Operating environment and market position

Operating and regulatory environment (Half-year 2020 Financial Report)

European power markets

According to preliminary statistics, electricity consumption in the Nordic countries was 87 (88) TWh during the second quarter of 2020. The Nordic power demand showed a minor decline while temperatures were close to the long-term average and slightly below the level in the second quarter of 2019.

Measures taken against the spreading of Covid-19 impacted power demand in various European countries during the second quarter of 2020. There was a large decline across Continental Europe and the UK, with Italy, the UK, France, Spain, and Germany seeing a 10%, or higher, drop in power demand. In the Nordic countries, power demand was close to the previous year’s levels, and the impact of the Covid-19 pandemic has so far been negligible.

Electricity is expected to continue to gain a higher share of total energy consumption in the longer term. Over the next few years, electricity demand in the Nordic countries is expected to grow annually by approximately 0.5% on average. The growth rate, however, will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries. In the longer term, the rate of electrification of the industrial, transportation, and heating sectors is a key element determining the growth in electricity consumption.

At the beginning of 2020, the Nordic water reservoirs were at 79 TWh, which is 5 TWh lower than the long-term average and 5 TWh higher than one year earlier. The rainy and mild winter led to a rapid strengthening of the Nordic water reservoirs during the first quarter. However, the spring was fairly cold and thus the spring inflows were significantly delayed. At the end of the second quarter of 2020, the reservoirs were at 93 TWh, which is 9 TWh above the long-term average and 2 TWh higher than one year earlier.

In the second quarter of 2020, the average system spot price in Nord Pool decreased exceptionally to EUR 5.6 (35.6) per MWh. The decline in the Finnish and Swedish price areas was also significant, but clearly less than in the Nordic system price. The average area price in Finland was EUR 22.5 (37.4) per MWh, in the SE3-area in Sweden (Stockholm) EUR 15.1 (33.0) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 8.2 (33.0) per MWh. A strong hydrological surplus and the risk of spilling in many hydro reservoirs were the main reasons for the very low spot prices during the second quarter of 2020. During January-June 2020, the average system spot price in Nord Pool was EUR 10.5 (41.2) per MWh. The average area price in Finland was EUR 23.2 (42.4) per MWh, in the SE3-area in Sweden (Stockholm) EUR 16.9 (39.7) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 11.9 (39.5) per MWh.

According to preliminary statistics, electricity consumption in central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands) was 265 (299) TWh during the second quarter. The significant drop in power consumption was caused by the impact mainly on industrial demand following the Covid-19 pandemic. In Germany, the average spot price decreased significantly to EUR 20.3 (35.8) per MWh in the second quarter of 2020. Low gas prices together with decreased power demand pushed down the German spot prices during the second quarter. In January-June 2020, the average German spot price was EUR 23.4 (38.3) per MWh.

In mid-August 2020, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2020 was around EUR 15 per MWh and for 2021 around EUR 20 per MWh. The Nordic water reservoirs were about 16 TWh above the long-term average and 20 TWh higher than one year earlier. The German electricity forward price for the remainder of 2020 was around EUR 35 per MWh and for 2021 around EUR 39 per MWh.

Commodity markets

Gas demand in central western Europe was 380 (419) TWh during the second quarter. The central western European gas storage levels increased from 337 TWh at the beginning of the quarter to 500 TWh at the end of the quarter, which is 40 TWh higher than a year earlier and 144 TWh higher than the five-year average (2015–2019).

The average gas spot price (TTF) during the second quarter was EUR 5.4 (13.0) per MWh. The 2021 price developed mainly sideways, being at EUR 12.1 per MWh at the beginning of the quarter and closing at EUR 12.5 per MWh at the end of the quarter.

During the second quarter, European Emission Allowances (EUA) were strong, the price recovered and increased from EUR 17.7 per tonne at the beginning of the quarter to EUR 27.0 per tonne at the end of the quarter, which is close to the price level one year earlier.

The forward quotation for coal (ICE Rotterdam) for 2021 increased from USD 55 per tonne at the beginning of the quarter to USD 58 per tonne at the end of the quarter, which is USD 10 per tonne below the price one year earlier.

