Good morning, everyone. A warm welcome again to Fortum's joint webcast and news conference for the investor community and media on our second quarter 2023 results. My name is Ingela Ulves, and for those who don't know, I'm heading the investor relations at Fortum. This event is being recorded, and a replay will be provided on our website later today. With me here in the studio, I have our CEO, Markus Rauramo, and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's second quarter and first half 2023 figures and the group's performance. After the presentations, we will then open up the Q&A session for your questions. Okay, I now hand over to Markus to start.
Thank you very much, Ingela. A warm welcome to our investor call also from my side. For the first time in a long time, we now have a more normal quarter for our core business. I will start by going through our second quarter events, then talk about our strategy execution, market fundamentals, and development, then how this turned into results in the quarter and first half of 2023. After that, Tiina will walk you through the numbers in more detail. Let me now start by commenting on the second quarter. The second quarter is typically a lower result quarter due to the seasonality of our business. Winter quarters yield higher results than the summer quarters. Q2 is typically also characterized by flooding caused by melting snow, which affects the hydro reservoirs and hydro volumes.
This year in Q2, the Generation segment performed well and made robust results, while Consumer Solutions and the other operations segment were behind compared to last year. We progressed in our strategy execution and continued to reshape our organization to better support our renewed business structure. Following the seizure of our Russian assets, we have now deconsolidated our Russia segment in Q2 and have fully written down all Russian assets. Today, we also announced that we will initiate a strategic review of our Circular Solutions business. In connection with the strategy launch in March this year, Circular Solutions was classified as a non-core business, and the logical next step for us is to review what we will do with these businesses going forward. The main part of Circular Solutions is our recycling and waste business, which comprises municipal waste treatment, plastic recycling, hazardous waste business, and battery recycling business.
We will look at all options, including potential divestments for the various businesses, and we expect that the strategic review can take up to 1 year. A bit more about strategy execution on the next page. In the earlier quarters in 2022, I highlighted 3 key priorities and challenges that we had to solve in order to continue full speed with our strategy execution. These 3 issues were to conclude the Uniper divestment, exit from the Russian market, and improve our financing balance and return to the bond market. We have now concluded all 3 objectives, although the exit from Russia obviously was not the kind we would have preferred. We have a solid financial platform with a strong balance sheet and low net debt, and our focus is now on profitability and building capabilities and pipelines for future growth to enable value creation.
Let's look at the strategic development during this second quarter. First, on our priority to deliver clean energy reliably, our focus continues to be on ensuring uninterrupted supply of power to our customers and the societies around us. In this context, I'm very pleased that TVO's long-awaited third Olkiluoto nuclear power plant unit in Finland started regular power generation in April and commercial operation in May. This supports security of supply in the Nordics as it adds to the baseload capacity. We will also continue our efforts to decarbonize our operations that are not yet carbon neutral, for example, by building sustainable waste heat solutions. We will invest EUR 225 million in decarbonization of our district heating as a part of the ongoing Espoo Clean Heat program.
This means that we would be offtakers for Microsoft's waste heat from data centers that Microsoft is planning to build in Espoo and Kirkkonummi. The target is to cover approximately 40% of the heat demand in the Espoo area with this waste heat. In June, our Consumer Solutions business acquired Telia Energi, one of the top 10 retail businesses in Sweden. This is a good fit to our business and increases our retail customer base. We expect to be able to finalize the transaction during the third quarter. A few words on our priority to drive decarbonization in industries. During Q2, we signed new cooperation agreements within the sphere of our nuclear feasibility study with Korean KHNP and the U.S.-based Westinghouse Electric Company. In the feasibility study, Fortum explores the prerequisites of investing in new nuclear in Finland and in Sweden....
We examine the commercial, technological, societal, including political, legal, and regulatory conditions for both small modular reactors, SMRs, and conventional large reactors. On hydrogen, we are happy to have announced a joint FEED study with SSAB to explore the possibilities of producing hydrogen-reduced fossil-free sponge iron in Raahe in Finland. Any possible investment decisions on these nuclear and hydrogen projects will be made at a later stage. Finally, a few words on the ongoing internal changes. Our Renew program has two objectives: to build an efficient and fit-for-purpose operating model, and to develop our culture and leadership to support strategy execution. Since we got our new leadership team in place in the spring, we are adapting the rest of the organization to the new business structure. This also enables us to take a more customer-centric approach.
The implementation of the new operating model progressed in Q2 with the appointments of second-level senior leadership. The next level appointments are now ongoing, and the target is to have the entire organization fully operational by the end of this year. To the markets. Although the Nordic power system is largely based on clean power, it is still affected by the volatility of gas, coal, and carbon prices. As you recall, during spring and summer last year, we saw gas prices climb to unprecedented levels as Europe pushed to refill gas storages in preparation for winter under extreme supply challenges and high uncertainty of their future development. In the fall, prices started to ease, with higher filling levels in Europe, higher LNG supplies, and curbed demand stemming from fuel switching and efficiency measures caused by the high prices.
