European power markets
In the second quarter of 2021, European power prices continued to rise, driven by strong gas and carbon prices. Even if Nordic power prices benefitted from this development to some extent, continued congestions in both export interconnectors and the internal Nordic grid had a visible impact causing widening price differences towards Continental Europe and between Nordic price areas.
According to preliminary statistics, power consumption in the Nordic countries was 90 (87) TWh during the second quarter of 2021. The higher power demand in the Nordics, compared to the second quarter of 2020, was caused by increased consumption in both the industrial and the non-industrial sectors. Temperatures were at the long-term average and half a degree below the level in the second quarter of 2020. During January-June 2021, power consumption in the Nordic countries was 210 (199) TWh.
In central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), the power consumption in the second quarter was 296 (265) TWh, according to preliminary statistics, which is in line with the pre-Covid-19 level power demand. During January-June 2021, power consumption in central western Europe was 653 (620) 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 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 second quarter, the Nordic water reservoirs were at 55 TWh, which is 14 TWh above the long-term average and 3 TWh higher than one year earlier. High hydropower generation and below normal precipitation has lead to the normalisation of water reservoirs. At the end of the second quarter of 2021, the reservoirs were at 87 TWh, which is 3 TWh above the long-term average and 6 TWh lower than one year earlier.
In the second 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 41.9 (5.6) per MWh. The average area price in Finland was EUR 46.3 (22.5) per MWh, in the SE3 area in Sweden (Stockholm) EUR 38.7 (15.1) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 33.1 (8.2) per MWh. In Germany, the average spot price in the second quarter of 2021 was EUR 60.3 (20.3) per MWh.
In January-June 2021, the average system spot price in Nord Pool was EUR 42.0 (10.5) per MWh. The average area price in Finland was EUR 47.5 (23.2) per MWh, in the SE3 area in Sweden (Stockholm) EUR 42.2 (16.9) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 35.3 (11.9) per MWh. In Germany, the average spot price during January-June 2021 was EUR 55.0 (23.4) per MWh.
In early August 2021, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2021 was around EUR 63 per MWh and for 2022 at around EUR 39 per MWh. The Nordic water reservoirs were at 88 TWh, which is about 9 TWh below the long-term average and 24 TWh lower than one year earlier. The German electricity forward price for the remainder of 2021 was around EUR 98 per MWh and for 2022 around EUR 83 per MWh.
European commodity markets
In the second quarter of 2021, gas demand in central western Europe was 457 (380) TWh and 1,260 (1,110) TWh in January-June 2021. The central western European gas storage levels increased from 144 TWh at the beginning of the quarter to 233 TWh at the end of the quarter, which is 267 TWh lower than one year ago and 146 TWh lower than the five-year average (2016–2020).
The average gas spot price (TTF) during the second quarter of 2021 was EUR 25.1 (5.4) per MWh and EUR 21.8 (7.6) per MWh during January-June 2021. The 2022 forward price increased from EUR 18.1 per MWh at the beginning of the quarter to EUR 25.5 per MWh at the end of the quarter.
During the second quarter of 2021, the market sentiment for EUAs was strong. The price increased from EUR 42.5 per tonne at the beginning of the quarter to EUR 56.4 per tonne at the end of the quarter, which is EUR 29.4 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2022 increased from USD 72.5 per tonne at the beginning of the quarter to USD 87.2 per tonne at the end of the quarter, which is USD 29.4 per tonne above the price one year earlier.
In early August 2021, the TTF forward price for gas for the remainder of 2021 was EUR 45 per MWh and for 2022 EUR 32 per MWh. The forward quotation for EUA’s for 2021 was at the level of EUR 56 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2021 was USD 143 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 (232) TWh during the second quarter of 2021. The corresponding figure for the first price zone was 188 (176) TWh and for the second price zone 50 (48) TWh. The increase in consumption was caused by the abnormally hot temperatures in the second quarter of 2021 and economic recovery: the most negative effect of the Covid-19 pandemic and oil production restrictions were observed in May 2020. In January-June 2021, Russian power consumption was 544 (518) TWh. The corresponding figure for the first price zone was 412 (391) TWh and for the second price zone 110 (105) TWh.
