CHAMBERS EUROPE 2020: PRACTICE AREA OVERVIEW
FINLAND: ENERGY & NATURAL RESOURCES
Journey towards renewables continues
With the Finnish government setting the most ambitious target for achieving carbon neutrality in the world, Finland has been accelerating the transition towards renewable energy production in recent years. According to leading industry body Finnish Energy, emissions trading and the transition towards renewable energy sources has had a significant effect on how energy is produced. Statistics by Finnish Energy show that wind power production set a new record for annual production during 2019 at 6.1 TWh. Even bigger growth is expected for the year 2020 since the production volumes of the 79 new wind turbines put into operation in 2019 are not yet fully reflected in the statistics. In 2019, the share of wind power was 9% of the total electricity production and has now, for the first time, permanently settled above fossil fuels. Carbon-neutral energy sources in general set records in 2019. The share of renewable energy sources was 47% and the share of carbon-neutral energy sources was 82% of the total electricity production.
The 2019 Government Programme states that Finland will become carbon neutral by the year 2035 and carbon negative shortly after that. It also states that Finland aims to become the first fossil-free welfare state in the world by replacing the fossil-fuel based production of electricity and heat with fossil-free options by the year 2030. To achieve these goals, big efforts to support the transition towards renewable sources of energy are needed. As part of these efforts the government is planning to remove some of the administrative, zoning-related and other barriers to wind power construction and to undertake general reform of energy taxation at a rapid pace.
The transition towards clean energy in Finland has created significant opportunities for overseas developers and investors during recent years and the pace of foreign investment in Finnish renewable projects and energy infrastructure generally has also accelerated. In addition to interest in the rapidly-evolving onshore wind sector, opportunities are also increasingly arising in power and heat distribution, waste-to-energy facilities, the natural gas market and anticipated development of an offshore wind sector.
Energy markets opening up
The Finnish Natural Gas Market Act was reformed in 2017, which, among other things, meant that the Finnish pipeline gas market would open for competition in the beginning of the year 2020. As a result the natural gas market has opened and the operations of Gasum, which formerly held a monopoly in Finnish wholesale gas market, have been unbundled. Gasum continues to operate as a wholesale market participant on the free market but its transmission operations have been handed over to Gasgrid Finland, a new transmission system operator. Gasgrid Finland is responsible for the transmission system and for offering transmission services to market participants on the competitive market.
In addition to the opening of the gas market, the Balticconnector gas pipeline between Finland and Estonia was commissioned. The pipeline connects Finland to Baltic and European gas markets, which improves the reliability of regional gas supply and creates new trading opportunities at the same time as reducing Finland’s reliance on gas imports from Russia.
Another sign of the evolution in the Nordic energy market generally is that the market for power trading is going to be opened for competition, which will end the long-standing regional monopoly of Nord Pool as the sole power exchange operator. Competition between platforms for spot electricity trading was scheduled to begin on 10 March 2020 but, according to the Finnish Energy Authority, it has been delayed due to minor technical issues. The opening of the market is now scheduled to occur at some point before the end of June 2020 although the exact date is not yet clear. With this change, the Nordics will become the second area in Europe, after Central Europe, to allow competition between power exchange operators.
No more subsidies – the rise of power purchase agreements
After the feed-in tariff subsidy scheme was effectively closed to new participants in 2017, the Energy Authority held a competitive auction through which seven new projects were accepted in a premium-based support scheme. After this, no more auctions are expected to be held, which means that new wind power projects will have to be developed and operated subsidy-free on market-based terms. However, with the increased production possible from ever larger and more efficient turbines and the cost of technology falling, the pace of development is proving that the market believes that good returns are still achievable from Finnish wind farms.
Since 2018, corporate power purchase agreements (PPAs) have been the hottest topic in the Finnish renewables market. For some time PPAs were more a subject of interest rather than a reality but during 2019 there have been a number of PPAs signed in the Finnish market. The first Finnish PPA was announced by TuuliWatti in 2018. Since then Fortum has entered into a PPA with Taaleri for the Finnish wind farms in Taaleri’s portfolio. Google has signed PPAs with Neoen/Prokon, CPC Finland, Ilmatar and wpd Finland. More recently Fortum and Neste entered into a PPA for the Kalax wind farm in Närpiö and AXPO entered into a PPA concerning the Storbacken and Kröpuln wind parks constructed and operated by OX2.
Since new projects will have to be market-based and the best option to fund new projects on market-based terms is the use of PPAs, the flow of new PPAs is expected to continue. With the increased awareness of climate change and Finland being home to a large number of large industrial companies and a growing number of data centres with high electricity consumption, the PPA market is expected to grow significantly over the next few years. Alongside physical PPAs, financial or virtual PPAs are increasingly seen as a sensible hedging instrument for new wind farms, which will most likely result in the growing use of such agreements. Project finance banks have already shown signs of becoming more comfortable providing construction finance based on PPAs, particularly on the basis of ‘as produced’ PPAs. If large off-takers continue to enter into PPAs, the PPA market is likely to also eventually attract smaller off-takers who have the need for energy and the desire to be viewed as climate-friendly. This may also result in the increased use of aggregators to connect smaller producers with smaller off-takers.
The wind conditions on the coasts of Finland are excellent for offshore wind power production. Previously the cold and icy winter conditions have made developers uncertain as to the climatic effect on the construction and operation of offshore wind parks in Finland which, when combined with both the higher costs and associated risk of developing larger offshore sites as well as the availability of good and available nearshore and onshore sites for development, resulted in the offshore sector never being seen as a viable investment opportunity. However, the latest developments in wind turbine technology and the possibility for improved returns have made the construction and operation of offshore projects more commercially attractive. The first significant offshore project, the Tahkoluoto wind farm, was completed and started operating in 2017. The wind park consists of 10 Siemens turbines with a capacity of 4.2 MW each and one 2.3 MW Siemens turbine which was constructed earlier than the others. The Tahkoluoto wind farm was a demonstration project for offshore wind power in Finland and was granted a EUR20 million investment subsidy for the implementation of the project by the Ministry of Economic Affairs and Employment. Several other offshore wind parks are now under development and, according to the Finnish Wind Power Association's data, in February 2020 planned offshore projects accounted for 2,700 MW.
One of the biggest barriers to offshore wind development has been the relatively high tax burden on offshore wind farm owners. Due to, amongst other issues, the need for more sturdy foundations, the property tax for an offshore wind park in Finland has been approximately three times that of a similar-sized onshore wind park. However, this too is about to change. As part of the energy taxation reform and the removal of administrative and zoning-related barriers contemplated by the 2019 Government Programme, conditions for the construction of offshore wind power plants will be improved and property tax relief is expected to be provided for offshore wind power plants. As a result, Finland is expected to be one of the bright spots for developers and investors interested in offshore wind and a new range of opportunities for developers, funds, utilities and banks, as well as contractors with experience of offshore wind will open up. By definition, a large proportion of these opportunities will, at least initially, be taken by experienced international players until such time as the local players gain sufficient experience to go it alone.