European power markets
European power markets
Following Russia’s attack on Ukraine, the global economy and commodity and raw material prices have been significantly affected by various sanctions and counter-measures. Specifically, the Russian pipeline gas flow to Europe has decreased by more than 80% from previous years’ levels, causing all-time high gas and power prices. The full impact of the energy crises has been experienced in Continental Europe, and the low level of nuclear power generation and low hydro power generation have further elevated very high energy prices. The impact has been tangible in many Nordic price areas as well. With the strong interconnectors to the high-priced Continent and UK and the full stop of Russian electricity imports to Finland, the Nordic system price made its fifth consecutive quarterly record.
According to preliminary statistics, power consumption in the Nordic countries was 81 (83) TWh during the third quarter of 2022. Power demand was somewhat below the five-year average. In September, demand was particularly low, well below the five-year average, despite lower than normal temperatures. This is most likely due to demand response on the back of the very high spot prices in August and September. During January−September 2022, power consumption in the Nordic countries was 282 (293) TWh.
In Central Western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands), power consumption in the third quarter of 2022 was 305 (307) TWh, according to preliminary statistics. During January−September 2022, power consumption in Central Western Europe was 985 (1000) TWh. Power demand in Continental Europe was below the five-year average, here again likely affected by demand response due to the high electricity prices.
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. In the near term, however, demand response to counter high electricity prices is likely to impact power demand.
At the beginning of the third quarter of 2022, the Nordic water reservoirs were at 82 TWh, which is 2 TWh below the long-term average and 11 TWh lower than in the previous year. Inflows have been below normal, while hydro generation was at a normal level. At the end of the third quarter of 2022, the reservoir levels were at 89 TWh, which is 12 TWh below the long-term average and 25 TWh lower than in the previous year.
In the third quarter of 2022, power prices again reached new record-high levels. The average system spot price in Nord Pool was EUR 176 (68) per MWh. The average area price in Finland was EUR 220 (79) per MWh, and in the SE3 area in Sweden (Stockholm) EUR 168 (71) per MWh. In the SE2 area in Sweden (Sundsvall), the average area price was at a lower level at EUR 55 (55) per MWh due to stronger power balance and higher installed wind capacity. In Germany, the average spot price in the third quarter of 2022 was EUR 376 (97) per MWh.
In January−September 2022, the average system spot price in Nord Pool was EUR 136 (51) per MWh. The average area price in Finland was EUR 144 (58) per MWh, in the SE3 area in Sweden (Stockholm) EUR 123 (52) per MWh, and in the SE2 area in Sweden (Sundsvall) EUR 44 (42) per MWh. In Germany, the average spot price during January−September 2022 was EUR 250 (69) per MWh.
In early November 2022, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2022 was around EUR 130 per MWh and for 2023 around EUR 120 per MWh. The Nordic water reservoirs were at 96 TWh, which is about 5 TWh below the long-term average and 3 TWh higher than one year earlier. The German electricity forward price for the remainder of 2022 was around EUR 215 per MWh and for 2023 around EUR 340 per MWh.
European commodity markets
In the third quarter of 2022, gas demand in Central Western Europe was 264 (300) TWh and 1,326 (1,547) TWh in January–September 2022. The Central Western European gas storage levels increased significantly: from 354 TWh at the beginning of the quarter to 564 TWh at the end of the quarter, which is 136 TWh higher than one year ago and 40 TWh higher than the five-year average (2017–2021).
The steep reduction in the Russian pipeline gas flows to Europe has pushed European gas prices to unprecedented levels amid high volatility. The average gas front-month price (TTF) in the third quarter of 2022 was EUR 205 (49) per MWh. The 2023 forward price increased from EUR 107 per MWh at the beginning of the quarter to EUR 183 per MWh at the end of the quarter, which is EUR 151 per MWh higher than one year earlier. At the highest, the 2023 forward price traded at EUR 312 per MWh on 26 August.
In the EUA (EU Allowance) markets, the price decreased from EUR 90 per tonne at the beginning of the third quarter of 2022 to EUR 67 per tonne at the end of the quarter, which is EUR 5 per tonne higher than one year earlier.
The forward quotation for coal (ICE Rotterdam) for 2023 increased from USD 252 per tonne at the beginning of the quarter to USD 287 per tonne at the end of the quarter, which is USD 176 per tonne above the price one year earlier.
In early November 2022, the TTF forward price for gas for the remainder of 2022 was EUR 100 per MWh. The forward quotation for EUAs for 2022 was at the level of EUR 76 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2022 was USD 200 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.
The Russian market is divided into two price zones. Fortum’s Russia segment operates in the first price zone (European and Urals part of Russia).
According to preliminary statistics, the Russian power consumption was 252 (248) TWh during the third quarter of 2022. The corresponding figure for the first price zone was 191 (191) TWh. The 1.5% increase in consumption was caused by growth in oil production, the warmer weather and the growth of aluminium production. In January−September 2022, the Russian power consumption was 808 (792) TWh. The corresponding figure for the first price zone was 612 (603) TWh.
In the third quarter of 2022, the average electricity spot price, excluding capacity prices, decreased by 1.5% to RUB 1,518 (1,541) per MWh in the first price zone. The spot price in the Urals hub increased by 7% and was RUB 1,396 (1,304) per MWh. In January−September 2022, the average electricity spot price, excluding capacity prices, was RUB 1,440 (1,405) per MWh in the first price zone and RUB 1,305 (1,206) per MWh in the Urals hub.
