It’s time to develop the Nordic power market 2.0
Lars Erik Maurud Interviews Simon Erik Ollus, Executive Vice President Generation, Fortum
In March 2021, you took over Fortum’s generation division at short notice. It must have been an exciting ride, not least because of current power-prices?
It has been an exciting year during which a lot has happened. A very volatile year – but it has been tremendously exciting and intellectually fun.
We’re a power producer in the Nordic area with a diverse, CO₂-free asset portfolio, which is exactly what the energy transition needs – for decarbonisation and strong electrification. I think it’s exciting to work with these assets to support our customers with the journey ahead.
So, has generation moved from a sleeping giant to a key player for the public as well as businesses?
I realise I’m biased but definitely! It’s about serving the needs of society and customers for decades to come. We need a balanced CO₂-free generation mix to enable the energy transition and in the Nordics we have that.
But how will the industry answer those who say the market-based system is broken?
The energy-only power market model we have in the Nordics is under a lot of stress currently and the time may have come to start discussing if it is the optimal model going forward. As a former trader, I believe that some variation or volatility in prices is good, but the extreme volatility we have recently experienced in energy prices are not beneficial for society or clients.
What we’ve seen in the last years is a build-up of a perfect storm in energy markets. It started with a strong economic recovery post-COVID-19; in the winter we had a cold spell in Europe, less wind than normal combined with dry hydrology in the Nordics. This happened at the same time as we experiences a commodity and CO₂ price boom, faulty interconnectors and a lot of congestion in the Swedish grid resulting in very high prices. Then when it slowly started to ease, Russia invaded Ukraine that made questions of security of supply and affordability top of the agenda.
Management consultants have for some time talked about the VUCA world. VUCA comes from Volatility, Uncertainty, Complexity, and Ambiguity. Now it really feels like VUCA has landed also in energy markets.
How easy will this be to explain to the public and politicians?
We see a political debate on energy markets in all our countries, which is natural in these circumstances. Politicians are rightfully concerned about vulnerable consumers and see a need for creating “a hedge” for consumers to strive for more stability in power prices. We’ll likely see a shift in the Nordics, where many have preferred short-term price contracts. We must also work against the dysfunctions of the market that could put many people in misery if not controlled better. I think it is obvious that we need better and more diverse hedging instruments than are available at today’s market places.
We’ve seen several interventions around tax reductions, increased subsidies etc. around Europe. This is of course the privilege of governments, but we must be vigilant about not undermining market efficiency and investment certainty that may come back to bite us.
Speaking of market efficiency, this might also be the time for examining a broader spectrum of topics. Do we have the right products for retail hedging? What are the products offered to end-customers? And how does the whole power system or power market actually operate? What are the actions which really improve predictability for market participants to invest in right kind of services the customers’ needs?
It’s fair to say that, factoring in all items, we do have a fairly well-functioning power market in the Nordics. However, we need to take care not to become complacent. Right now, I’d say it’s time for much stronger and bolder discussions. How are we developing the energy market to be successful and delivering also in the next period?
As some of the market instabilities come from the rapid removal of base-load capacities – over-relying on intermittent renewables to cover the gap – how can we tackle it all?
What we need now is a real Nordic discussion on energy market 2.0.
Our success to date is based on all the good things we strived for when liberalising the power market – strong security of supply, good support of energy-intensive industries, absorbing the over-supply of electricity, efficiently dispatching power resources at any moment. But the world is changing as we speak. Now we talk about strong electrification and security of supply, resulting in a big shift in the generation mix. We’ve seen decommissioning of large base-load capacities and some fossil fuelled generation, along with a shift towards the fast growing intermittent power supply of wind and solar.
This is a discussion around building tomorrow’s energy market and securing a good mix of base load, intermittency and flexibility in the Nordic power system. They key question is how should we amend the existing energy market to meet future needs? Right now, we don’t discuss enough how we ensure that in 10 or 15 years we’ll have a power system that’s sufficiently balanced with various characteristics the energy system needs to have to be both competitive and provide good security of supply. To work properly, the power system also needs stable energy. Additionally, peak capacity and plenty of ancillary services are also needed. What I would like to see is a Nordic discussion around how we modify the existing market.
And will we be able to control the inclination to protect national interest in this discussion?
We must ask ourselves if we actually are able - within the Nordics - to discuss a Nordic target model. The Nordic electricity market is a complex animal, where no single entity really “owns” the market nor its development. We have commercial derivatives and physical exchanges, national TSOs that have ancillary services market places and manage the grid, national authorities with different overseeing mandates and a large mix of market participants from consumption to production. And perhaps surprisingly the market has delivered fairly well in a geographical area comprising seven nations (the Baltic countries are also part of the Nordic power market). The challenges come when we want to develop the market and make it fit for future challenges with strong electrification, a different generation mix and probably a stronger focus on security of supply. Today the discussion on the target state for the electric market easily becomes a national political discussion. We lack the more holistic discussion on how to develop the overall market so it enables new investments in electrification, while continuing to incentivise efficient market operations and ensuring security of supply both today and in the future. The big question is really how can we develop this animal in the Nordics, together?
