FINLAND: An Introduction to Energy & Natural Resources

FINLAND: INTRODUCTION TO ENERGY AND NATURAL RESOURCES 

A journey towards renewable energy and climate-friendly solutions continues

Finland is set to become carbon neutral by 2035 and carbon-negative shortly after that. This is the goal set by the Finnish Government as stated in the 2019 Government Program. As a result, the country is leaning towards more environmental and climate-friendly solutions in its industries as well as in terms of political decisions. The emphasis is on the transition towards renewable energy production. This is reflected in the reform of the Finnish Mining Act currently in preparation.

Renewable energy – a rise of offshore wind power and solar power

According to statistics provided by Finnish Energy, wind power production increased by 3.3% in 2021 compared to 2020, setting a new record for annual production at 8.06 TWh, which amounts to 11.8% of the total electricity production in Finland. The rising trend of wind power production in Finland is, however, better illustrated by the installed overall capacity, which increased by as much as 26% in 2021. Also on a more general level, the share of renewable energy sources amounted to 54% and the share of carbon-neutral energy sources to 87% of the total electricity production in 2021, both making new records. The lack of a subsidy scheme for wind power has driven rapid growth of the market for long-term private Power Purchase Agreements (PPAs), which is constantly expanding and now includes a broad spectrum of off-takers, from industrial operators to municipal utilities.

A majority of Finnish renewable projects are onshore wind projects. However, 2021 saw an important milestone for offshore wind power development, as Metsähallitus (the Finnish state-owned enterprise that administers State-owned land and water areas), launched a bidding contest for the co-development of a 1.3 GW offshore wind power project situated within state-owned waters in the municipality of Korsnäs in Western Finland. Finland has vast offshore areas with a significant, yet unexploited, wind power production capacity, and the Korsnäs project is the first step in what is generally expected to become the next stage of development in the Finnish energy sector. The shallowness of the Baltic Sea makes it an attractive location for large-scale offshore wind projects. Offshore wind power has also been highlighted by the Finnish Government as one of the key elements in Finland’s climate strategy. The Government is preparing proposals to introduce an auction model to lease out State-owned offshore areas (administered by Metsähallitus) for wind power development. The first auction round should take place in 2023-2024 and would include three to four offshore areas. The winner(s) of the auction would be granted a lease right to the area(s) for a period of 40 to 50 years and the exclusivity on project development, permitting, construction and production of electricity in the area.

One of the obstacles for the development of Finnish offshore wind so far has been that the property tax applicable to wind power plants is calculated based on the construction costs, which are significantly higher for offshore wind farms when compared to onshore wind farms, resulting in a higher property tax burden compared to onshore wind farms. However, in order to make offshore wind projects commercially viable, the Finnish Government aims to correct the situation, and a proposal has been issued according to which the replacement value of offshore wind power plants would be lowered to 35% of their original construction costs (compared to 75% for onshore wind power). If adopted, the amendment would significantly reduce the tax burden of offshore wind power and further accelerate investments in the sector. Thus, although there are currently no plans to implement any specific subsidy schemes for offshore wind power, the Government has recognised a need to improve the commercial environment for offshore wind power development.

The development of the solar PV sector has so far lagged behind wind power, partly as a result of the Finnish climate. However, the first signs of a transition from small-scale test projects to industrial-scale commercial projects have appeared during the past 12 months. In addition to rooftop solutions, which have been placed e.g. large retail facilities, an increasing number of larger solar farms are currently being planned for former industrial sites and peat production areas. The acceleration of solar power development will also require certain legislative reforms, notably with regard to the taxation of solar power plants.

As in most European countries, green hydrogen is a widely discussed topic in Finland, and there are currently 14 hydrogen projects planned, most of which are scheduled to be commissioned within the next few years. The legislation regarding green hydrogen is still under development and to a large extent driven by the European Union. The most critical legal questions, such as the criteria of green hydrogen, taxation and possible State aid mechanisms, will therefore depend on the development of the legislation at the EU level.

As a final thought, as many Finnish cities are still dependent on coal for heating especially in winter, thermal energy storage (that stores surplus energy generated in the summer for use during the winter) as well as small modular reactors (SMRs) are currently looked at as a potential solution for accelerating the transition to carbon-free heating. Vantaa Energia, the municipal utility for the Vantaa city region, is currently developing the world’s largest cavern thermal energy storage of 1,000,000 m3 in size, which will have a storage capacity of 90 GWh of energy – the annual heat consumption of a medium-sized town. The total project cost is approximately €100M. In addition, the Finnish Radiation and Nuclear Safety Authority is currently conducting a study on how to simplify the permitting processes of SMRs, as the current nuclear safety legislation has been designed with regard to large-scale nuclear power plants and is therefore poorly applicable to SMRs. The current estimate is that the first SMRs in Finland would be operational within ten years.

Mining sector – Mining Act under reform and new mining tax under preparation

According to the latest report on the mining industry published by the Ministry of Employment and the Economy in March 2021, in 2020 the total excavation reported by 21 companies from 45 mines was 115.4 million tonnes of which total metal ore (32.8 million tonnes in 9 mines), carbonate rock (3.3 million tonnes in 16 mines), industrial rock (12.3 million tonnes in 13 mines) and industrial mineral (0.1 million tonnes in 7 mines) mining was 48.6 million tonnes (9% increase from a previous year). The total amount of investment into Finnish mines was €392M. Total exploration investments increased by 8% compared to 2020 to a total of €67.9M, which is a sign of continued interest in Finland’s mineral potential, including minerals used in batteries.

The Ministry of Economic Affairs and Employment is preparing a reform of the Finnish Mining Act with the aim to improve the level of environmental protection and ensure the operating conditions of mines, while also improving local opportunities for local input (for example from municipalities and landowners). The Government Programme also sets targets to develop the regulation on financial security so that environmental obligations can be discharged in all situations. The programme aims to develop the ability to assess the uranium content of ore when considering the environmental impact of mines.

The most recent changes in the Government proposal draft include, inter alia, changes to the validity period of reservations and reservation fees, changes to prerequisites to extend the validity of an exploration permit and changes to the prerequisites for the award of a mining permit. Comparison of interests gained from a mining project to losses for public or private interests has been discussed as a prerequisite for a mining permit in connection with the reform but has not been included in the latest draft of the Government proposal. The Government proposal for the reform of the Mining Act is currently expected to be submitted to the Parliament in spring 2022.

According to the outcome of the Government’s 2022 budget negotiations, a separate mining tax will be introduced in Finland in 2023 (rather than increasing the electricity tax category in mining operations). The new tax is intended to raise annual tax revenue of €25M, of which 60% will be directed to municipalities where the mines are located and 40% to the State. The final form of the new tax will be determined during the legislative process led by the Ministry of Finance. The Government study published in May 2021 deliberated that if the objective is to collect tax revenue with little or no economic distortion on companies’ financial choices or negative incentive effects on investments and production, a tax on rental income is the most recommended option. If, on the other hand, the objectives also include a stable revenue flow and raising the profitability threshold of mining, a combination of low royalties and tax on rental income would be a way of achieving this. A working group appointed in February 2022 will prepare an assessment of the suitability, viability and major impacts of different alternatives, based on which an assessment decision on the tax model would be made, which will form the basis for the preparation of the Government proposal for the relevant legislation. The working group is expected to provide a report by 31 May 2022, after which the report will be published for public consultation.