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Fingrid Current: Simon-Erik Ollus, Vice President, Trading and Asset Optimisation, Fortum

Towards more integrated Baltic Sea region power market

Presentation by Simon-Erik Ollus, Vice President, Trading and Asset Optimisation, Fortum

In Fingrid Current 10.3.2020

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Fingrid Current: Simon-Erik Ollus, Vice President, Trading and Asset Optimisation, Fortum

  1. 1. Customer view on Baltic Sea region power market development Fingrid Current Towards more integrated Baltic Sea region power market Helsinki, 10 March 2020 Simon-Erik Ollus, Vice President, Trading and Asset Optimisation, Fortum
  2. 2. 4 Fortum at a glance • A leading clean-energy company across the Nordic region, the Baltic countries, Poland, and Russia • A circular economy champion, providing solutions for sustainable cities, including waste, recycling, and biomass • Rated BBB/CreditWatch Negative and BBB/Rating Watch Negative by S&P and Fitch respectively • In 2018, Fortum closed its tender offer to shareholders in Uniper (holding of 49.99% of the outstanding shares and voting rights as of 31.12.2018), in 2020 additional >20% stake to be closed Description of Fortum Operations by business segment Foreign investors 30.3% Finnish State 50.8% Other Finnish investors 7.7% Finnish households 9.5% Financial and insurance institutions 1.7% Key shareholders Production by source • Listed on the Helsinki Stock Exchange since 1998 • Market capitalisation of ~EUR 20bn • Finnish State is a majority owner Note: All data as of FYE 2019 unless otherwise stated (1) Comparable EBITDA defined as operating profit plus depreciation and amortisation less items affecting comparability Generation 50% Russia 25% City Solutions 17% Consumer Solutions 8% EBITDA(1) EUR 1.8 bn 31.1.2020 Heat 26.4 TWh Biomass 9% Heat pumps, electricity 2% Waste 10% Natural gas 59% Coal 18% Peat 1% Others 1% Power 76.3 TWh Nuclear power 31% Coal 3% Biomass 1% Hydropower 26% Wind, solar 1% Waste1% Natural gas 37%
  3. 3. Fortum’s geographical footprint 5 Key figures 2019 Sales EUR 5.4 bn Comparable EBITDA EUR 1.8 bn Total assets EUR 23 bn Personnel 8,200 Nordics 69% Sales by market area 2019 Russia 20% Poland 7% Other 4% EUR 5.4 bn Note: Ranking based on year 2018 pro forma figures Source: Fortum, company data, shares of the largest actors Nordic countries Power generation 45.5 TWh Heat sales 5.9 TWh Electricity customers 2.3 million Russia PAO Fortum Power generation 29.3 TWh Heat sales 16.9 TWh Poland Power generation 0.6 TWh Heat sales 3.3 TWh Baltic countries Power generation 0.7 TWh Heat sales 1.5 TWh #3 #1 #5 #10 #7 x = Fortum market share ranking
  4. 4. 4 Fortum’s is a true Nordic electricity generator with presence in Nordics, Baltics and Poland Associated companies’ plants (not included in the MWs) Stockholm Exergi (Former Fortum Värme), Stockholm; TSE, Naantali GENERATION CAPACITY MW Hydro 4,677 Nuclear 2,821 CHP 831 Other thermal 565 Wind 159 Nordic, Baltic and Polish generation capacity 9,053 Figures 31 December 2019 DENMARK, DK1 MW Generation capacity, CHP 16 FINLAND MW Hydro 1,553 Nuclear 1,487 CHP 452 Other thermal 565 Generation capacity 4,057 NORWAY MW Price areas NO4, Wind 82 NO1, CHP 20 Generation capacity 102 SWEDEN MW Price areas SE2, Hydro 1,550 SE2, Wind 75 SE3, Hydro 1,574 SE3, Nuclear 1,334 SE3, CHP 9 Generation capacity 4,542 BALTICS AND POLAND MW Generation capacity, CHP in Estonia 49 in Latvia 34 in Lithuania 18 in Poland 233 in Latvia, Wind 2 NO2 NO5 NO1 NO3 NO4 SE1 SE2 SE4 EE LV LT PL FI SE3 DK1 DK2 The capacity includes the 52 MW Joensuu CHP plant in Finland, which has been sold in January 2020. Demand: • ~2.3 mln. retail customers in Norway, Sweden, Finland and Poland • Leading B2B supplier in Nordics
  5. 5. Setting the Scene: Nordic countries have some of the most ambitious climate targets in the world, setting net zero greenhouse gas emission targets 5 Denmark Estonia Finland Latvia Lithuania Norway Sweden
  6. 6. Electrification is the enabler for the climate neutrality, and electricity use will grow 6 • From 400 TWh/a to 600 TWh/a of Nordic power demand • From 3 000 TWh/a to 6 000 TWh/a in the EU • Most of the Nordic growth from wind power • Flexibility must increase • Power grids must be reinforced • All carbon-neutral generation forms will be needed Source: Energiföretagen, Svenskt Näringsliv, Statnett, Finnish governmet, Energinet, Danish Energy Agency, Eurelectric, ENTSO-E Climate targets in the Nordics Sweden: Net zero 2045 Denmark: Net zero 2040 Norway: -95% by 2050 Finland: Carbon neutral 2035