In mid-August 2020, the TTF forward price for gas for the remainder of 2020 was EUR 10 per MWh and for 2021 EUR 13 per MWh. The forward quotation for EUAs for 2020 was at the level of EUR 26 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2020 was USD 50 per tonne.

Russian market

Fortum’s Russia division operates 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, Krasnoyarsk regions, the Perm territory, and the Khanty-Mansiysk Autonomous District.

The Russian market is divided into two price zones and 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 electricity consumption was 232 (244) TWh during the second quarter of 2020. The corresponding figure for the first price zone was 176 (186) TWh and for the second price zone 48 (49) TWh. The decline in consumption was caused by a decrease in oil production and economic activity in the second quarter of 2020.

In the second quarter, the average electricity spot price, excluding capacity prices, decreased by 13% to RUB 1,160 (1,334) per MWh in the first price zone and by 13% to RUB 902 (1,042) in the second price zone. The spot price in the Urals hub decreased by 11% and was RUB 1,021 (1,151) per MWh.

The Russian Government increased the gas price by 1.4% in July 2019 and by 3% in August 2020.

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 2,368 MW. Correspondingly, Uniper’s CSA capacity amounts to 2,455 MW. In February 2020, the System Administrator of the wholesale market published data from 2019 regarding the rate of return and the CPI, which were used to calculate the CSA price for 2020. The CSA payments were revised downwards to reflect the lower Government bond rates and higher earnings from the electricity-only market.

In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning (see tables below). In 2020, an increase in CSA payments is expected for one unit of Fortum’s Uniper segment, but none for Fortum’s Russia segment’s generation fleet. After the CSA period ends, units can receive CCS payments from CCS auctions

Fortum’s Russia division’s generation capacity not receiving CSA payments, totalling 2,560 MW, is allowed to participate in the annual CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 8,790 MW. The next CCS auction, for the year 2026, is expected to be held in the fourth quarter of 2020.

Regulatory environment

EU Sustainable Finance Regulation

The Taxonomy Regulation, setting sustainability criteria for about seventy business sectors, was formally adopted by the European Council and Parliament in mid-June. The detailed metrics for the criteria are still to be defined in the delegated acts that the Commission will issue. The status of nuclear power is still open, and the Commission therefore decided to establish an expert group to investigate the environmental impact of nuclear power generation.

Fortum has consistently called for a European taxonomy that is well-aligned with the EU’s 2050 climate neutrality goal and that takes duly into account the complementing role of technologies aimed at reducing or removing greenhouse gas emissions. Fortum has also asked for a prompt assessment of the environmental impact of nuclear power.

Ambitious EU financial and budgetary response to Covid-19 approved

In July, the EU member states reached a political agreement on the EU budget and Covid-19 recovery package. The ambitious EUR 1.85 trillion recovery package, composes of a seven-year EU budget amounting to EUR 1.1 trillion and a EUR 750 billion ‘Next Generation EU’ fund. This recovery plan is unprecedented and innovative as it allows bringing the recovery and the European Green Deal together whilst leveraging the high EU credit rating to borrow under the best conditions. To sustain its ambition, the Commission is relying on a temporary increase of national contributions of 2% of GDP together with new revenue streams. The package will be finalised during the autumn.

Fortum supports the emphasis placed on climate change mitigation and digitalization in the recovery as well as sticking to the commitments on the Green Deal.

German and EU hydrogen strategies

On 10 June, the German Government approved the National Hydrogen Strategy, which focuses on hydrogen produced on renewable energy (green hydrogen). The strategy provides a framework as well as a mid-term action plan for hydrogen generation, transport, and use. To advise in implementation of the strategy, the Government has set up a National Hydrogen Council, in which Uniper’s CEO Andreas Schierenbeck has been appointed as a member.

EU’s Hydrogen Strategy was published on 8 July. Although the EU is focusing on green hydrogen, the Commission also allows hydrogen produced from gas during a transition phase. The strategy proposes both quantitative targets for electrolysers (6 GW installed by 2024 and 40 GW by 2030) and possible sector specific quantitative targets for hydrogen use to create demand pull.

Fortum welcomes the strategies with the strong push to develop the hydrogen economy based on renewables and gas, however regrets that the role of nuclear in hydrogen production is overlooked. Uniper is well positioned to participate in the development and ramp-up of the hydrogen market, with experience from the natural gas sector and power-to-gas pilot projects.

