Market development

In 2011, global economic activity slowed and the European sovereign debt crisis got much of the political and market attention. Furthermore, the Fukushima accident led a number of countries to reconsider their standpoint towards nuclear energy, therefore increasing the uncertainty of energy sector’s investments.

European and Nordic economic growth slowed during the year, which was reflected in stagnant electricity demand. However, the European utility sector was on par with other European industry sectors’ performance, as the equity markets were mostly affected by general economic uncertainty with relatively stable commodity prices.

While the Russian economy grew faster than the world average, growth there also slowed somewhat towards the end of the year. Fortum operates in the Chelyabinsk and Tyumen areas in Russia. In the Chelyabinsk area, where much of the metals industry is located, power demand increased by nearly 4% from the previous year, while power demand growth in the oil- and gas-rich Tyumen area was modest. Electricity demand in North-Western Russia overall increased by 2% in 2011.

Volatile operating environment

During the first half of 2011, commodity prices roller-coasted after the Fukushima nuclear accident; but, due to escalating sovereign debt worries and slowing growth, they started to even out in the summer and the latter part of the year. European CO2prices in particular were affected and fell in early summer, due to increased uncertainty in terms of economic development and hence the demand for CO2 allowances. 

Due to declining commodity prices in the latter part of the year and increasing precipitation, Nordic electricity prices were at EUR 47 per megawatt-hour (MWh) on average in 2011, which was nearly a tenth lower than the previous year. German EEX prices were EUR 51/MWh on average in 2011. They were a tenth lower than in the previous year. Russian spot power prices (excluding capacity fees) were at RUB 989/MWh (EUR 23/MWh) on average – about 12% higher than the previous year. 

The role of nuclear power uncertain after Fukushima accident 

The Fukushima accident in March 2011 led a number of countries, including Germany, Italy, Switzerland and Belgium, to reconsider their standpoint towards nuclear power. In most cases those decisions coincided with political points of discontinuity like elections, forming a new government, etc. Germany took very drastic measures and quickly decided to close down all its nuclear power plants by 2022. Eight reactors were immediately closed down.  

The EU also responded very quickly to the events in Japan. In May, the Commission agreed upon the methodology and timetable for the so-called EU nuclear safety stress tests. The purpose of the stress tests is to assess whether the current safety margins are sufficient to cover various unexpected events. Nuclear power plant operators submitted their reports to national regulators at the end of October and the Commission reported preliminary findings to the European Council in December. The national reports will be peer-reviewed by multinational teams by 30 April 2012, and the Commission will submit its final report to the European Council in June 2012. The Commission is also considering updating the Nuclear Safety Directive from 2009 based on the stress test results.

It is too early to conclude, whether the Fukushima accident was an end of the so-called nuclear renaissance that was springing up throughout the world. Several new investments in Western European countries are on hold and delayed as a result of increased investor risks, challenges in financing new projects and expected new safety measures. In many Central and Eastern European countries, however, interest in new nuclear power has increased.

EU energy policy proceeds

The term of the EU Commission is approaching its midpoint, which means that it is in a hurry to put forth proposals that it wants adopted before its term is over. The European Commission presented its Energy Strategy for 2011–2020 in November 2010. The strategy builds on five priorities with which the EU aims to meet its 2020 energy and climate targets: energy efficiency, energy market integration, empowered consumers, safety and security, technology and innovation leadership, and the external dimension of the EU energy policy. 

Fortum welcomed the overall approach of the strategy and especially the strong emphasis put on the completion of the internal energy market. In Fortum’s opinion, a competitive and properly functioning internal energy market is a source of efficiency gains and is essential for achieving the environmental and security of supply goals – and at the lowest cost to society. Fortum also believes that the EU internal energy market development should lead to more efficient policy coordination between the EU member states and, ideally, towards harmonisation of all relevant energy market-related legislation. 

Electricity market models sparked discussions

The completion of the European internal energy market was progressing, but somewhat incoherently. The target date for the implementation of the so-called 3rd internal energy market legislation was 3 March 2011. Only a few member states were able to meet the target date; in September, the Commission opened infringement procedures against 17 member states for not implementing the package in time. 

The market coupling development however progressed. European power exchanges and transmission system operators agreed to start a common price calculation for the Nordic and Central Western European markets by the end of 2012. 

Investments in electricity distribution endangered 

Achieving politically set targets regarding renewable energy and energy efficiency requires considerable investments in networks. According to the EU Commission, of the EUR 600 billion total investments needed in electricity networks, EUR 400 billion would be invested in distribution and the remaining EUR 200 billion in transmission networks by 2020. This would require regulation that encourages investments. 

During 2011, regulatory authorities both in Finland and Sweden adopted new regulatory models applicable to distribution business for the four-year period 2012–2015. In both countries, the distribution industry assessed the regulatory model as being insufficient in terms of guaranteeing reasonable rate of return for distribution network investments, and launched court appeals against the regulatory model.

Development of the Nordic retail market continued

The process to develop a harmonised Nordic retail market for electricity continued under the leadership of NordREG, the association of Nordic energy regulators. In 2011, clear progress was made in some key issues, such as a proposal to make the supplier the customer’s main point of contact. The work is based on the task given by the Nordic Energy Ministers with the aim to implement a common Nordic retail market by 2015. 

Global climate deal pending 

The international climate negotiations continued throughout 2011, but the 17th Conference of the Parties (COP17) in Durban, South Africa, in late 2011 resulted in only modest progress. Consequently, the second commitment period under the Kyoto Protocol seems to include only the EU and a couple of small other parties, and negotiations on a legal global agreement are expected to continue for years.

EU roadmaps paving the way to a low-carbon economy

During 2011, the Commission published four different “2050 Roadmaps”: low-carbon economy roadmap, white paper on transport policy, resource efficiency roadmap and lastly, energy roadmap. The aim of the roadmaps is to present sector-specific pathways for achieving a competitive low-carbon economy by 2050. The present EU targets for CO2 reduction and renewable energy are set up to 2020 and the political discussion on possible milestones for reaching the 2050 target is expected to start during 2012.

All roadmaps emphasise EU-level policy steering and the increase of binding targets. The EU is targeting an 80–95% reduction in greenhouse gas emissions by 2050 with interim targets for 2030 (–40%) and 2040 (–60%). This would mean that the power sector would be virtually CO2-free by 2050. 

Lack of progress in global climate negotiations and unclarity with regard to EU policy measures water down the competitiveness of early movers in climate change mitigation. Even though the EU roadmaps in general are supportive of Fortum’s low-carbon strategy, overlapping and conflicting policy measures in terms of CO2reductions, renewable energy sources and energy efficiency are watering down the effectiveness of each other. Fortum would rather see the carbon price to steer energy production in a sustainable direction.

Nordic power market structure