The trillion euro question ahead: To decarbonise without compromising economic competitiveness

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1 The trillion euro question ahead: To decarbonise without compromising economic competitiveness Simon-Erik Ollus, pääekonomisti & johtaja, Industrial Intelligence, Fortum Suomen Energiaekonomistien vuosikokous, Espoo

2 Low Resource & system efficiency High We believe in the Solar Economy Oil Traditional energy production Exhaustible fuels that burden the environment Coal Gas CHP Advanced energy production Energy efficient and/or low-emission production Solar Economy Solar based production with high overall system efficiency Nuclear tomorrow Nuclear today Hydro Geothermal Ocean Wind Finite fuel resources Large CO2 emissions Infinite fuel resources Emissions free production CCS Bio Sun 2 Copyright Fortum Corporation All rights reserved by Fortum Corporation and shall be deemed the sole property of Fortum Corporation and nothing in this slide or otherwise shall be construed as granting or conferring any rights, in particular any intellectual property rights

3 Source: Fortum Industrial Intelligence Solar Economy is NOT only solar power Also hydro, bio, wind, and wave supplemented still for an intermediate period with CHP, nuclear and some fossil NOT only centralised production Also distributed energy systems, storage and demand response NOT only technology development Also development in market, behaviour and business models NOT to happen overnight Long term vision and decisive policies NOT restricted to Fortum New type of energy environment 3

4 CO2 Intensity EU RoadMap Scenarios (gco2/kwh) EU 25 energy roadmap emission targets: Starting point - we target 2gCO 2 /kwh by 25* Scenario 1: Reference Scenario 1bis: Current Policy Initiatives Scenario 2: High energy efficiency Scenario 3: Diversified technologies Scenario 4: High RES Scenario 5: Delayed CCS Scenario 6: Low nuclear CO 2 Intensity, ~8-9 gco2/kwh 5 CO2 Intensity, ~5-2 gco 2 /kwh 4 *Power sector target a % reduction in CO2 emissions from 199 level by 25 Source: EU Commission 25 roadmap impact assessment 212

5 DEI Drax RWE CEZ SSE Edipower Vattenfall Enel EDP E.ON GDF SUEZ Dong Union Fenosa EnBW Iberdrola Fortum total Verbund PVO Fortum EU EDF Statkraft Utility sector still has some way to go to meet the decarbonisation target: Big gap overall - Fortum still some way to go g CO 2 /kwh electricity, % of Fortum's total power generation CO 2 -free 93% of Fortum s power generation in the EU CO 2 -free Close to 1% of the ongoing investment programme in the EU CO 2 -free Average 338 g/kwh Note: Fortum s specific emission of the power generation in 212 in the EU were 42 g/kwh and in total 171 g/kwh. Only European generation except Fortum total which includes Russia. 5 Source: PWC & Enerpresse, Novembre 212 Changement climatique et Électricité, Fortum Industrial Intelligence

6 Trillion euros (212 prices) Decarbonisation fully possible with todays technology, but it is expensive: We should seriously discuss the most cost efficient alternative Required investments in power generation to meet the EU decarbonisation agenda Figures are sums of needed CAPEX for new generation in various EU25 roadmap scenarios to reach the 25 target 6 Source: EU25 roadmap assesment 212,, Fortum Industrial Intelligence 213

7 Popular European end user prices increasing compared to US: We need to understand what drives up energy prices 16 /MWh 14 Industrial end user energy prices* (nominal) Germany USA 7 *For industrial consumer of.6-2 GWh/a Source: BDEW, U.S. Energy Information Administration, Bank of Finland, Fortum Industrial Intelligence

8 Wholesale prices in real term tells something different: Europe is in parity with the US and wholesale electricity prices have decreased over time in real terms /MWh 8 Annual average wholesale electricity prices (real 212) 7 6 GE: y = -1,931x + 58, SE: y = -,2412x + 45, YTD GE FI SE FR US Linear (GE) Linear (SE) Wholesale energy prices in the US (including both electricity and capacity components) are close to the European prices. Clearly higher end-user electricity prices in Europe are explained by other factors than costs of generation, in particular, higher taxes which include RES support mechanisms 8 Sources: Eurostat, U.S. Energy Information Administration, Bank of Finland, Fortum Industrial Intelligence

9 Electricity price paid by industrial consumer is times lower than the one paid by households. Still notable share of tax and levies in Germany. Nordic industrial prices at US levels Comparison between Europe and US Major components of total electricity price, in Europe /MWh /MWh Industrial consumer electricity price* Finland Sweden Germany US industry US commercial Wholesale prices decreased, while taxes and levies increased Taxes and levies are 1/3 of electricity costs for industrial consumer in Germany. And cost is less then half of the consumers % 1 16 % 52 % Ge, energy Fi, energy Sw, energy Ge, network Fi, network Sw, network Ge, taxes Fi, taxes Sw, taxes and leviesand leviesand levies Ge, energy Ge, network Ge, taxes and levies *For industrial consumer of 2 7 GWh/a Sources: Eurostat, U.S. Energy Information Administration, Bank of Finland

10 EUR/MWh c / kwh Case Germany: Energiewende leads to increasing costs for the end consumer energy bill: Although wholesale prices are decreasing, end-user costs go up Cost of electricity has increased despite lower wholesale prices % 9 % 8 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % % EEG, KWKG, Article 19 levy, offshore liability charge, electricity tax, concession fee, VAT Other generation, transmission, sales Electr. Tax Offshore levy 19 levy KWKG EEG Concession fee VAT Renewables levy up nearly +2% for ' ,28 RES levy EEX spot + fwd 6.3 **) Average wholesale price 1 Cost of electricity for a three person household with consumption at 35 kwh/annum Source: BDEW, May 213; 213 wholesale price calculated as weighted average from spot and forwards Source: BDEW, Fortum Industrial Intelligence, October 213

