Why is Fortum’s wind and solar energy a good match with Uniper?

Kari Kautinen

Posted by: Kari Kautinen
2.11.2017

In September we announced our agreement with E.ON regarding their 47 per cent stake in Uniper and our intention therefore to launch a voluntary takeover offer to all Uniper shareholders. After the news became public, some people turned their attention on the fact that 80 per cent of Uniper’s production is fossil fuel-based – mostly natural gas. That was followed by a flurry of questions: How will the investment promote the change for a cleaner world? How does Uniper mesh with Fortum’s goal to lead the transition towards a low-carbon energy system?

I am happy to share my perspective, as one of the architects of the planned transaction at Fortum as the head of the company’s mergers and acquisitions. In addition, I am also responsible for Fortum’s wind and solar businesses.

Stable financial earnings ensure investments in renewable energy

In recent years we at Fortum have decisively developed our wind and solar energy businesses with the aim to grow significantly. For example, we consider wind power to be one of the most competitive production forms in the future up here in Northern Europe. We carefully select the targets of our wind and solar energy investments. The aim is to invest where the conditions are optimum for the production form in question.

We are currently constructing or planning wind power in Sweden, Norway and Russia. We have built over 170 MW of solar energy in India within the past couple of years, and we are continuing to pursue growth. Our goal is to invest about EUR 200-400 million in India’s solar energy projects. We expect our investment in Uniper to deliver an attractive return that will further enable us to accelerate the development and implementation of sustainable energy technologies.

The energy system transition will take time

The longer we have operated in wind and solar power, the deeper our understanding of the entire energy system has become. We at Fortum clearly see that the future energy system must be secure, agile and clean, and it must provide affordable energy for European consumers and businesses. No matter how much we all would like renewable energy alone to be the solution for the globally growing energy demand, it just isn’t realistic in the current situation.

The energy system transition to low carbon and renewable will not happen overnight at the snap of the fingers. Why not? One reason is because a feasible and economically viable solution for large-scale energy storage has not yet been developed. So we need steady production at least for the coming few decades to work alongside renewables to secure the functioning of society at all times.

Additionally, we need production that can be flexibly adjusted to secure the energy supply when it isn’t windy or sunny. Here in the Nordic countries, hydropower functions in this way. Many countries, like Germany, don’t have the same alternative on such a scale. Then you have to rely on another form of balancing power. Uniper’s gas-fired power plants and their pumped storage hydro power plants are efficient tools in reaching Europe’s climate targets.

An understanding of how the different types of generation work together in the energy system, and how this will evolve in the energy transition, is very important. Uniper’s portfolio which is well diversified by both fuel type (including hydro and nuclear as well as thermal production) and geography (Germany, Russia, Sweden, the Netherlands, UK and other markets) offers a clear complement to Fortum’s own portfolio.

We at Fortum are investing simultaneously in clean, renewable energy, and, with the Uniper transaction, more in stable and adjustable production. To me, this combination indicates social responsibility by Fortum in light of our position as a significant European energy sector participant: we are rapidly advancing the transition towards a low-carbon energy system while, at the same time, making sure there is a supply of electricity and heat when the sun isn’t shining and the wind isn’t blowing. I believe that as a responsible leader at the forefront of clean energy, Fortum is the best possible partner for Uniper.

Kari Kautinen, Senior Vice President, M&A and Solar & Wind Development, Fortum

The real monetary value of cross-border transmission

Tuomas_Harju-60x60 Posted by Tuomas Harju, 31.3.2016

Cross-border power transmission has significant monetary value for the Nordic region – especially for Finland. Nevertheless, national energy policies – like electricity self-sufficiency – have dominated the discussion over the regional benefits, which we have actually witnessed. From an economical point of view, it makes no sense to strive towards national policies when power generation is as diversified and efficient as it is in the Nordic region. To demonstrate this and to see what the actual welfare benefit of the Nordic power market and other imports has been, we modelled Finland as if there were no inter-connections to neighbouring countries.

The goal was to build a very simplified model that assumes perfect information about the market and in which hydro and wind generation are taken as given. However, the information was limited so that investment decisions were made with knowledge of only a few upcoming years of fuel and CO2 price development. Also investments were made in the model only if sufficient returns could be made. In practice, this means that the price was determined so that plants are profitable and no oversupply exists in the market. The year 2000 was chosen as the starting year in the model, after which we allowed the model to build new capacity when it was needed. The capacity additions were driven by commodity prices and the relative marginal cost of different technologies.

