FINLAND: An Introduction to Energy & Natural Resources
CHAMBERS EUROPE 2019: PRACTICE AREA OVERVIEW
FINLAND: ENERGY & NATURAL RESOURCES
Contributed by:
Andrew Cotton, Partner
Tarja Pirinen, Partner
Rapid pace of change in the Finnish energy sector
As with the majority of other European economies, Finland’s energy sector is undergoing a period of rapid change, as the legislative requirement and societal demand to transition from traditional carbon-emitting sources of power generation to low carbon, renewable energy sources have accelerated the pace of the transition. The move to renewable energy sources is highlighted by statistics produced by Statistics Finland in late December 2018 (covering the period from January to September 2018), which showed that the use of wood fuels, whilst still the biggest energy source in Finland at 26% of total energy production, decreased by 5% compared to 2017 and the use of coal in energy production also decreased by 2%. The use of coal is anticipated to decrease significantly in the mid- to long-term as the effect of the Government's proposed legislation to ban coal-fired power and heat generation by 1 May 2029 starts to be felt. A new bill submitted to the Finnish Parliament in October 2018 also put forward measures to promote the use of transport biofuels and biofuel oil for heating and machinery. The proposals are part of Finland’s National Energy and Climate Strategy to 2030 which aims to phase out the use of fossil fuels in energy generation, move towards an emission-free energy system and decrease the use of imported oil.
The transition to a cleaner energy sector has created and continues to create significant opportunities for overseas investors, specialist funds and equity sponsors, banks, utilities and corporations active at all stages of the energy project lifecycle to actively engage in the development of the Finnish energy sector.
Finnish mining sector rebounds
Finland has a strong mineral cluster which produces minerals, has high capacity for further processing and refining minerals and also produces high-quality mining and processing equipment and technologies. Activity in the Finnish mineral industry has increased in the past couple of years and the amount of extracted minerals has also continued to increase. According to the mining sector report published in November 2018 by the Ministry of Economic Affairs and Employment, in 2017 extraction of ore increased by 13% and extraction of industrial minerals by 7% compared to the previous year.
Existing mines are expanding their operations (such as the Agnico Eagle gold mine in Kittilä, the Terrafame multi-metal mine in Sotkamo, the Boliden Kevitsa nickel-copper mine in Sodankylä and the Outokumpu chrome mine in Kemi), and a number of exploration projects and mine development projects are ongoing. It appears from the mining industry sector report that in 2017 there was a clear increase in the ore extraction industry overall investments (approximately EUR480 million) from the previous year and mines have announced investment plans of approximately EUR1 billion for the next few years. Both mining companies and junior companies carry out ore exploration in Finland. Junior companies focus on finding and investigating potential new sites, even in areas where little or no exploration has taken place.
Topical global developments such as electrification of transport, the energy transition, circular economy and environmental protection also impact the Finnish mining sector. Possibilities to utilise by-products or waste materials from the processing industry are being studied in many mining projects. Battery minerals are of interest in the mining sector, which can be seen especially in the increased exploration for cobalt and lithium. Finland produces the essential battery minerals (nickel and cobalt) and, in addition, has an ongoing project aiming for production of lithium as well as a project aiming for production of vanadium. Two significant battery chemical production projects were announced late 2018. One of the largest chemical producers in the world, BASF, announced that it will place its first European battery materials production plant in Harjavalta, Finland adjacent to Norilsk Nickel's nickel and cobalt refinery and Terrafame Oy is investing in a battery chemical plant producing nickel and cobalt sulphates used in electric vehicle batteries.
The Finnish State strongly supports the development of the mining sector and battery cluster in Finland. A new holding and development company, Finnish Mining Group Oy, has been organised for this purpose with a task to manage the Finnish State’s mining industry investments and to develop the Finnish battery and mining cluster according to a long-term strategy together with domestic and international operators. A two-year programme for the activation of the Finnish battery industry has also been commenced by Business Finland, the government entity for innovation funding and acceleration of global growth.
Strong growth in renewable energy
In comparison, whilst still accounting for a small percentage of overall energy production, wind power grew strongly compared to 2017, with the share of wind energy consumption increasing by 28% overall. At the end of 2018, wind power’s total installed capacity was 2041 MW from 698 installed wind turbines. According to the Finnish Wind Power Association, in 2018 approximately 7% of Finland's electricity consumption was covered by wind power and about 9% of electricity production.
