European power markets
Following Russia’s attack on Ukraine, the global economy and commodity and raw material prices have been shaken by various sanctions and possible counter-measures. During the first half of 2022, this has been reflected in all-time high gas and power prices in several countries. The full impact of current situation has been experienced in Continental Europe, where the low level of nuclear production has further elevated very high energy prices. The impact has been increasingly visible in the Nordic price areas as well. Besides the strong exports to the high-priced Continent and UK, the full stop of Russian electricity imports to Finland, the delay in the commissioning of TVO’s third Olkiluoto nuclear power plant and the below normal precipitation have all contributed to higher Nordic power prices.
According to preliminary statistics, power consumption in the Nordic countries was 88 (90) TWh during the second quarter of 2022. The power demand was well in line with the five-year average, while temperatures were close to climate-adjusted normal. During January−June 2022, power consumption in the Nordic countries was 200 (210) TWh.
In Central Western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), power consumption in the second quarter of 2022 was 305 (317) TWh, according to preliminary statistics. During January−June 2022, power consumption in Central Western Europe was 676 (693) TWh. Power demand in Continental Europe was somewhat below the five-year average, impacted by the mild winter and demand flexibility due to the high price level.
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 second quarter of 2022, Nordic water reservoirs were at 35 TWh, which is 6 TWh below the long-term average and 20 TWh lower than in the previous year. Spring inflow was above normal, while hydro generation was at a normal level. At the end of the second quarter, the reservoir levels were at 82 TWh, which is 2 TWh below the long-term average and 5 TWh lower than in the previous year.
In the second quarter of 2022, power prices remained at exceptionally high levels. The average system spot price in Nord Pool was EUR 121.1 (41.9) per MWh. The average area price in Finland was EUR 117.5 (46.3) per MWh, in the SE3 area in Sweden (Stockholm) EUR 101.2 (38.7) per MWh. In the SE2 area in Sweden (Sundsvall), the average area price was at a lower level at EUR 51.9 (33.1) per MWh due to increased wind production and high spring inflow levels. In Germany, the average spot price in the first quarter of 2022 was EUR 187.0 (60.3) per MWh.
In January−June 2022, the average system spot price in Nord Pool was EUR 115.6 (42.0) per MWh. The average area price in Finland was EUR 104.7 (47.5) per MWh, in the SE3 area in Sweden (Stockholm) EUR 100.6 (42.2) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 38.4 (35.3) per MWh. In Germany, the average spot price during January−June 2022 was EUR 185.8 (55.0) per MWh.
In mid-August 2022, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2022 was around EUR 240 per MWh and for 2023 around EUR 170 per MWh. The Nordic water reservoirs were at 92 TWh, which is about 6 TWh below the long-term average and 5 TWh higher than one year earlier. The German electricity forward price for the remainder of 2022 was around EUR 520 per MWh and for 2023 around EUR 530 per MWh.
European commodity markets
In the second quarter of 2022, gas demand in Central Western Europe was 369 (453) TWh. The Central Western European gas storage levels increased significantly: from 138 TWh at the beginning of the quarter to 354 TWh at the end of the quarter, which is 116 TWh higher than one year ago and only 3 TWh lower than the five-year average (2017–2021).
Continuing tightness in the gas market, combined with the overhanging risk of further disruptions in Russian pipeline gas flows to Europe, kept European gas prices at unprecedented levels amid high volatility. The average gas front month price (TTF) in the second quarter of 2022 was EUR 101 (25) per MWh. The 2023 forward price increased from EUR 72 per MWh at the beginning of the quarter to EUR 107 per MWh at the end of the quarter, which is EUR 87 per MWh higher than one year earlier.
In the EUA (EU Allowance) markets, the price increased from EUR 76 per tonne at the beginning of the second quarter to EUR 90 per tonne at the end of the quarter, which is EUR 34 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2023 increased from USD 190 per tonne at the beginning of the quarter to USD 252 per tonne at the end of the quarter, which is USD 174 per tonne above the price one year earlier.
