Operating environment Q3 2023
European power markets
After a mild winter, the continuing high level of LNG imports and reduced energy demand reduced European energy prices in the second and third quarters of 2023. In addition, precipitation was high in the Nordics during the third quarter, resulting in rapidly increasing inflow and hydro reservoir levels. Combined with increased capacity, owing to the commissioning of TVO’s third nuclear power unit Olkiluoto 3 and significant growth in installed wind capacity, Nordic spot prices declined notably during the quarter.
According to preliminary statistics, power consumption in the Nordic countries was 79 (82) TWh during the third quarter of 2023. Power demand was clearly below the five-year average, due to continuous electricity savings in the industrial sector and warm weather at the end of the third quarter.
In Central Western Europe (Germany, France, Austria, Switzerland, Belgium and the Netherlands), power consumption was 293 (305) TWh in the third quarter of 2023, according to preliminary statistics. Power demand in Continental Europe continued to be clearly below the five-year average, affected by energy conservation measures.
At the beginning of the third quarter of 2023, the Nordic hydro reservoirs were at 82 TWh, which is 2 TWh below the long-term average and at the level of the previous year. Inflow was at a record high level while hydro generation was closer to normal levels, especially during August and September. At the end of the quarter, reservoir levels were at 106 TWh, which is 5 TWh above the long-term average and 16 TWh higher than in the previous year.
In the third quarter, power prices continued to decline, except for in Finland. The average system spot price at Nord Pool was EUR 28 (176) per MWh. The average area price in Finland was EUR 44 (220) per MWh. In Sweden, the average area price in the SE3 area (Stockholm) was EUR 28 (168) per MWh, and the price in the SE2 area (Sundsvall) was EUR 21 (55) per MWh. In Germany, the average spot price in the second quarter was EUR 91 (376) per MWh.
In late October, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2023 was around EUR 59 per MWh and for 2024 around EUR 47 per MWh. The Nordic water reservoirs were at 107 TWh, which is about 6 TWh above the long-term average and 12 TWh higher than one year earlier. The German electricity forward price for the remainder of 2023 was around EUR 105 per MWh and for 2024 around EUR 125 per MWh.
European commodity markets
In the third quarter of 2023, gas demand in Central Western Europe was 249 (269) TWh. The Central Western European gas storage levels increased from 480 TWh at the beginning of the quarter to 607 TWh at the end of the quarter, which is 42 TWh higher than one year ago and 70 TWh higher than the five-year average (2018–2022). Gas storages were filled to above 90% as of late August, two months ahead of the EU-wide mandatory target of 90% by November 1.
The average gas front-month price (TTF) in the third quarter of 2023 was EUR 34 (205) per MWh. The 2024 forward price decreased from EUR 53 per MWh at the beginning of the quarter to EUR 47 per MWh at the end of the quarter, which is EUR 72 per MWh lower than one year earlier.
The EUA (EU Allowance) price decreased from EUR 89 per tonne at the beginning of the third quarter of 2023 to EUR 82 per tonne at the end of the quarter, which is EUR 15 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2024 increased from USD 123 per tonne at the beginning of the third quarter of 2023 to USD 130 per tonne at the end of the quarter, which is USD 124 per tonne below the price one year earlier.
In late October, the TTF forward price for gas for the remainder of 2023 was EUR 53 per MWh. The forward quotation for EUAs for 2023 was at the level of EUR 79 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2023 was USD 127 per tonne.
Regulatory environment
Council reaches an agreement on the European market design file
On 17 October, the Energy Council reached an agreement on the European market design (EMD) legislation. The aim of the revised market design is to accelerate decarbonisation, secure access to electricity for European households and industry to respond to concerns relating to price volatility, and to provide instruments that helps to make the energy market more stable and predictable. Fortum welcomes these developments as necessary to longer term attract investments into Europe’s accelerating decarbonisation. The legislation is still subject to the trilogues negotiation, after which it will be transposed to national legislation during 2024.
National Capacity Remuneration Mechanisms (CRM) are being investigated in Finland and Sweden
Both the Finnish and Swedish governments are in the process of investigating what additional measures are needed to ensure capacity adequacy and security of electricity supply amidst industrial decarbonisation.
In Finland, the aim is to develop a cost-effective capacity mechanism or similar instrument to ensure the reliable supply of electricity. A government proposal is expected during 2024. In Sweden, the government is investigating various options to tackle the increasing challenges relating to capacity adequacy created by a combination of foreseen increasing demand and weather-dependent electricity supply. Concrete proposals are expected during 2024. Decarbonisation of our industries through electrification will over time require investments in stable and flexible power supply in addition to variable renewable generation to maintain a reliable, resilient and affordable power supply.
European Hydrogen Bank operational in November
In October, an important piece of EU hydrogen regulation was finalised when the revised Renewables Energy Directive was adopted. Renewable fuels of non-biological origin (RFNBO) have been explicitly incorporated into the industry and transport sector targets of the Renewable Energy Directive including sector specific targets for RFNBO by 2030. This is highly supportive of Fortum’s strategic priorities to deliver clean energy and drive decarbonisation in industries.
To promote the production and uptake of RFNBOs within the EU, the Commission will launch a competitive bidding mechanism under the Innovation Fund to support domestic renewable hydrogen production exclusively within the European Economic Area. The pilot auction, the European Hydrogen Bank, worth of EUR 800 million is scheduled for November 2023 – February 2024. Funding is secured for up to a decade of operation as a fixed premium EUR/kg of RFNBO hydrogen. The pilot auction has a predefined ceiling price of 4.5 EUR/kg and requires hydrogen project developers to submit letters of intent for power purchase agreements with renewable electricity suppliers.
The Hydrogen Bank incentivises European industries to decarbonise their production via hydrogen generated exclusively in the EU using renewable electricity. The subsequent competitive biddings may also consider low-carbon hydrogen (from nuclear); however, the EU’s legislative framework for low-carbon hydrogen is still pending.
Swedish nuclear waste fund financing
The national Debt Office in Sweden has presented its proposal for nuclear waste fund fees for the period 2024-2026. In December 2023, the government will decide on the new fees. According to the proposal, the fee for the Oskarshamn nuclear power plant will increase by 33% from 4.9 to 6.5 EUR/produced MWh and for Forsmark nuclear power plant by 50% from 2.6 to 3.9 EUR/produced MWh. The waste fund fees have an impact on Fortum’s cash flow.