The Nordic power market
Tapio Kuula Senior Vice President Fortum Corporation
Fortum Investor/Analyst day 2006 27 November, London Disclaimer
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Fortum shares.
Past performance is no guide to future performance, and persons needing advice should consult an independent financial adviser.
2 Contents
• The functioning of the Nordic power market • Main drivers for Nordic power price • Integration to other European markets
3 Market design is as important as infrastructure development
Large NordicNordic wholesale customers Competitive wholesale Generation marketmarket businesses Nord Pool and Retail Retail Small bilateral Retail companies marketmarket customers
Regulated Transmission and system Distribution monopolies services Independent TSO Independent DSO
4 Wholesale market price is a result of balance in liquid Nordic market – retail markets still mainly national
Supply Wholesale Demand price
Large NordicNordic wholesale customers Competitive wholesale Generation marketmarket businesses Nord Pool and RetailRetail bilateral Retail Small companies marketmarket customers
Retail Supply Demand price
5 Still a highly fragmented Nordic power market
Generation Distribution Retail
395 TWh 14 million customers 14 million customers > 350 companies ~ 500 companies > 450 companies
Vattenfall Fortum Fortum others others others Vattenfall Dong Energy 29% Vattenfall E.ON Fortum 51% 53% E.ON Helsinki BKK Dong Energy E-CO Energi Hafslund Norsk Hydro Hafslund Plusenergi PVO Statkraft Helsinki SEAS-NVE SEAS-NVE Helsinki Dong Energy E.ON BKK Statkraft Fjordkraft Göteborg Östkraft
2005 figures; the effects of the structural changes in Denmark and in Finland have been taken into account.
6 Price volatility on a year-to-year basis is driven by the annual generation mix - the system is hydro driven
TWh/a 450 40 Net import Condensing power Nordic 400 35 total Market 350 production 30 price CHP 300 EUR/MWh 25 Nuclear power 250 Wind power 20 200 15 150 10 100 Hydro power 50 5
0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
7 Competitiveness demonstrated through power prices
Industry 50 GWh/a Yearly moving average spot price Forwards €/MWh 140 120 €/MWh 100 100 80 60 90 40 20 80 0 70 UK Italy Malta Spain Latvia 60 Ireland Poland Austria Cyprus Croatia Finland Greece Estonia Holland Norway Sweden Belgium Bulgaria Portugal Slovakia Hungary Lithuania Romania Czech R. Czech Germany 50 Households 3,500 kWh/a 40 cent/kWh 30 25 20 20 15 10 10 Nov 17, 2006 0 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 0
UK Nord Pool German UK Italy Spain Ireland France Austria Greece Finland Holland Norway Belgium Sweden Portugal Dutch Spanish Denmark Germany Luxembourg Source: Eurostat 7/2006; prices for electricity and distribution excl. taxes 1/2006 Source: Reuters, OMEL
8 The liquidity of the Nordpool financial market ensures the credibility of the forward-looking price signals
Nord Pool volume development
TWh • Transparent price 3,108 3.000 formation and market Spot trade 2,658 information 1,764 1,797 2,156 2.000 Financial/bilateral clearing Nord Pool members • Hundreds of actors, 1.000 liquid market
500 • Physical spot trade 60% of Nordic 400 400 consumption* 300 300 • Financial clearing 200 200 more than five times
Members the Nordic 100 100 consumption
0 0 • Strict insider rules -93 -94 -95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05
* Nord Pool 1-9/2006
9 Information on the status of generation and network (among other key facts) is publicly available
Nord Pool provides a multitude of … the Finnish TSO, Fingrid, also information readily available online… publishes all information online
Planned outages in Finland 9.10. – 16.10. Example from Fingrid’s state of the Effect power system report* Unit (MW) Period
Inkoo B1 230 10.10.-10.10.
Inkoo B3 230 9.10.-11.10.
Kristiina B1 210 9.10.-16.10.
Meri-Pori B1 565 9.10.-13.10.
Tahkoluoto G1 240 9.10.-9.10.