The Russian Government increased the gas price by 5% in July 2022.
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.
The 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. 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. The next CCS auction, for the year 2027, is expected to be held in November 2023.
The EU energy ministers agreed on emergency interventions for the electricity markets
At the end of September, as another response to the energy crisis, European leaders agreed on a set of temporary measures for electricity market interventions, as proposed by the European Commission. The approved measures include electricity demand reduction measures (10% voluntary reduction on a monthly basis, 5% mandatory at peak hours), a revenue cap on inframarginal technologies set at EUR 180 per MWh and a solidarity contribution for fossil fuel companies.
The proposed measures are intended to serve as short-term measures for a specified period of time. The implementation of the revenue cap, in particular, leaves significant flexibilities for the Member States. The national implementation in Finland and Sweden has not yet started. Several Member States consider the agreed emergency measures as insufficient and urge further interventions, notably to address high gas price.
Margining crisis and revision of EMIR legislation
At the end of August, when energy prices reached unprecedentedly high levels, several European energy companies experienced various stages of liquidity crisis due to the increase in cash collaterals as required under EU’s strict EMIR (European Market Infrastructure Regulation) legislation. This resulted in the Finnish and Swedish governments providing national liquidity support packages (EUR 10 billion and EUR 25 billion, respectively) to ensure sufficient liquidity for utilities. Fortum has raised its concerns over the systemic risks resulting from the EMIR regulatory framework and is calling for an immediate revision of the EMIR collateral requirements to be more suitable for the power commodity market.
On 18 October, the EU Commission presented some limited and temporary emergency measures (such as the use of non-collateralised bank guarantees as collateral) to address the issue, however, not providing sufficiently efficient measures to alleviate the liquidity pressure on energy companies nor solving the root cause of the liquidity crisis. The Commission will launch a wider structural reform of EMIR in December.
EU imposes further sanctions against Russia and agrees with G7 on oil price cap
As the geopolitical situation continued to further escalate, the EU decided on further sanctions against Russia. During the third quarter, the EU agreed on two additional sets of sanctions.
In late September following the illegal annexation of the four Ukrainian regions to Russia, the 8th package of sanction was negotiated and was published on 6 October. The package contains further trade restrictions and import bans on Russian products. In addition to the previous sanctions against Russian seaborne crude oil imports, the EU decided to join the G7 and place a price cap on Russian oil imports to third countries. Details of the oil price cap are still to be defined. The price cap is planned to become effective in December 2022.
On 5 August, Russia published the Executive Order on the application of specific economic measures in the financial, fuel and energy sectors in connection with the “unfriendly actions by some countries and organisations”. However, the list of companies that fall under the Executive Order has not yet been published. Under the Executive Order, certain transactions, such as divestment of ownership by Russian legal entities, are prohibited. Prohibited transactions may be carried out under special decision by the President of Russia.
REPowerEU financing likely without direct intervention to the EU ETS
The REPowerEU plan aiming at reducing dependency on Russian fossil energy was presented in May and the financing options of the plan have since been discussed. The European Commission proposed using EUR 20 billion worth of emission allowances from the market stability reserve (MSR) of the EU ETS for this financing.
Both the EU Parliament and the Council have proposed a market-neutral approach without a direct intervention to the ETS. According to the general approach of the Council, the funds would be raised from the Innovation Fund and by frontloading a portion of allowances from the auctions in 2027-2030. The Council does not support raising of any revenues by auctioning allowances from the MSR. The Parliament’s final position is still pending, but there seems to be support for the frontloading of auctions. The negotiations are expected to be finalised by the end of 2022.
Fortum has opposed any direct interventions to the ETS in order to finance REPowerEU.
Strong push for new nuclear from the new Swedish government
The new Swedish right-wing government coalition consists of Moderates, Liberals and Christian Democrats with the active support from Sweden Democrats. The government has presented a new far-reaching energy and climate agreement and has set a new political target of 100% fossil-free electricity production by 2040 instead of 100% renewable energy.
The government has a strong focus on incentivising the newbuild of nuclear. It proposes EUR 40 billion in state credit guarantees to lower nuclear financing costs. The state guarantees are intended to compensate for any future political decisions on premature closure, and the government suggests investigating a possible restart of the Ringhals 1 and 2 reactors. The Environmental Act will be amended to allow for the newbuild of nuclear at new sites. The government has set new instructions to SSM (the Swedish radiation authority) to cut permission lead times for nuclear and to enable a faster and easier licensing process.
The government further proposes a long-term electricity security of supply target with a subsequent mandate to the TSO Svenska Kraftnät as well as new instructions to purchase firm and dispatchable capacity and to secure system adequacy. A new inquiry on market design will also be started to secure long-term security of supply with a premium for firm and dispatchable technology.
Regarding hydropower, the ongoing re-permitting process will be paused until a proper impact assessment has been carried out. A new framework for the re-permitting process will be developed including the electricity production interest as a priority. Subsidised grid connection fees for offshore wind will be stopped and cost-based grid fees should apply for all technologies.
With the proposed measures, the new government aims to promote nuclear investments to enable a doubling of Swedish power demand in line with the electrification target in order to meet the national net-zero climate target (net-zero by 2045), while increasing security of supply.