The growth in installed wind power capacity came against a backdrop of the Feed-in-Tariff support scheme (implemented in 2012) having expired and the new technology-neutral auction scheme having not been confirmed until autumn 2018. Under the auction scheme, whilst the total capacity offered for tender was 1.4 TWh annually, the 26 bids received by 31 December 2018 totalled approximately 4 TWh and the tenders were all wind projects. The Finnish Energy Authority is processing the tender offers and the winning bids should be confirmed during spring 2019.
Accelerating private Power Purchase Agreement market
Given the amount of planned wind capacity which will not receive any subsidy under the auction scheme, as described above, the main market development was the move in wind power towards a market driven largely by private Power Purchase Agreements (PPAs), currently the hottest topic in the Finnish renewable energy sector.
The first sign of this new development was detectable in May 2018, when TuuliWatti announced the first Finnish ‘market-based’ wind power project consisting of five Vestas V150 turbines, which are set to be the highest turbines in the Nordic countries when constructed. According to TuuliWatti’s press release, as the V150 is up to twice as high as previous turbines the production cost of electricity will stay below EUR30/MWh. However, it is worth highlighting that this project is set to receive government subsidies, and it is therefore arguable as to whether it is a truly ‘market-based’ project and whether the project is supported by a true private PPA.
Of potentially greater significance, however, was Google’s announcement in September 2018 that it has signed three Finnish PPAs to acquire the whole production of three soon-to-be-built wind farms for a duration of ten years. The wind farm operators that have signed PPAs with Google are long-standing European players: French Neoen and German-based CPC Finland and wpd Finland. In addition, OX2 announced in October 2018 that it will construct a total of 25 wind turbines with a combined capacity of 107.4 MW in cooperation with IKEA Retail Finland, part of Ingka Group, which is financing the construction, as well as a commitment to acquire the farms once they are fully operational in the beginning of 2020. It is anticipated that with Finland home to a significant number of large industrial companies with high levels of energy consumption, as well as a growing number of data centres, the PPA market will develop significantly in the next few years, with international sponsors bringing their experience of PPAs from other markets and banks becoming more comfortable providing construction finance on the basis of long-term PPAs.
The wind farms will be the first wind farms in Europe that will be built completely without any government subsidies through the use of PPAs. The push towards renewables projects being built without subsidy reflects a trend seen in a number of European and global renewables markets, which is characterized by an initial support scheme that provides a generous financial incentive to producers in order to encourage development of an immature renewables market, followed by a withdrawal of public and political support for subsidising renewables projects, which in Finland are funded by the State budget and therefore indirectly by all Finnish taxpayers.
Nuclear newbuilds – Finland bucks the trend
Nuclear power represents a significant element of the Finnish energy mix, accounting for approximately 18% of the energy consumed in Finland from January to September 2018 (Statistics Finland). Unlike other European countries, Finland is continuing to approve investment into the nuclear sector by way of both upgrades to existing nuclear units and the planning of new nuclear units. One of the most significant generation investment projects in Finland for well over a decade has been the construction of a new nuclear power plant unit Olkiluoto 3 on the west coast of Finland. The completion of the building of this 1,600 MW unit has been delayed for several years and the subject of a significant arbitration between the operator (TVO) and the constructors (AREVA and Siemens) as a result of the severe delays. In March 2018, a settlement was agreed to end the long-running dispute over cost and schedule overruns at Olikiluoto 3 in which AREVA and Siemens would pay EUR450 million in compensation to TVO. Originally, the new unit should have been commissioned by the end of 2009, but according to the latest estimates it will be in commercial operation in early 2020.
In addition to the Olkiluoto 3 project, in June 2007 a new consortium of 67 industrial and energy companies announced plans to establish a joint-venture company (Fennovoima Oy) to construct a new nuclear power plant in northern Finland. The project will be constructed and partly financed by Rusatom, the Russian atomic energy agency, which has committed equity funding of approximately EUR2 billion against an overall project budget of EUR6–7 billion. Fennovoima has said its goal is to get the construction licence by the end of 2019, with construction estimated to commence in 2021.