The winter period 2022 to 2023 was mild, which resulted in lower gas prices and consequently lower power prices. At the end of the first quarter this year, gas storages were approximately 55% filled, and at the end of Q2, filling levels had increased to approximately 77%. At the end of July, they were already at 86%. During Q1, it looked like the European gas market found a new balance. For most of Q2, this balance remained intact, but the reduction in Norwegian pipeline flows to the continent, combined with seasonally lower LNG arrivals, reminded us that the new European gas balance is very fragile. Although renewed concerns over security of supply in the short term halted the decline of gas prices, we didn't see any extreme price spikes.
Thanks to the consistently good gas storage levels, the market is now much calmer about Europe's ability to meet the winter demand compared to last year. As said, the lower gas prices reflect also on the power prices. The Nordic system price, both spot and futures, declined steeply in sync with the continental European and UK power prices. The products for the rest of the year 2023 are currently trading around EUR 57 per megawatt hour, and 2024, around EUR 55 per megawatt hour. Although we are talking about much lower levels than last autumn, it is good to keep in mind that forward prices are still elevated compared to the historical price range. Over to the 2nd quarter financial KPIs. What you see here are the comparable headline KPIs for Fortum Group's 2nd quarter and 1st half 2023 continuing operations.
These are excluding both Uniper and Russia, which are now both discontinued operations. The second quarter comparable operating profit was exactly on the same level as last year, and due to the very strong result in the first quarter, our first half-year result was clearly higher than a year ago. Our comparable EPS was lower in the second quarter, but in the first half of the year, we clearly exceeded the 2022 performance. The operating cash flow improved in the second quarter, mainly due to the higher cash released from working capital. Finally, the balance sheet, and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, it was at 0.3 times for the last 12 months. The main reasons for the improvement are the good results and cash flow. The low leverage provides us a solid platform to continue to develop Fortum.
To sum it up, I'm satisfied with the group's positive performance in a continued volatile market. With this, I conclude my part in this first section and hand over to you, Tiina.
Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail and will start with the development of the second quarter. With this, let's move to the key financials for our continuing operations. As Markus already mentioned, the Russia segment is now deconsolidated and reported as discontinued operation as a one-liner. These numbers do not include anything from the Russian operations. Let me now comment on some of the comparable KPIs for continuing operations. Our comparable EBITDA amounted to EUR 344 million, and was slightly down in the second quarter. On a last 12 months basis, it totaled EUR 2.4 billion.
The comparable operating profits was flat at EUR 262 million in the second quarter, while the comparable net profit decreased from EUR 199 million to EUR 147 million. You will see that our comparable EPS in Q2 is somewhat lower than last year at EUR 0.0016. The reason for this was lower income from associated operation as a result of inflation assumptions adjustment in nuclear waste-related provisions in Sweden. Our comparable EPS for the last 12 months was strong at the level of EUR 1.43. Also, our cash flow was strong in both, second quarter and in the first half, mainly thanks to the good result, and especially in the second quarter, the positive change in working capital. On dividend payment, in the second quarter, we paid half of the EUR 0.91 dividend for 2022.
Despite the payments of EUR 0.46, our net debt decreased from EUR 0.9 billion to EUR 0.7 billion due to the strong cash flow and leverage. The ratio for financial net debt to comparable EBITDA for the last 12 months decreased to 0.3 times. On a more technical note, I also want to highlight that at the end of June, the last tranche of Fortum's parent company guarantee facility of EUR 1 billion granted to Uniper was released. This was the last outstanding obligation related to Uniper. Over to the segment overview. This one again shows that the result improvement was entirely subject to the performance of our Generation segment, which reported a comparable operating profit of EUR 304 million.
In the second quarter, we recorded a clearly higher achieved power price, even though spot prices were significantly lower compared to last year. Our Generation segment achieved power price increased by EUR 5.2 per MWh to EUR 57.5 per MWh, driven by higher hedge prices. At the same time, the spot price is more than half compared to Q2 last year and declined from EUR 97.9 to EUR 44.5 per MWh. However, the quarterly physical optimization premium was lower compared to last year. Volume-wise, we were at last year's level. Hydro volumes were marginally lower, while nuclear volumes were slightly higher. However, you need to know that volumes from Olkiluoto Three are not as profitable as the other nuclear volumes, and that Oskarshamn plant annual outage was longer than last year.