And all this calls for one Nordic system operator?
In a perfect world, you probably should have a joint Nordic system operator optimising the system as a whole. But are the national political agendas ready to go that far?
Let’s talk some more about the generation mix. Here in Finland, you recently commissioned Olkiluoto 3, the nuclear reactor. What else are you seeing for the Nordics generation mix?
We have a good generation mix in the Nordics and we should ensure it stays so for the future. We’ll have an influx of intermittent renewables, which needs be balanced by base load and an increase in flexible capacity.
How do you see the Swedish decommissioning of nuclear capacity impacting the situation?
Our existing nuclear reactors have license to operate until the end of their lifetime. And that’s of course what we want to do. At the same time, we’re keen to discuss lifetime extensions because we believe nuclear will still be an essential part of the generation mix going forward.
This is supported by the fact that the nuclear acceptance has been increasing to record levels in Sweden and Finland.
Now there’s also a stronger understanding of nuclear power’s quintessential role in the power mix. We see this every time a nuclear reactor is on planned outage –it causes larger frequency instabilities in the system and stricter flow limitations between price areas. I think the nuclear assets are proving their importance for security of supply and for enabling growth of intermittent renewable capacity.
And how attractive is the power industry to financial investors these days?
The world is full of capital that will always fund good cases and good business models. At present, we see so many interesting ventures: hydrogen cases, Northvolt battery factory, Perstorp liquid wind and hydrogen and many others.
What we see is the actual effects of strong electrification. There are more players who want to come to our region and see the opportunities that the Nordic countries offer - something I welcome.
What’s Fortum’s appetite for venturing into the new technologies?
In addition to growing in wind & solar production, hydrogen and carbon capture and storage technologies will be key.
Together with Uniper, we’re developing a hydrogen business line and Perstorp is the first case we have talked publicly about.
Our recent collaborations in capturing excess heat both from data centers and a hydropower plant for district heating are other examples of how we look for new clean solutions to reduce CO₂ emissions. We are also actively scouting SMR technologies and business cases. I am actually quite excited that SMR can be a big thing in future.
We are also actively developing battery solutions with customers combining local storage and flexibility with fast balancing services for the grid.
And is your strategic direction supported by Fortum including the Uniper operation?
Absolutely! Fortum Group now includes Uniper and we’re working increasingly as one group. And Uniper is very much the vehicle for our European journey.
But Uniper also includes large capacities that are far from CO₂-free?
We need to shift coal assets away from the core portfolio, but we need to do it in a responsible way. Our commitment is that by 2035, the whole European fleet will be CO₂-free. We still use our gas-fired capacity to deliver security of supply, but by then also our gas fleet will be CO₂-free.
Looking ahead, where are Fortum’s investments going?
Our strategy is to grow solar, wind and hydrogen. And we’ll continue our commitment to hydro and nuclear as a key part of the future power system.
How do the reinforced environmental requirements impact hydropower?
I think it’s very good that we’re talking more about biodiversity. We’re talking about climate change. We’re talking about decarbonisation. The policy proposals must be holistic, otherwise we may not end up where we want to be.
In that sense, for example, I consider the Water Framework Directive important. It’s important to consider biodiversity more as it’s actually the second most important challenge globally after climate change.
We have, of course, a responsibility to balance various interests and needs, which we try to do. For example, in Klarälven in Sweden, we’ve managed to grow the fish population as a result of 30 years of consistent work at the river. I think there are good examples where we can make a difference. Each location is different and we aim to identify solutions that are adapted to the local environment and the desired outcome.
So, you do recognise there may be a built-in conflict between preserving global climate and supporting the local environment?
All power generation has environmental impacts. Our thinking needs to focus on how to optimise the situation and minimise dysfunctions while balancing needs at various levels e.g. local needs versus energy system needs versus climate change. The use of fossil fuel causes CO₂ emissions, hydropower can disturb the biodiversity locally, wind power can damage bird life, solar installations occupy fertile soil. But our economic activities and society require energy, and our goal and responsibility is to deliver it in the least adverse way.
In Fortum, we want to be holistic in our approach. We always try to see the big picture and understand what the holistic approach calls for. I’ve always been very proud of us being able to maintain that focus.
Are you still an optimist?
I’m an optimist. I see a tremendous opportunity in the Nordics. We have already almost completely decarbonized our power generation once, so we can surely take on the challenge to decarbonise also energy production. We have a great generation mix. We have plenty of opportunities to grow in intermittent generation. We have lots of flexible hydropower. And we have very good base-load production. I also see a tremendous interest to invest in Nordic electrification.
The Nordic electricity demand could double in 10 to 30 years. And I believe the Nordics could be, for example, the major CO₂-free hydrogen hub for Europe. That’s a valid proposition I think we should definitely be working for.