Operating environment and market position
Market conditions in 2017
According to preliminary statistics, electricity consumption in the Nordic countries was 108 (107) terawatt-hours (TWh) during the fourth quarter of 2017. In 2017, electricity consumption was 392 (390) TWh.
At the beginning of 2017, the Nordic water reservoirs were at 75 TWh, which is 8 TWh below the long-term average and 23 TWh lower compared to the previous year. At the end of 2017, the reservoirs were 86 TWh, which is 3 TWh above the long-term average and 11 TWh higher compared to the previous year. Precipitation in the Nordics, was clearly above the normal level both in the fourth quarter and during the full year 2017.
In the fourth quarter of 2017, the average system spot price in Nord Pool was EUR 30.6 (34.4) per MWh. The mild and wet weather resulting in higher hydro reservoirs and higher hydro production volumes, depressed the Nord Pool system price for the fourth quarter. The average area price in Finland was EUR 33.0 (37.5) per MWh and EUR 31.1 (36.7) per MWh in Sweden (SE3, Stockholm). Higher availability in the Nordic nuclear generation and the internal transmission capacity in combination with mild weather lowered area prices in Finland and Sweden compared to the year 2016.
The average system spot price in Nord Pool for the year 2017 was EUR 29.4 (26.9) per MWh, and the average area price in Finland was EUR 33.2 (32.4) per MWh and EUR 31.2 (29.2) per MWh in Sweden (SE3, Stockholm). The main driver for the price increase was the clearly higher marginal cost of coal condensing power, which has contributed to stronger continental prices and increased exports from the Nordics.
In Germany, the average spot price in the fourth quarter of 2017 fell to EUR 33.0 (37.6) per MWh, while the full-year price for 2017 increased to EUR 34.2 (29.0) per MWh.
The market price of CO2 emission allowances (EUA) increased from EUR 6.5 per tonne at the beginning of the year to EUR 8.2 per tonne at the end of 2017.
Fortum operates both 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 in two price zones and Fortum operates in the First Price Zone.
According to preliminary statistics, Russian electricity consumption was 281 (287) TWh during the fourth quarter of 2017. The corresponding figure for the First Price Zone (European and Urals part of Russia), was 215 (220) TWh. Russian electricity consumption in 2017 was 1,035 (1,027) TWh and the corresponding figure for the First Price Zone was 799 (787) TWh.
In the fourth quarter of 2017, the average electricity spot price, excluding capacity price, increased by 1.5% to RUB 1,221 (1,203) per MWh in the First Price Zone. In 2017, the average electricity spot price, excluding capacity price, was unchanged at RUB 1,204 (1,204) per MWh in the First Price Zone.
More detailed information about the market fundamentals is included in the tables at the end of the report (pages 63-65).
European business environment and carbon market
Revision of the EU ETS approved
After two and a half years of legislative processing the revision of the EU Emissions Trading Scheme (ETS) for the period 2021-2030 was adopted in December. The new rules will increase the annual emission reduction target of the ETS from the current 1.74% to 2.2%. From the carbon market balance and pricing perspective the essential improvement is the strengthening of the Market Stability Reserve (MSR), including a temporary doubling of the intake rate from 12% to 24% during 2019-2023 and cancellation of allowances from the reserve from 2023 onwards. In addition, the new directive includes a provision for voluntary cancellation of allowances from the market.
However, the agreed setup is not yet in line with the Paris Climate Agreement and meets only the lower end of the EU 2050 goal to reduce emissions by 80-95% by 2050.
Swedish hydropower legislation
In June, the Swedish Government released a proposal on revision of hydro legislation including changes in the Environmental Act. This is a follow-up of the Swedish energy agreement done in summer 2016 and includes adjustments to meet requirements based on the EU Water Framework Directive. The aim is to mitigate environmental impacts and facilitate more efficient power production. According to the proposal, environmental permits for hydropower should be revised during a 20-year period in accordance with a national plan for prioritisation. The Ministry of Environment aims to have the revised legislation in place in March 2018.
Fortum emphasises the need to reform the Swedish system for hydro management. However, the proposal fails in ensuring a fair balance between environmental improvements and power production and a reasonable level of legal certainty.
The energy agreement requires hydro power companies to carry the full cost of environmental improvements. The largest hydro power companies are planning a joint fund in order to secure financing for the improvements. The fund is expected to be in operation from July 2018 provided that the revision of hydro legislation has been completed.
Swedish nuclear waste fund fee approved
In December, the Swedish Government decided on the waste fund fees for the period 2018-2020. The fees are based on a new structure with a calculated lifetime of 50 years and on parts of the funds capital being invested in shares.
Swedish nuclear and hydro taxes adopted
In May, the Swedish Parliament adopted the proposed changes of nuclear and hydropower taxation in accordance with the energy agreement from June 2016. Starting from 1 July 2017, the tax on installed effect in nuclear reactors decreased by 90%, from SEK 14,770/MW/month to SEK 1,500/MW/month, and on 1 January 2018 the tax was abolished. The hydropower real-estate tax will be reduced from 2.8% to 0.5% in four steps by 2020.
Development of Nordic energy cooperation
Development of regional energy cooperation in the Nordic context moved forward in 2017. Following the June 2017 report by independent investigator Jorma Ollila, the Nordic energy ministers discussed the report in their annual meeting in November. They agreed on next-step actions to implement these proposals, including a proposal to establish a Nordic electricity market forum comprising various actors in the sector to discuss topics particularly related to development of the Nordic regional power market.
Market position (year end 2016)
Fortum is the 3rd 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.