German coal phase-out

In June, the German Parliament passed the coal phase-out law. It sets the path to phase out hard coal and lignite-fired electricity generation by 2038 at the latest. In 2019, 23 GW of hard coal and 21 GW of lignite capacity were on the market.

The Government has set the schedule for the exit of lignite mining and power generation in a contract with the lignite operators. The closures of hard coal plants will, up until 2027, be determined based on auctions.

Uniper announced a strategy for decommissioning of its European coal power plant fleet already in March 2020.

Finnish Waste Law under consultation

In April, the Ministry of the Environment published a draft law for consultation that would implement the EU 2018 waste package into Finnish legislation. The proposal also includes some national changes in the producer’s responsibility for packaging waste.

For Fortum, the most significant issues are reorganising the producer’s responsibility and defining the cost responsibility for the collection of packaging waste. The draft law proposes that the producers of packaging material would be responsible for only 80% of the collection cost of packaging waste instead of 100% that has been prescribed in the EU Waste Directive. The proposed change may restructure the collection of packaging waste and lead to one single producer responsibility entity instead of the existing five entities.

Fortum has highlighted the need to allow the possibility for specialised producer responsibility entities in order not to harm the positive development for plastic waste collection started in 2016. Fortum also opposes the proposal to lower the cost responsibility of packaging producers to 80%.

Final Governmental decision on nuclear repository still pending in Sweden

The 30-year-long process of developing a final repository for spent nuclear fuel in Sweden is coming closer to an end. In June, the final legislative hurdles were cleared in the Swedish Parliament. The municipality of Östhammar is expected to approve the project in September, and thereafter the Swedish Government is expected to make its final decision; the time schedule, however, still remains open.

The estimated annual cost for delaying the project totals EUR 80 million for all nuclear owners. Furthermore, the approval of the final repository is part of the same approval process as the expansion of the short-term storage for spent nuclear fuel. This storage will reach its capacity limit in a few years and, consequently, needs to be expanded.

Waste incineration taxes under preparation in several Nordic countries

On 1 April, the tax on waste incineration entered into force in Sweden. The Tax Agency interprets the regulation as non-hazardous waste received at an incineration plant being subject to the taxation no matter if it will be incinerated or not. This interpretation causes an unfavourable tax burden for non-hazardous waste dedicated for other, non-incineration treatment options.

The development in Sweden is being monitored closely in Norway. The pending steering alternatives are either a waste incineration tax or opting waste-to-energy into the ETS (Emission Trading System) starting from 2021.

In Finland, the Ministry of the Environment commissioned a consultant study on the feasibility of a waste incineration tax in order to promote the preparation and use of recycled raw materials, to be completed by the end of this year.

Fortum opposes the waste incineration taxes, as they will not have any meaningful or demonstrated steering effect to stimulate waste prevention, recycling, or lower greenhouse gases. Taxes or product design standards must be placed higher up in the waste hierarchy.

Swedish National Prioritisation Plan for hydropower adopted

On 25 June 2020, the Swedish Government adopted a National Prioritisation Plan for Hydropower. As a part of the process to fully implement the EU Water Framework Directive, the plan sets out the timeline and priorities for renewing hydropower permits during a 20-year period. The Government emphasises the need to keep generation losses of all Swedish generators below the 1.5 TWh level when deciding on environmental measures, also taking into account the impact from Nature 2000 areas.

The plan is well in line with Fortum's position and provides the authorities with clear guidelines.

Proposal for the reduction of electricity tax in Finland

The Ministry of Finance is proposing to reduce the electricity tax for industry to the EU minimum level from the beginning of 2021. This change has political support in the Government and therefore the proposal is likely to be approved. The electricity tax for industry (EUR 7.0 per MWh) in Finland is currently much higher than e.g. in Sweden where the EU minimum level (EUR 0.5 per MWh) is applied. The reduction of the electricity tax would support the electrification of society and improve Finland’s attractiveness for international investments in data centers

Market position (year end 2018)

Fortum is the third largest power generator and the largest electricity retailer in the Nordic countries. Globally, we are one of the leading heat producers. As two thirds of our power production is hydro and nuclear, Fortum is also among the lowest-emitting generators in Europe.

Power generation and electricity retail graph

Largest power and heat producers graph