Consumer Solutions result half to EUR 10 million, mainly due to losses resulting from customer outflow from certain hedge contracts. This means that customers switch out from certain contracts, either to spot contracts or to other service providers, and this resulted in overhedged position that created these losses. This was also the case in the first quarter of 2023. Finally, very briefly on the other operating segment. The comparable operating profit decreased by EUR 10 million to total minus EUR 52 million. The main reason was that the comparison period was affected by a positive one-time impact from changes in pension fund arrangement in Sweden. We move over to a waterfall of the first half the year. This picture further highlights that the strong result improvement is entirely created by our Generation segment, which reported a comparable operating profit of EUR 1,027 million.
The result improvement derived from the higher achieved power price, supported by a higher hedge price. In fact, the achieved power price in the Generation segment increased by EUR 24.1 per MWh to EUR 72 per MWh, driven by higher hedge price, especially in the first quarter. This is great achievement. For the half year, hydro volumes were down, mainly due to lower inflows that left the hydro reservoirs level somewhat below average during the quarter. Currently, hydro reservoirs are somewhat below the average. As for nuclear, I'm satisfied with the good operational performance, and that the generation volumes were solid. The increase in volumes is coming from Olkiluoto Three. For the first six months, Consumer Solutions result fell by EUR 40 million to EUR 16 million.
A large part of the decline is related to losses from the customer outflow from certain hedge contracts, as I explained on the previous slide. Consumer Solutions' comparable operating profit was also negatively impacted by the Polish government's price cap implemented for end users in 2023. Finally, on the other operation segment, where the comparable operating profit decreased by EUR 26 million and showed a loss of EUR 83 million. This was mainly due to structural changes in the Circular Solutions business and already mentioned positive effect of changes in pension fund arrangement in Sweden, affecting last year's figures. Now, over to the balance sheet. Just as a reminder, the Russian assets have been fully written down, and the EUR 1.7 billion impairment has negatively affected equity. Further, there is a positive effect of EUR 1.7 billion from a change in hedge reserves.
A total dividend of EUR 870 million, corresponding to EUR 0.91 per share, was already recorded in Q2, despite that only first installment of EUR 0.46 was paid. The second installment of EUR 0.45 will be paid in the fourth quarter. You might remember that last time we presented a illustrative balance sheet, where Russian assets, write-down was taken into account. Equity in that balance sheet was EUR 8.1 billion. The major difference to this balance sheet are that the approximately EUR 800 million dividend is now booked in full from equity, while the Q2 result of approximately EUR 400 million has increased equity. As you can see, our gross debt has come down as we repaid some debt.
At the end of Q2, net margin receivables amounted to EUR 0.8 billion, which already is closer to historical levels compared to the levels we saw last year. We also continue to have sufficient liquid funds, EUR 4.2 billion. All in all, we can summarize that we have relatively clear balance sheet. A few comments of our net debt and debt portfolio. Maintaining a solid credit rating still continues to be a key objective for us. We now have a more balanced situation and continue to have a good dialogue with our rating agencies. Let's go through the reconciliation of our financial net debt during the quarter, which has further improved and strengthened, and that shows that our leverage situation is indeed very good.
In the opening balance sheet at the beginning of the quarter, we had financial net debt of EUR 900 million. The operating cash flow was very strong, at EUR 657 million. This effect was slightly offset by investment of EUR 192 million. The dividend payment amounted to EUR 413 million in the second quarter, and the change in interest-bearing receivables was EUR 149 million. At the end of June, our financial net debt had further declined and was at only EUR 745 million. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. First, we have rebalanced the maturity profile of our debt. In May, we successfully re-entered the bond market and issued EUR 1.15 billion bonds for 5 and 10 years, after which we also repaid some loans.
Consequently, our maturity profile is very balanced, and there are no large maturities in any single year. All in all, our gross debt is approximately EUR 6 billion. At the same time, we have sufficient liquid reserves with EUR 4.2 billion of liquid funds and EUR 4.3 billion of undrawn credit facilities, so our liquidity position is strong. We need to have the capability to, if needed, repay any maturity, maturing short-term debt. Considering the strong liquidity, we continue to optimize our cash position and credit lines to manage any future market volatility and price situation. The overall objective is to constantly ensure an optimal balance between the balance sheet, investment, and dividend. Finally, as interest rates have gone up, the interest rate for our debt portfolio has consequently also increased somewhat.
Going forward, the cost for our EUR 6 billion loan portfolio is 4.55%. It is good to remember that we get some interest income for our liquid funds, currently 3%. With this, over to the outlook section. The outlook section comprises, in essence, three elements: guidance on hedging, CapEx for 2023, and tax rates. Over the years, Fortum's successful hedging of the outright generation has created predictability and visibility. The hedge position for the Generation segment outright for the rest of the year 2023 was EUR 49 per MWh, and the hedge ratio was 70% at the end of June 2023. The hedge price for 2024 increased by EUR 3 per MWh to EUR 46, and the respective hedge ratio increased 5 percentage points to 50% at the end of June 2023.