Image1_electricity_mix

Figure 1: Modelled electricity mix with realised 2015 figures

Quite interestingly, the results reflect the development of past trends in the energy sector. During the first years, gas price was very competitive compared to coal and, therefore, the model initially builds a relatively large number of gas plants to satisfy the demand. However, the competitiveness of gas has since crashed, even in terms of marginal cost, and thus, basically, all gas investments are replaced with coal plants, with the gas going unused. This is highly reflective of the current market fundaments in which fuel costs clearly favour coal generation over gas. In the Nordic power market, the price is largely set by hydropower. In the disconnected Finland model, however, the price is mainly set by coal condense plants (gas condense at the beginning of the period), since the cheap Norwegian and Swedish hydro is not available.

With above mentioned assumptions, the model resulted in higher price in Finland of some 16 €/MWh on average over the 2000-2015 horizon. In terms of system inefficiency, this totals, cumulatively, a difference of over 20 billion € between the national and Nordic power market. If nuclear had been built, the price difference would have decreased, but only by some 2 to 4 €/MWh, as the fossil condense sets the price. It should be noted, however, that the Nordic system price has been under pressure due to the oversupply of past years, which has a natural increasing effect on the price difference. Nevertheless, the benefits of Nordic integration are clear.

Image2_cost_difference

Figure 2: Cost difference between national and regional Nordic power market

Admittedly, national self-sufficiency in generation capacity would in some sense increase the security of supply in Finland, but the question is: at what price?  The higher power price and increasing dependence on imported fossil fuels would be significant disadvantages. Despite the prevailing populism in public discussion, we should determine whether we actually favour nationalism over the Nordic region and European market – rigid and costly over agile and efficient.

Tuomas Harju
Market Analyst, Fortum

 

We can curb climate change – please, policy makers in Paris be ambitious and brave enough

Simon-Erik OllusPosted by: Simon-Erik Ollus
9.12.2015


In order to reach decarbonisation the direction of energy and climate policy needs to change. Carbon pricing is the way forward.

The ongoing 2015 United Nations Climate Change Conference, COP 21, has the mandate to solve the climate change issue politically by  making the right decisions as soon as possible. We business actors are actually able to deliver decarbonisation even faster than what the overall political commitments so far have promised.  In order  to succeed – we ask for clear direction, ambitious political commitments and stable and long-term energy and climate policy steering  – both in Europe and globally.

Role of energy industry in mitigating climate change

The energy sector is today responsible for 2/3 of global CO2 emissions. It plays a vital role in the fight against climate change.  One of mankind’s largest challenge is actually to decarbonise energy production in order to decouple economic growth and emission growth.

This challenge is fully possible to meet, even with today’s technologies. It requires strong political commitment and massive investments in new energy production while decommissioning of oldest polluting generation capacity prior end of lifetime.

I believe the energy sectors largest uncertainty today is that we miss this broad political commitment on where actually to head. The Finnish Environment Minister recently stated touché that the success of Paris COP will be measured with the volume of energy sector’s investments it will launch. Companies are racing towards a future low-carbon world but we cannot deliver, if they do not have the firm political support.

Utilities want to do more but need consistent policy

We as utilities want to mitigate climate change,  but we need to deliver it on a commercial logic. Investors and customers need to be willing to pay for clean energy and there need to be incentives created for customers to do so.  This will not happen if there is inconsistency in policy making, target setting and regulatory steering. Inconsistency creates uncertainty – and that is unfortunately where the European power industry is today.

Due to divergent national support schemes on renewable energy sources and actually divergent national energy and climate polices,- we are today endangering the benefits of the European Internal Energy Market, and even worse – endangering the opportunities to decarbonize the power sector. The European power companies have been one of the poorest performing industry during the last five years, decreasing shareholder value notably. And this is the same industry which should be investing much more –  not less going further.

Momentum for carbon pricing increasing

The direction needs to change. Carbon pricing is the way forward. In Paris, stronger than ever, it has been promoted by numerous business organisations: IETA, WBCSD, CDP, World Bank, IEA, We Mean Business and Caring for Climate. And it is not only business doing this: we are accompanied by investors, pension funds and capital markets as a whole. Nobody has been able to ignore the importance of the issue.

Whether or not carbon pricing and markets finally are part of the agreement, the snowball is already rolling. Things are moving ahead in business and the economy, regardless of the negotiations or in spite of them. Markets will solve the situation, if the politicians cannot do that. However, a strong, binding and forward looking agreement could clearly boost the transition to a low-carbon economy.

Fortum paving the way

We at Fortum take climate change seriously. Fortum has in its mission statement a noble purpose: “to improve life of present and future generations”. This is a true promise we try to live up to. We aim to deliver carbon free energy. Today ~95 % of our European power production is CO2 free, mainly based on hydropower, nuclear and bio CHPs.  We can – and should  still do much more.  But also we face challenges to make the noble mission to true business under current investment uncertainty. Fortum is one of the signatories of the Paris Pledge for Action – an initiative providing the opportunity for signatories to show that they are willing to support government efforts in meeting and exceeding commitments made to keep the world on a trajectory that keeps us within 2 degrees.