* Fingrid, for example, reports all operational failures in transmission network online instantly Source: Fingrid; Nord Pool 10 Demand response to short-term price peaks is often the most efficient "reserve capacity" on the market
Example from Norwegian metals industry
Energy consumption in metals Average Nord Pool spot price production per month (TWh) per month (NOK/MWh)
3,2 600
3,0 500
2,8 400
2,6 300
2,4 200
2,2 100
2,0 0 Aug-02Feb-03Aug Feb Aug-03Feb-04Aug Feb Aug Aug-04Feb-05Feb Aug Aug-05Feb-06Feb 2002 2003 2003 2004 2004 2005 2005 2006
Source: SSB (Statistic Norway), Nord Pool
11 Strong focus on market operations through organisation structure in Fortum
Portfolio Generation Management & Trading (PMT) Physical and Focus on technical, Focus on market financial environmental and operations of the Nordic asset productivity generation portfolio. power issues of the Physical and market generation portfolio. financial trading.
12 Contents
• The functioning of the Nordic power market • Main drivers for Nordic power price • Integration to other European markets
13 An increasing trend in Nordic power prices
System Price Forward Curve 21.11.2006 90
80
70
60
50
40
EUR / MWh 30
20
10
0 1995 1997 1999 2001 2003 2005 2007 2009 2011
14 Fundamental Price Drivers
• Demand-Supply balance – Tightening all over Europe – Need for new capacity • Weather: precipitation, temperature and wind
•CO2-allowance prices - Kyoto period and beyond • Fuel prices • Convergence of power markets on European level – Increasing interconnection capacity – Common need for new capacity; common cost for building it – Increasing dependence on condensing power - coal and gas?
– EU-wide CO2-trading increases correlation between markets
15 Spot price is based on supply and demand balance
DEMAND • Seasonal variation, hourly profile Demand • Temperature dependence Price Supply • Price elasticity Oil SUPPLY condense Hydro production • Uncertain future volumes • Long term profit maximisation sets the Coal value condense • Storable and run of river hydro power Thermal production CHP • CHP, nuclear, condense • Available capacity Hydro Nuclear •CO2 price changes • Fuel price changes Volume Exchange with Europe • Price difference between Nordic and European market
16 Electricity demand in Nordic countries 1980-2005
450 000
400 000
350 000
300 000
GWh/a 250 000
200 000
150 000
100 000 Sweden Norway 50 000 Finland Denmark 0 1988 1990 1992 1994 1998 2000 1996 1980 1982 1984 2004 1986 2002
Source: Nordel
17 Electricity demand in Nordic countries 2005
160
140 Other 120
100 Households TWh/a 80
60
40 Retail and services
20
0 Industries Denmark Norway Sweden Finland
Source Nordel
18 Power generation and procurement 2000-2005
450 000
400 000
350 000
300 000
GWh/a 250 000
200 000 Imports 150 000 Wind 100 000 Condensing and CHP 50 000 Nuclear Hydro 0 1988 1990 1992 1994 1998 2000 1996 2002 2004 1982 1984 1980 1986
Lähde:: Nordel
19 Power generation in Nordic countries 2005
160 Total 395 TWh
140 Wind
120 Gas 100 Condensing
TWh/a 80 CHP, industry 60
40 CHP, district heating 20 * ) Nuclear 0 Denmark Norway Sweden Finland Hydro
*) incl. condensing production Surce: Nordel
20 New capacity will be needed to meet the demand growth
European wide ...... and in the Nordic market
TWh TWh 3,500 500
3,000 900 400 80 TWh 2,500 TWh 300 2,000 1,500 200 1,000 100 500 0 0 2000 2005 2010E 2015E 2020E 2000 2005 2010E 2015E 2020E
Existing/remaining capacity Demand Source: Eurprog 2005; Europe: EU25
21 Forward prices reflect the foreseeable supply-demand balance and are indicators of future electricity price
EUR/MWh EUR/MWh80 80 CO2 cost 15 €/ton 70 70 Fuel costs Fixed costs 60 ( variation) 60 Futures 50 50 23 Nov 2006
40 40
30 30
20 20
10 10
0 0 1995 -97 -99 -01 -03 -05 -07 -09 2011 Coal Gas Nuclear Hydro Wind