  7. 7. • The report investigates the operational, legislative and historical differences among the Nordic TSOs operations and planning. • The report was prepared by Pöyry Management Consulting for Fortum Corporation. It is an independent report by Pöyry and all the findings and views expressed in the report reflect the views of Pöyry as they were interpretable based on public information and interviews. • The report was published in November 2019. • Key findings: – TSO obligations and tasks are similar across the Nordics, however governance structures differ – Nordic TSOs operate in quite different physical context – Nordic collaborative activities have visibly slowed, and European electricity market design has been led by other countries with different drivers – There are platforms and processes to support Nordic cooperation and harmonisation but there are different views on their effectiveness and the underlying development needs – Grid planning and investment is probably the least Coordinated activity between the Nordic TSOs. Grid investments are subject to national interests and prioritisation – There are national differences in approach to the existence and management of congestion in the main transmission grid – Information about the state of the market is not revealed in a systematic way across the TSOs 7 Fortum Energy Review: From national to regional transmission system operations Report available:
  8. 8. The energy and climate system dilemma: In order for demand to meet supply, and supply to meet demand, we need credible policies, strong infrastructure and effective remunerations signals 8 Policy • Credible climate and energy targets and policies • Other polices and tools supporting the climate targets • Environmental licensing supporting. climate targets • Taxes and levies to support the climate targets • Regional harmonisation between country policies Overall policy framework emerging. Several sector policies contradicting Infrastructure • A power transmission system reinforced to enable the energy transition • A gas transportation system reinforced to enable the energy transition • Transport infrastructure to support decarbonisation • Local transmission systems planning also aligned Infrastructure planning not based on climate ambition. Hydrogen infrastructure taking first baby steps Demand • Decarbonisation of energy consuming industry, buildings, transport and agriculture • Sector coupling of various energy sectors, leading to direct and indirect electrification • Transition to use of clean and green gas Industry roadmaps emerging and some good initiatives/pilots. Large scale electrification not yet visible Supply • More CO2 free energy needed to provide energy transition • Societal acceptability of wind, solar, hydro and nuclear Falling cost of renewable investments and site available. Increasing acceptability issues and falling instalment rates Market design • Energy market that remunerates flexibility and gives credible dispatching and investment signals • Efficient CO2 pricing • Enables efficient hedging of various risks that producers or consumers don’t want to carry • Preferable Nordic harmonisation of market rules Lack of adequate hedging instruments Flexibility not fully utilised
  9. 9. A well developed regional electricity and gas grid could be an enabler for the energy transition 9 Policy Infrastructure Demand Supply Market design • National and regional grid development plans should be aligned with political decarbonisation commitments • The grid development should target improving the underlying energy market to deliver • Congestion revenues should be invested in grid development to reduce existing bottlenecks. • A hydrogen (green gas) grid for transmitting large energy volumes and decarbonising hard-to-electrify industrial sectors is also needed NO4 NO3 NO1 NO5 NO2 SE1 SE2 SE3 SE4 DK2 DK1 FI Source: ETSO-E Regional grid
  10. 10. 10 An illustration of key mid-term developments in the electricity grid in the region Grid map source: ENTSO-E TYNDP 2018 (TYNDP 2018 already includes some projects in areas with blue colour) The 3rd 400 kV line between Sweden and Finland must be completed in time by 2025 in order to transmit growing wind generation from Northern Sweden southwards through Finland, too Stronger Finnish north-south grid to keep Finland as a unified price area and also to enable more power transit through Finland Lithuania-Poland synchronisation and new sea cable to provide more export possibilities to replace coal power Swedish internal north-south grid upgrades (NordSyd project) urgent to allow Nordic wind power growth, current plan is not ambitious enough and it is too slow Additional NO-UK links required after the upcoming NSL interconnector Multi-terminal North Sea DC grid to connect offshore wind and several coastal countries SE-DE Hansa PowerBridge to be doubled after the decided 1st phase Bornholm offshore wind hub for more RES generation and DK/SE/DE/PL grid interconnection Policy Infrastructure Demand Supply Market design
