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
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. 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. Fortum’s geographical footprint
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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
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. Setting the Scene:
Nordic countries have some of the most ambitious climate targets
in the world, setting net zero greenhouse gas emission targets
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Denmark
Estonia
Finland
Latvia
Lithuania
Norway
Sweden
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. • 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
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Fortum Energy Review:
From national to regional transmission system operations
Report available: https://www.fortum.com/sites/g/files/rkxjap146/files/documents/fortum-energy-review-grid-planning-11-2019.pdf
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
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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. A well developed regional electricity and gas grid could be
an enabler for the energy transition
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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
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
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. 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. 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
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Policy Infrastructure Demand Supply Market design
Zonal prices 4.3.2020 at 21-22 CET
PLN 194.09
= € 44.96
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. The balance is actually very fragile
Energy markets can not deliver decarbonisation of the supply if any of other elements fails
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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. 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.
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