In mid-August 2022, the TTF forward price for gas for the remainder of 2022 was EUR 230 per MWh. The forward quotation for EUAs for 2022 was at the level of EUR 95 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2022 was USD 360 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 253 (248) TWh during the second quarter of 2022. The corresponding figure for the first price zone was 192 (188) TWh and for the second price zone 52 (50) TWh. The 2.2% increase in consumption was caused by growth in oil production and colder weather during the spring.
In January−June 2022, Russian power consumption was 556 (544) TWh. The corresponding figure for the first price zone was 421 (412) TWh and for the second price zone 113 (110) TWh.
In the second quarter of 2022, the average electricity spot price, excluding capacity prices, increased by 3% to RUB 1,354 (1,315) per MWh in the first price zone and by 23% to RUB 1,108 (900) in the second price zone. The spot price in the Urals hub increased by 6.9% and was RUB 1,236 (1,156) per MWh. In January−June 2022, the average electricity spot price, excluding capacity prices, was RUB 1,402 (1,337) per MWh in the first price zone, RUB 1,104 (909) in the second price zone, and RUB 1,260 (1,157) per MWh in the Urals hub.
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 10,465 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 1.3 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 of 38 MW was commissioned in the beginning of July 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.
Taxonomy criteria for nuclear power and gas approved
In early July 2022, the European Parliament approved the Complementary Delegated Act (CDA) which establishes strict criteria for the inclusion of nuclear and gas under the EU Taxonomy. The debate leading up to the final vote remained extensive and the motion to object the Act was rejected with a vote that was ultimately less tight than predicted. As the Council did not object the CDA either, it was officially approved on 15 July 2022 and will apply from 1 January 2023. It will help guide investors’ decision in taxonomy-aligned activities as a way to channel investment towards technologies that are supporting the Paris Agreement.
Fortum has welcomed the adoption of the CDA, as it positively acknowledges the role of nuclear in reaching Finland’s 2035 climate neutrality target and the EU’s objective to become climate neutral by 2050.
The European Commission published a detailed plan to phase out Russian fossil fuels
In late May 2022, the European Commission published a package of largely non-binding measures aimed at ending the EU’s dependency on Russian fossil fuels. The package, named REPowerEU Plan, intends to reduce energy demand, boost renewable energy production and diversify energy supplies from third countries. The Commission estimates that an additional investment of EUR 210 billion by 2027 is needed for the execution of the plan.
The REPowerEU plan was issued alongside with a Market’s Communication that lists possible short-term interventions to tackle high energy prices and addresses the necessary adaptations to the future power market design. Commission President von der Leyen has prompted more visibility to this issue by committing to issue proposals on power market design at the next European Council to be held in October 2022.
On 26 July 2022, with the outlook of substantially reduced gas volumes from Russia, the EU countries approved a voluntary and temporary 15% gas demand reduction target based on the EU Commission’s “Save Gas for Safe Winter” package. The aim is to ensure that there is enough gas to get through the next heating season. If the savings doesn’t materialise on a voluntary basis, or if there is a supply shortage risk, the Commission can initiate an EU alert with a binding gas consumption reduction target. Based on the new EU gas storage legislation, all gas storages should be 80% full by November 2022 to ensure secure gas supplies until next spring.
Rules on producing green hydrogen about to be finalised
In early June 2022, the European Commission published two long-awaited Delegated Acts clarifying the rules for green hydrogen production. The rules aimed at transportation are supposed to be extended to all other sectors under the current revision of the Renewable Energy Directive.
Notwithstanding some noticeable improvements, including a grandfathering clause for projects coming into operation before the end of 2026, the draft Delegated Acts propose overly complex and strict criteria for producing green hydrogen that may severely restrict the quantity and affordability of this clean gas. In particular, the obligation to locate RES plants and electrolysis in the same bidding zone poses acute problems for countries with several bidding zones such as Sweden.
A final fine tuning should take place between the European Parliament and the Council ahead of adoption by the European Commission after the summer.