  11. 11. 11 Long-term electricity and gas grid development ideas Grid map source: ENTSO-E TYNDP 2018 Northern Norway (Finnmark) has good wind resources and needs the planned extension of the Norwegian 400 kV grid and the planned DC back-to-back station with Finland to control loop flows Old low-capacity 220 kV line from NO4 to SE2 needs to be replaced by a stronger 400 kV line in order to avoid locking in wind and hydro power in NO4 SE-FI transit through the Åland cables and Fenno-Skan renewal (#3) Estlink 3 needed to enable more power transit to and through the Baltics Doubling of the SwePol interconnector capacity to reduce Polish emissions and the currently high SE-PL price difference Norway should strengthen the currently weak NO3-NO1 links Norway-Zealand link as one option to reduce NO/SE/DK2 congestions Pipeline or ship transport of hydrogen or other synthetic fuels Policy Infrastructure Demand Supply Market design illustrative Pipeline or ship transport of hydrogen or other synthetic fuels Build Export capability to Russia Strengthen Northern Norway grid
  12. 12. There exists a vision for the Nordic electricity market • Nordic Energy Ministers’ agreed on a Nordic Electricity Market Vision for 2030 on their meeting in June 2019 in Stockholm: “In 2030, the Nordics have the world’s most competitive, innovative, and consumer-oriented electricity market, that contributes to reaching the ambitious Nordic climate goals.” • This vision was created in the Nordic Electricity Market Forum 2018 in November • Who is responsible for delivering this vision? – All stakeholders and their national and Nordic organisations should commit to the vision – This should be clearly included in TSO’s and regional policy work – The vision should also include the Baltic electricity market12 Policy Infrastructure Demand Supply Market design
  13. 13. Today’s market challenges are related to • Small unbalanced price areas and no plan how to balance the markets • Scattered balancing and reserve markets, different national philosophies on role of the balancing market, market access and operations • Poor transparency especially on real time scarcity signals • Lack of local flexibility market places • Lack of hedging instruments for real risks that some consumers and producers do not want to carry, as market places do not develop accordingly 13 Policy Infrastructure Demand Supply Market design Zonal prices 4.3.2020 at 21-22 CET PLN 194.09 = € 44.96
  14. 14. • Aim for truly Nordic-Baltic joint solutions prior national solutions • Develop a power grid that create more balanced bidding zones in the region • Harmonise Nordic balancing markets and decrease the number of balancing market places. Implement Nordic Balancing Model in agreed timeline, focusing on fulfilling legal requirements • Disclose market information in a systematic and transparent way across the region. Flow- based market coupling can not be introduced without improved transparency • Support development of local flexibility markets by opening up balancing markets for various local assets and developing intraday markets. Regulators should enable Nordic DSO regulation to purchase flexibility and prioritise cost-efficient solutions to secure distribution reliability • Support development of functioning derivatives markets to provide right hedging instruments to hedge asset risk • Strengthen the Nordic Regional Security Co-ordination (RSC) to be the co-ordination center for system operations and planning 14 Policy Infrastructure Demand Supply Market design TSOs can support development of the energy markets
  15. 15. The balance is actually very fragile Energy markets can not deliver decarbonisation of the supply if any of other elements fails 15 OROR • Investors not trusting market mechanisms. Investments only occur with fixed remuneration or subsidies • Loosing the advantages in market and technology development for decarbonisation This could lead to: Policy Infrastructure Demand Supply Market design Policy Infrastructure Demand Supply Market design
  16. 16. Key take-aways • The region’s climate targets are ambitious. With holistic policies and broad sector consensus we can reach this transition efficiently and on market based terms. • Strong regional co-operation on all levels (policy makers, TSOs, regulators etc) facilitates the transition more cost-efficiently than national actions alone • There exist a good vision for the regions’ electricity market – lets embrace it • Embrace the regional co-operation among TSOs • The regions TSOs should review the National and regional grid development plans accordingly to the climate neutrality ambitions. Regional plan should be a top-down exercise • The regions TSOs have a strong responsibility to facilitate market development and enhancing the energy market to deliver. 16
  17. 17. Join the change

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Towards more integrated Baltic Sea region power market Presentation by Simon-Erik Ollus, Vice President, Trading and Asset Optimisation, Fortum In Fingrid Current 10.3.2020


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