Source: Nord Pool, Fortum Source: IEA "World Energy Outlook 2006"; Elforsk "El från nya anläggningar", 2003. Adjusted to indicate nominal costs year 2011. Large variations in cost of new hydro and wind due to location and conditions
22 Hydro remains a key driver
TWh EUR/MWh 30 80
20 70 Nordic spot price 10 60
0 50 mpared to normal mpared to -10 40
-20 30 Nordic spot price
-30 20 Water + Snow co Water + Snow Water + snow balance -40 10
-50 0 2000 2001 2002 2003 2004 2005 2006
23 Cumulative inflow below normal due to poor snow accumulation last winter plus dry summer and autumn this year
[TWh] [EUR/MWh] 240 100 Yearly average inflow 1990-2000 Water inflow 52 cum weeks 90 220 Hydro production 52 cum weeks Weekly System Price 80
200 70
60 180
50
160 40
140 30
20 120 10 2003 2004 2005 2006 100 0
24 Norpool spot prices clearly above 2004-2005 levels
44,24 EUR / MWh 2004 2005 2006 November 22, 2006 90
80
70
60
50
40
30
20 Day Avg Price EUR / MWh 10
0 1/1 1/2 1/3 1/4 1/5 1/6 1/7 1/8 1/9 1/10 1/11 1/12
25 NordPool year forwards
26 Nordic water reservoirs
Source: Nord Pool - Norway and Sweden reservoirs
27 Hydro power production in Norway and Sweden
6 240
5 200
4 160
3 120
2 80 Cum Prod ( TWh ) Prod ( TWh / wk ) Prod ( TWh /
1 40
0 0 1 5 9 13 17 21 25 29 33 37 41 45 49 53
2004 2005 2006 cum. 2004 cum. 2005 cum. 2006
28 CO2 important in short and long term
• Weather: temperature, wind and precipitation - e.g., weather in Spain affects all European CO2 and power markets • Fuel prices: coal to gas switch (gas linked to oil, too), biomass • Kioto mechanisms in acquiring additional emission allowances: CER-credits (Certified Emission Reductions) from CDM projects in developing countries (Clean Development Mechanism); from year 2008 ERU credits (Emission Reduction Units) from JI projects (Joint Implementation) mainly in Eastern Europe and Russia, as well as AAU allowances (Assigned Amount Units) from states being under their Kyoto caps ("hot air") • Allocation of emission allowances for the period 2008-12: tightness to existing plants, free allowances to new plants, purchases by governments
• Possibilities to develop CO2-free energy production
29 CO2 price was driving both Nordic and German power forward prices until May 2006
EUR/MWh 70 German price Year 2007 60
50
40 Nordpool Price Year 2007 30 CO2 price Year 2007 20
10
0 01/05 03/05 05/05 07/05 09/05 11/05 01/06 03/06 05/06 07/06 09/06 11/06 2005 2006
30 Emissions trading impacts marginal costs of generation and the European merit order
With carbon at € 20/tCO2 Without carbon constraint
Source: Projected Costs of Generating Electricity, 2005 Update; OECD/IEA
31 CO2 prices for 2007 have declined clearly more than for 2008
35
30
25
20
15 EUR / ton of CO2
10
5
0 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06
CO2 price 2007, ECX CO2 price 2008, ECX
32 Emission Market - tighter allocation plan in phase II
National Allocation Plan 2005-2012 CO2 price 2160 50
2120 40
2080 -6%-6% 30 2040 20
2000 EUR/t CO2 Forward
1960 10
1920 0 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Phase I Phase II Phase I Phase II Phase I Phase II The realised emission in 2005 was 90 Mton less The guideline from European Commission is a than the yearly average allocation in Phase I reduction of 6% between the phases. The final allocation plan is expected to be published in The market price is currently ~8 EUR December
33 Fuel prices affect the CO2 price
Oil price Gas price (UK) 80 120 Futures show a slightly decreasing 70 100 trend? 60 50 80 40 Oil futures at a high 60 GBp / therm USD / bbl 30 level 40 20 10 20 0 0 In combination 2004 20052006 2007 2008 2004 20052006 2007 of high 2008 coal price and low gas price the Coal price CO2 price coal to gas 90 35 switch is 80 30 preferable
70 2 60 25 50 Markets expect 20 coal price to stay
USD / t 40 above 60 USD/t 15 30 EUR / tCO 10 20 10 5 0 0 2004 20052006 2007 2008 2004 20052006 2007 2008