11 TWh/annum EUR/MWh GW Renewables growth has so far brought down prices and profitability of condensing generation: In Germany one fifth of gas generation that is needed for back-up and flexibility is under pressure to be closed down 12 Increase in intermittent RES and profitability of condense 1 3 Gas capacity in Germany , ,5 1,5 1,1 3, , Total gas CHP Running reserves Cold reserves Other system relevant Under pressure Wind / rolling year CSS rolling year Solar / rolling year CDS rolling year CCS: Clean Spark Spread margin between power prices and short run marginal cost of gas condense generation CDS: Clean Dark Spread margin between power prices and short run 11 marginal cost of coal condense generation Source: EEX, Bloomberg, Fortum Industrial Intelligence

12 Strong RES growth together with poor demand drive fossil plant closures in Europe: Notable early plant closures and mothballing on-going German CSS and CDS development Announced early plant closures Several utilities are communicating about notable closures, mothballing, moving plants to strategic reserve, making deals with TSOs ( redespatching reserve for EON s Irshcing CCGT): EON: closing 6,5 GW, 4,5 GW under review RWE: closing 4.3 GW, 6 GW under review Fortum: closing 1 GW (Inkoo) GDF Suez: closing 1.6 GW, 2 GW under review EnBW: closing.7 GW, considering 7 units further Stadtwerke Bremen: closing.3 MW Tauron: 4-6 to intervention reserve CSS History CDS History CSS October 213 fwd CDS October 213 fwd 12 Source: Fortum Industrial Intelligence, Bloomberg

13 European internal energy market is fragmenting: Diverse RES-support schemes and capacity market proposals distort the energy market integration Capacity mechanisms in Europe RES-support schemes in Europe Energy Only Proposal for new capacity elements Partial capacity mechanisms Quota obligation Feed-in tariff Feed-in premium Major capacity mechanism 13 Source: Fraunhofer ISI, Ecofys, Fortum Industrial Intelligence

14 Levelized cost of electricity (LCOE) in Europe Current market prices hardly justify any investments into new generation, but still we oversubsidise renewables LCOE (=CAPEX+OPEX) shows the achieved price required for an investment into a power plant to break even over the lifetime of the project. Disclaimer: The presented figures do not represent Fortum s own view on the levelized costs of electricity. The figures are based on recent external publications.. Commodity prices are the market forward prices as of October 213. Note, there are large variations in cost of hydro, wind and solar depending on location and conditions. 14 Sources: Sähkön tuotantokustannusvertailu. Vakkilainen Esa, Kivistö Aija, Tarjanne Risto. Lappeenrannan teknillinen yliopisto Re-considering the Economics of Photovoltaic Power. Bloomberg New Energy Finance PV Status Report 213. Arnulf Jäger-Waldau. EC, DG Joint Research Centre, Institute for Energy and Transport Connecting the sun. Solar photovoltaics on the road to large-scale grid integration. EPIA Projected Costs of Generating Electricity: 21 Edition. International Energy Agency. 21. * Lessons learnt from the current energy and climate framework. Frontier Economics. May 213.

15 / MWh Comparing market based and regulated way to promote non-hydro RES: Sweden vs Germany - striking differences in end-user costs 7 Consumer cost for RES support** * 214* Sweden Germany *213 and 214 figures are the German government plan **Grid cost excluded 15 Source: BDEW, Swedish energy agency, Fortum Industrial Intelligence

16 Today EU Emission Trading System (ETS) does not steer decarbonisation due to multiple environmental targets The current low CO2 EUA prices do not provide incentives for Low emitting generation to run prior higher emitting* New investments in low emitting or non-emitting generation Market based RES investments There is currently a considerable oversupply of EUAs Oversupply presses the price level Four factors explaining the oversupply: 1. Overlapping policy instruments 2. Economic recession / lack of growth 3. International credits 4. Distribution of allowances by member states In phase 2 (28-212) lack of growth and use of international credits were found to be the main reasons; in phase 3 (213-22) overlapping policy instruments have become the main reason for the oversupply EUA Price Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Share of factors behind the oversupply of EUAs Economic Recession Overlapping instruments International credits Distribution of allowances by member states Source: GreenStream: Oversupply and structural measures in the EU ETS, September 24, * efficient coal to gas switching Source: GreenStream, Bloomberg, Fortum Industrial Intelligence

17 Which road for the EU and national energy policies to go forward? It s really a question of choosing the least costly alternative Lost in translation No clear vision (survival/adaptation) Conflicting policies, retroactive changes National policies for RES to continue to grow. Various capacity market designs to keep national generation adequacy Costly CO2 reduction driven by subsidized RES investments Non-competitive energy prices European, market-based policy based on: EU approach on climate, RES, market design Cost efficiency Regional generation adequacy assessment. Flexibility has a value Cost-efficient CO2 reduction based on market based ETS Competitive energy prices 17

18 We need to reach decarbonisation without compromising competitiveness with consistent energy, climate and economic polices Decarbonisation requires notable investments, which will not happen in uncertainty Decarbonisation requires consistent European energy, climate and economic polices Clarity of the EU23 framework ASAP uncertainty prevents investment decisions - only on a single CO2 reduction target. EU ETS as the most cost efficient policy driver for low-carbon technology investments National taxes and energy policies need to be in line with the overall decarbonisation targets (e.g. Windfall and nuclear taxes) Definitely more Renewable sources but lets bring mature RES fully into the market and only support immature technologies with R&D and Innovation supports 18

19 19 Next generation energy company