In the second quarter of 2021, the average electricity spot price, excluding capacity prices, increased by 13% to RUB 1,315 (1,160) per MWh in the first price zone and decreased by 0.2% to RUB 900 (902) in the second price zone. The spot price in the Urals hub increased by 13% and was RUB 1,156 (1,021) per MWh. In January-June 2021, the average electricity spot price, excluding capacity prices, was RUB 1,337 (1,194) per MWh in the first price zone, RUB 909 (905) in the second price zone, and RUB 1,157 (1,044) 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. 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, 848 MW is under construction, and 491 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, 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 2,953 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.
More detailed information about the market fundamentals is included in the tables at the end of the report.
‘Fit for 55’ legislative package published
On 14 July, the European Commission issued the long awaited ‘Fit for 55’ package that is expected to implement the ambitious climate target of a 55% reduction of greenhouse gas emissions by 2030 with the goal of achieving climate neutrality by 2050, as part of its Green Deal. This wide-encompassing package, including a dozen legislative proposals, is aimed at driving the transformation of European producing and consuming sectors towards net zero emitting activities.
Fortum welcomes the Commission’s extensive package as an important implementation step towards the EU’s climate neutrality objective and global leadership. We endorse the continued commitment to carbon pricing and the EU Emission Trading System (ETS) as the main instrument of the EU climate policy as well as the proposal to extend the ETS to buildings and road transport, starting with a separate trading scheme for those sectors. The package is well-aligned with Fortum’s priorities and strategic aim to drive the transition to a carbon-neutral economy. Going forward, it will be essential to adopt a cost-efficient and technology-neutral approach for the necessary transformation of the European economy.
The publication of the package is followed by a series of consultations with stakeholders and will enter the decision-making process before the European Parliament and the EU Council of Ministers after the summer.
Renewed Sustainable Finance Action Plan published
On 6 July, the European Commission adopted a ‘Strategy for financing the transition to a sustainable economy’ that sets out the next steps for the EU sustainable finance framework. Along with this communication, the European Commission also issued a legislative proposal on the European Green Bond standard and the final delegated act on the reporting obligation.
The work on the EU taxonomy continues with major forthcoming deliveries, such as the complementary delegated act on climate change focusing on nuclear and gas which were separated from the original taxonomy delegated act published in April 2021. The Commission is expected to issue the draft delegated act in the autumn, building upon the completion of the nuclear environmental assessment by the Commission’s Joint Research Center and specific expert committees. The Commission is also expected to publish the delegated act on the remaining environmental objectives, including circular economy, biodiversity, water and marine resources, as well as pollution prevention.
Fortum has consistently called for a thorough, science-based, and technology-neutral EU taxonomy that builds on the complementarity of technologies and their actual contribution to reducing climate change.
Possible further delay in decision on the final nuclear waste repository in Sweden
The Swedish Government has decided to start a public consultation suggesting a separation of the intermediate nuclear waste storage application from the application of the final waste storage, in order to further postpone a decision on the final waste repository. Because the licensing process of the final repository has been delayed, the intermediate storage in Oskarshamn is becoming full. The nuclear power operators have therefore warned about the risks of major disruptions in the electricity supply already in spring 2024. When the intermediate storage becomes full, nuclear plants will no longer be able to get rid of their spent nuclear fuel and thus run the risk of not being able to further run the reactors. In order to avoid this situation, a Government decision is needed before 31 August 2021, as the continued permission processes are estimated to take about two years.
The intermediate storage and the final repository are connected in a coherent final repository system. For the municipality of Oskarshamn, it has always been important that the intermediate storage does not become a permanent solution. Therefore, the municipality does not approve a decision on increased capacity in the intermediate storage without having a decision for the final repository. The additional costs of the delayed decision for the nuclear owners are an estimated EUR 80 million per year.
Amendment of the German Climate Protection Act with significantly higher ambition
At the end of June, the German Federal Government passed an update of the Climate Protection Act that aims at reducing its greenhouse gases by at least 65% by 2030 and by 88% by 2040 (compared to 1990 levels). Under this revised Climate Act, Germany should be climate neutral by 2045 instead of 2050 following a ruling of the Federal Constitutional Court in March 2021 that deemed the previous Climate Protection Act of 2019 incompatible with fundamental rights.
Germany is facing the biggest technological shift and transformation in the energy sector since the early industrialisation times. This will require converting a large array of sectors, such as industry, heat, and mobility, into climate-neutral activities within 24 years while preserving international competitiveness and social cohesion.
This will be the main topic for the new Government after federal elections are held in mid-September 2021.