German Government takes action to counter potential gas supply shortage
Russia’s attack on Ukraine as well as economic sanctions against Russia and countermeasures by Russia represent an unprecedented and tense geopolitical environment which in turn holds many implications for the energy industry and its customers. Fortum is particularly affected in the area of natural gas trading due to significant reductions of deliveries from Russia, which has a particular impact on the stake in Fortum’s subsidiary Uniper in Germany and the neighbouring countries involved. To address this most severe situation, the German Federal Government has implemented several important measures whilst at the same time accelerating the deployment of renewable energy:
The Energy Security Act has been updated to allow time-limited price adjustment between importers and customers in case the Federal Network Agency (BNetzA) declares a significant gas shortage.
Stewardship or expropriation over critical infrastructure companies by the German States is also made possible.
Diversification of natural gas is enabled through the construction of infrastructure projects, like LNG terminals whilst planning processes are improved with permit standards reduced to the minimum required by the EU.
In case of a gas shortage, the Federal Network Agency (BNetzA) can take over in order to ration energy and prioritise who will be supplied.
Natural gas usage for industry and heating is prioritized, with the possibility of coal-fired power generation to cover the rationing of gas-fired power plants in case of emergency.
Western sanctions on Russia and Russia’s counter sanctions
By the end of the second quarter of 2022, the EU has adopted and implemented six sanction packages, including a wide range of measures to limit Russia’s ability to pay for the war and targeting Russian banks and financial institutions, individuals, business, state-owned enterprises and energy, among other things. As part of the 5th and 6th sanction packages, the EU decided to stop importing coal from Russia from 10 August 2022 onwards and to ban imports of oil transported by sea by 5 December 2022. The appetite to impose further energy sanctions has decreased after difficult negotiations on oil sanctions, and the focus has shifted from new sanction packages to managing the situation with significantly reduced gas volumes from Russia.
Russia has also implemented countermeasures. Through presidential decrees the Russian Federation has made it illegal to follow Western sanctions. It has restricted payments from Russia especially to so-called ‘unfriendly countries’ (a list published by the Russian Federation covering also EU countries, including Finland). Only rouble payments in specific situations have been possible from Russia and escrow account concepts have been introduced (“C”-accounts). Entities and companies of the so-called ‘unfriendly countries’ are also restricted from selling their shareholding and assets or are subject to government approvals and potentially to requiring a permit from the Russian President.
Positive outlook for nuclear, but concerns for hydro in Sweden
In June 2022, the Swedish Government invited political parties to start negotiating a new energy deal (Energy Agreement 2.0) after the general elections to be held in September 2022. The government also presented several new measures regarding specific energy sources, in particular nuclear. They welcome safe extensions of existing nuclear sites and have assigned the Authority for Radiation Security to examine regulatory changes and other possible actions needed to utilise existing and new nuclear energy sources. The assignment also includes developing policies and proposals for new regulations for reactor technologies such as small modular reactors (SMR).
As part of the process, the government also plans to assign the Energy Authority and the Swedish TSO to monitor and analyse efforts to provide hydropower actors with modern environmental criteria. The objective of Fortum is to secure positive market conditions for hydro in the context of the planned political Energy Agreement, as well as in the ongoing process to renew environmental permits for the hydropower fleet in line with the national prioritisation plan.
Land and Environment Court granted permit for increased interim storage in Clab
On 22 June 2022, the Land and Environment Court announced that Svensk Kärnbränslehantering AB (SKB) was granted a permit to increase the amount of spent fuel in the interim storage facility Clab in Oskarshamn from 8000 tonnes to 11000 tonnes. The permit may be implemented even if there is an appeal to higher courts. In addition to customary environmental permit conditions, the permit also requires SKB to investigate and present an enhanced cooling system for the storage pools. This permit is an important milestone to enable storage of additional spent fuel beyond December 2023, and thereby to ensure uninterrupted operation of the Swedish nuclear power plants.