In the near term, the ongoing disruption of the energy sector is impacted by geopolitical tensions, the general negative economic outlook with high inflation and interest rates, tightening regulations and volatile commodity markets. In addition, in the short-term, price elasticity to counter high electricity prices has an impact on power consumption.
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 energy-intensive industrial, transport and heating sectors through direct electrification and green hydrogen.
Hedging
At the end of September 2023, approximately 75% of the Generation segment’s estimated Nordic outright power sales volume was hedged at EUR 50 per MWh for the remainder of 2023, approximately 65% at EUR 47 per MWh for 2024 (hedges at the end of the second quarter of 2023: 50% at EUR 46 per MWh), and approximately 30% at EUR 43 per MWh for 2025.
The reported hedge ratios are based on the hedges and power generation forecasts of the Generation segment.
The reported hedge ratios may vary significantly, depending on Fortum’s actions on the electricity derivatives markets. Hedges are mainly financial contracts, most of which are electricity derivatives quoted on Nasdaq Commodities and traded either on Nasdaq Commodities or with bilateral counterparties. As an additional liquidity risk mitigation measure, Fortum has mainly been hedging with bilateral agreements, and the exposure on the Nasdaq Commodities exchange has been clearly lower during the past year.
In the third quarter of 2023, Fortum continued to utilise dual channels for its hedging: trading on the Nasdaq Commodities exchange depending on the market liquidity and financial optimisation complemented with bilateral arrangements. The majority of the trades still remained in bilateral contracts.
Capital expenditure
Fortum updates its estimation on capital expenditure, including maintenance but excluding acquisitions, to be approximately EUR 650 million in 2023, of which the share of maintenance capital expenditure is estimated to be approximately EUR 300 million, below the level of depreciation. Earlier the estimate on capital expenditure was EUR 700 million in 2023. In 2024, the capital expenditure, including maintenance but excluding acquisitions, is estimated to be approximately EUR 550 million, of which the share of maintenance capital expenditure is estimated to be approximately EUR 300 million, below the level of depreciation.
Fortum also revises the growth capital expenditure to be up to EUR 1 billion for the years 2023-2025 (earlier up to EUR 1.5 billion).
Generation
The Generation segment’s achieved Nordic power price typically depends on factors such as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum’s flexible generation portfolio, as well as currency fluctuations. Excluding the potential effects from changes in the power generation mix (currently approximately 45 TWh), a EUR 1 per MWh change in the Generation segment’s achieved Nordic power price will result in an approximately EUR 45 million change in the segment’s annual comparable operating profit. The achieved power price also includes the results of optimisation of Fortum’s hydro and nuclear generation, as well as operations in the physical and financial commodity markets. Historically, the optimisation margin included in the achieved power price has been in the range of EUR 1-3 per MWh. Due to the increased price volatility, Fortum updates the estimated optimisation margin and expects it to be in the range of EUR 6-8 per MWh, depending on the overall market conditions, level of volatility and electricity prices.
Income taxation
Fortum updates the estimate for comparable effective income tax rate to be in the range of 18−20% for 2023 (previously 20−23%) and for 2024 to be in the range of 18−20% (previously 19-21%). Fortum does not expect any effect from the windfall tax for 2023. Fortum’s comparable effective tax rate is impacted by the weight of the profit in different jurisdictions and differences in standard nominal tax rates in these jurisdictions. The tax rate guidance excludes items affecting comparability