second stage of evaluation. The second evaluation round is expected to be completed and financing decisions to be announced by the end of 2021.
’Fit for 55’ legislative package to be proposed in July
On 21 April, the EU institutions agreed on the European Climate Law, including the increase of the 2030 climate target to 55%, and a goal of climate neutrality by 2050.
In July, the Commission is expected to publish the so-called ’Fit for 55’ legislative package to reach the new 2030 climate target. The public consultations on key initiatives were finalised in February. The legislative proposals to be published include e.g. the revisions of the Directives on Emissions Trading, Renewable Energy, Energy Efficiency, and Energy Taxation.
Fortum supports the new EU climate ambition and the EU Emission Trading System (ETS) as the most suited and cost-efficient instrument to reach it. The revision of the 2030 climate and energy legislation should be finalised as soon as possible.
National recovery and resilience plans progressing
All EU member states were required to submit their national recovery and resilience plans by 30 April, setting out their reform and investment agendas for 2021-2026. This is a necessary step for the member states to be eligible for obtaining funding disbursed under the EUR 672 billion Recovery and Resilience Facility of the EU. The Commission will conclude the assessment of the plans within two months from the submission. After the approval of the plans, reforms and investments will shift to the implementation phase. The member states can start to distribute up to 10% of the grants prior to the plan approvals.
According to the Commission’s guidance on the use of recovery finance for member states, the focus should be on renewable energy rather than on CO2-free energy. Supported investments are expected to be substantial and credible and need to respect the ’Do No Significant Harm’ principle, which is a key concept in the sustainable finance taxonomy.
Fortum closely follows the progress of the national recovery plans and has a number of project proposals that could be eligible for funding in the framework of the Recovery and Resilience Facility.
Battery Regulation discussed by the EU institutions
On 10 December, the Commission published its proposal for the EU Batteries Regulation, which aims to ensure that batteries used in the EU market are sustainable and safe throughout their entire life cycle. The regulation intends to facilitate reuse, repurposing, and recycling of batteries, whereas non-rechargeable batteries are to be phased out. This is an important driver for increasing the demand for recycled materials and accelerating investments in recycling capacity within the EU.
In the European Parliament, the file has been referred to the Committee on Internal Market and Consumer Protection, where the first exchange of views took place on 17 March. The draft Committee report is expected in mid-July and voting in December, followed by a plenary vote in early 2022. In the Council, the proposal is being examined by the Working Party on the Environment.
The proposal is well in line with Fortum´s priorities regarding ambitious recycling targets and requirements on mandatory recycled content in batteries. Fortum considers the timeline for the proposed targets realistic and emphasises the importance of securing future supplies of raw materials including recycled materials.
Several electricity market design-related initiatives moving along in Sweden
In February, the Swedish Government presented a proposal to exempt offshore wind from grid fees that are usually paid by the connecting party. The legislation is planned to enter into force by 1 August. Fortum is critical of exempting one specific technology since it will distort the market and put extra costs on consumers.
The Swedish TSO, Svenska Kraftnät, has been given a Government assignment to suggest remuneration mechanisms for ancillary services by 1 September. Fortum has proposed preliminary remuneration mechanisms for both frequency and non-frequency-related ancillary services.
In March, the pre-study of the Swedish electrification strategy was published. It includes twelve points for a “rapid, smart, and socio-economically efficient electrification”. The overall target of the strategy is to enable the doubling of electricity demand by 2045. The study will also investigate an option for an updated and ’sharpened’ energy-only market. The concrete reforms to be implemented are still unclear, but the strategy is likely to result in further public inquires on market design. The strategy will be published in October.
Germany launched a carbon pricing scheme for non-ETS sectors
On 1 January, Germany launched its CO2 pricing scheme for the transport and heating sectors. The national scheme will be operated as a cap-and-trade system and exist in parallel to the EU ETS. The system started with a fixed price of 25 euros per tonne CO2 and the Federal Government expects to generate approximately EUR 40 billion in revenues in the first four years of the scheme. The fixed price will gradually increase to EUR 55 by 2025. From 2026, the price will be determined in auctions with a price corridor of EUR 55 - 65 set for 2026.
The Government is still expected to pass a so-called Carbon Leakage Directive to avoid double charging companies already under the ETS and to ensure the competitiveness of the CO2-intensive industries in Germany.