Let’s hope for successful last minute negotiations in Paris!

Simon-Erik Ollus
Chief Economist

Five “no regret” measures to improve the market

Timo_Karttinen_2014_60x60 Posted by: Timo Karttinen
25.9.2015

[published originally in European Commission’s DG ENER Monthly Newsletter in September]

Despite some genuine progress the political target to have fully integrated EU internal energy market in place by 2014 has been missed. A year past the deadline we see virtually the opposite trend taking place. The rapid increase in subsidy-driven renewable electricity is challenging the electricity and carbon market, while the economic recession has pushed down the demand. The power industry is struggling with unprofitable power plants when they should be investing in new low-carbon technologies. A number of national initiatives have emerged in place of the missing market signals. Regulatory failures have been “cured” with new regulations. Capacity mechanisms and national carbon policies are examples of such development.

Against this backdrop, the electricity market design consultation launched by the Commission in mid-July is very timely, and the questions put to governments, industry and other stakeholders are to the point. The core issue is about making a choice: do we aim for a common European market driven by market signals, or do we opt for a more regulated, more fragmented and less competitive energy system?

Fortum sees clearly the value added of a common competitive European energy market. The lower societal costs afforded by an efficient market benefit consumers, energy producers and societies alike. It is crucial to study a broad range of key elements of the current internal electricity market design and how they could be further developed. There is no silver bullet that alone would solve the current challenges, not even those much-debated capacity mechanisms.

My top five “no regret” measures to improve the current market would be: 1) Increase efforts in transmission infrastructure development and go for more regional system planning and optimization; 2) Full market integration of renewable energy including small decentralized generation; 3) Enforce CO2 price steering by letting the ETS do the work in the ETS sector; 4) Allow market price to drive investments and demand-response development without artificial price caps or other restrictions; and 5) Remove regulated end-user prices in all member states and make real-time pricing an option available to consumers.

Read also our response to the EU consultation on new electricity market design.

Timo Karttinen
CFO

Sometimes you have to go far away to see the light: Solar and future energy system

Simon-Erik Ollus
Posted by: Simon-Erik Ollus
13.8.2015Ollus_Intia

I visited again India in early August. One cannot be other than impressed by the phase of development there. When I first time visited the country the national solar PV target was 3GW, last time 30GW and now already 100GW by 2022. The solar target has grown over thirtyfold in just five years.

Also Fortum has proceeded with our solar plans. We finalised early this year our second Solar PV plant of 10MW in the village of Kapelli, in the region of Madhya Pradesh. Visiting the plant was again eyes opening – a power plant in full silence and no moving parts. The only noise is the sound of the inverters. A true future generation technology compared to any conventional technology production: safe, fast to construct and CO2 free. Continue reading Sometimes you have to go far away to see the light: Solar and future energy system

Lima roadshow over – the climate show goes on

Kari Kankaanpää
Posted by: Kari Kankaanpää
17.12.2014

The Peruvian capital of Lima waCOP_entrances subject to the world’s eyes during the last two weeks. The magic word in the city was COP — the Conference of the Parties. With that, you had access to everywhere in the city of 10 million, and you received special treatment – and even special (inflated) prices.


Business-as-usual outcome

The good news was that there was no bad news. So the Peruvian COP was a step forward, albeit a small hop rather than a giant leap. In the international climate policy arena, you are used to not expecting too much. Most important, the negotiators ultimately achieved a common understanding, although the outcome represents the lowest common denominator. They also acknowledged having put off the most difficult decisions for later. The show must and will go on. Continue reading Lima roadshow over – the climate show goes on

EU Energy Union – Emperor’s new clothes or genuine momentum towards a stronger European energy policy?

Merja PaavolaPosted by: Merja Paavola
27.11.2014

The EU Energy Union has been a buzzword since last spring when Mr. Donald Tusk, Polish Prime Minister at the time, came forward with his initiative to establish a European Energy Union. The background was the increased risk for gas supply disruption following the escalating crises in Crimea and Ukraine and the need for the EU to counteract by adopting a stronger common energy policy.

We have heard lots of talk, but a common view of what this concept could or should actually contain has yet to gain traction. One concrete step has nevertheless been taken: the new European Commission President Mr. Juncker has nominated a dedicated Vice President for the Energy Union. Continue reading EU Energy Union – Emperor’s new clothes or genuine momentum towards a stronger European energy policy?