Source: ; market prices 17 November 2006; 2006-2008 future quotations
34 Summary on power price drivers
• Main prices drivers are supply/demand balance, hydrological situation and prices for CO2 allowances • In the Nordic area year 2006 hydrological balance has turned into deficit due low inflows resulting in higher prices than previous couple of years • During 2006 prices for emission allowances have dropped to lowest levels since early 2005 when the market opened. The emissions allowance market faces a discontinuity point when the Kyoto period starts in the beginning of 2008. Negotiations on Post-Kyoto are ongoing
35 Contents
• The functioning of the Nordic power market • Main drivers for Nordic power price • Integration to other European markets
36 Today, physical constraints in transmission divide Europe into price regions – "regional markets" Average wholesale electricity prices 2005 and 2006, EUR /MWh High congestion from High congestion from Core 50 Central Europe to Nord Pool Central Europe to BENELUX. 29 Nordic, UK and Iberia Nordic Integration of BENELUX to 52 Germany Core Central Europe is first in 46 line to proceed. 50 France 47 52 UK Austria Baltics 47 63 UK NL/BE 57 Centrel The 59 Netherlands 52 Core Central 53 Spain Iberia Europe 55 South-East 75 Italy Europe 58 30 Poland 28
Italy 0 20406080 EUR/MWh Medium to high 2006 (1-10) 2005 congestion from Central High to medium Sources: Nord Pool, EEX, Powernext, EXAA, OMEL, Europe to Italy and congestion from Central GME, POLPX, Reuters particularly within Italy and South-East Europe to Central Europe
37 European integration continues - Market coupling between Denmark and Germany
PRESS RELEASE 16/2006, (Lysaker, 02 November 2006) Market coupling between Denmark and Germany The European Energy Exchange AG, Nord Pool Spot AS, Energinet.dk, Vattenfall Europe Transmission GmbH and E.ON Netz GmbH have adopted a Memorandum of Understanding concerning market coupling. The companies agree that the integration of wholesale electricity markets requires a more efficient utilization of existing interconnectors. During the next three months an implicit auction concept shall be developed. The aim is to introduce an implicit auction, i.e. the joint allocation of energy and capacity, for the daily cross-border capacity allocation for both interconnectors between Denmark and Germany (i.e. the connection between E.ON Netz and Jutland as well as the KONTEK interconnector).
38 Nordic market is becoming more integrated into Europe
Present • NorNed (Norway - The Netherlands) by Under construction +100 70 50 Planned 2008 60 Discussed • Estlink (Estonia - Finland) by 2007 1500 Nordel priority 800 +200 • Nordel priority projects enhance Nordic projects power market integration 500 – Snitt4, Sweden. Technical solutions under + 200 investigation. In operation 2011 550 100 2050 1300 – FennoSkan 2 (800MW), decided. Operation 2010 350 1040 +800 1000 900 – Nea-Järpströmmen (200MW), decided. Operation 630 (490) 900 2009 600 +90 1600 1000 1200 300 – Skagerrak (600MW). To be investigated further 700 1200 600 600 600 +300 600 – Store Baelt (600MW). Applications before year-end 1000 2200 2006 (operational ~2010) 600 550 200 1000 • In 2005, Nord Pool introduced a spot 3800 2500 market area "KONTEK" to facilitate 125 market coupling on the Kontek cable 1700 3500 1600 1000 2750 1500
39 Summary on integration to other European markets
• Integration of the Nordic market to other European markets continues via new grid investments and improved congestion management • The Emissions Trading System also contributes to the integration • European level market liberalisation and integration continues. Almost all Member States are opening the national markets next year. Security of European energy supply is high on agenda and nuclear is brought back as feasible solution
40 41