Our CapEx guidance for 2023 is unchanged. We expect to spend a total EUR 700 million, and this includes maintenance CapEx, but exclude potential acquisition. Maintenance CapEx will be approximately EUR 300 million, which continues to be below our depreciation level. Then our tax guidance for this year. Taking into consideration also the temporary windfall tax, the group's comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 20%-23% for this year. Excluding the windfall tax, it is estimated to be in the range of 19%-21%. For 2024, the comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 19%-21%. Just as reminder, the Finnish windfall tax applies just for the fiscal year 2023.
The actual outcome of it naturally depends on the power price and result development. This was all for this presentation, and then we are happy to answer your question. Ingela, over to you.
Thank you, Tiina, and thank you, Markus. Okay, we are then ready for the Q&A session. With this, I would hand over to the moderator to start. Please go ahead.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Harry Wyburd from Exane BNP Paribas. Please go ahead.
Hi. Morning, everyone. Thanks very much for taking my questions. Two from me. Firstly, on the hedging for 2024, you've made a bit of progress there, but it looks like the achieved price is quite a lot better than you did in the first quarter. I wondered if you could just comment on conditions and the hedging there for the second quarter, please, or, or you did in the second quarter. Then secondly, just on your, on your balance sheet capacity. I guess that's improved this quarter, and I guess it would improve even more if you did end up selling Circular Solutions. You mentioned that you were in the process of thinking about hydrogen and nuclear. I wondered if there's any update on how long you would wait to make those decisions on investment in hydrogen and nuclear.
It's sort of notable that Centrica, for instance, in the UK, announced an increase in their buyback, and that triggered a very significant move in their shares. I wondered whether there is any point at which you would consider different uses of that cash should we felt that that hydrogen and nuclear investment wasn't worth quite well? Thank you.
Okay, I can start with the, with the hedging optimization. Tiina, Tiina may add to that, then, and then the balance sheet, I will, I will comment the growth prospects. Starting with the hedging, then the difference between the spot and hedged prices comes from the optimization. That continues to be something we have a good possibility to do with our flexible hydro asset. Depending on market volatility and depending where the absolute price levels are, that will then impact how much of optimization proceeds we can, we can get. With regards to the balance sheet, it, it is indeed so that the balance sheet is now strong, liquidity is good, maturity profile is, is flatter, and we're very happy about that because the world has been a very uncertain place, continues to be volatile.
We'd rather err a little bit on the careful side to be sure that we can weather any, any upcoming storms in the market that could, could come. But for the longer term, this is very much in the strategic heart of our business. We think that the Nordic offers very good prospects for energy-intensive industry, steel, chemicals, battery factories, and so on. We, we do expect that there will be significant growth in electricity demand. We are looking to invest in renewables in the short term, so these investments could come, could come quicker. We have projects that are, are well advanced. On hydrogen, the demand is clear, so, so there are industrial processes that will need hydrogen.
The question there is that at the scale required, technologies have not, not been so proven so far compared to the maturity of the of the rest business. There's a lot of, lot of work to do still on that front, on the on the FEED studies that we announced with SSAB. We are very interested in helping our customers actually to achieve their decarbonization goals. For the nuclear, there, there's work to do, so we are studying SMRs, we are studying conventional reactors and the different aspects of those. We will then talk about the the results of our of our feasibility study once we are ready with that next year, so we'll talk about the findings. I do think that that the the energy system as such needs all the aspects.
It will need a lot of clean megawatt hours from renewables, but they are intermittent, so then base load is needed and flexibility is needed as well, and we are interested in providing all three. Maybe, Tiina, if there's something you wanna add on the, on the hedging and the achieved power price.
Yeah. Thank you. The achieved power price in second quarter indeed was very good. As Markus mentioned, the physical optimization still remained very, very good level. I think what is remarkable that, that if we look at the spot price, spot price more than half, it was nearly EUR 100 per megawatt hour a year ago, and now less than 50. It also shows that the hedge price there was really well, well managed. What comes to 2024, I think that this is our systematic, in a way, in a way, increased the hedge position as shown the result for 2024, very, very good, increasing the hedge ratio and the price, and we will continue on that path.
Okay. Thank you very much.
The next question comes from Vincent Ayral from JP Morgan. Please go ahead.
Yes, good morning, and thank you for taking my question. Coming back a bit on capital allocation, so I'm not talking about hydrogen and nuclear, but inquiring a bit regarding the possibility of potentially buying some of the Uniper assets in Scandinavia that were to be put on sale. What's your view there? Would you be interested, given you already have operations in some of these reactors or riverbeds? And do you think it is something likely to present as an opportunity in the coming 12 months, or what is overall your view on that one? Second, and a quick question, is regarding the Consumer Solutions.
So you've seen margin pressure and basically some clients leaving your contract there due to the hedging. How long will this situation last for you, and what should we basically assume going forward? Basically, when does this normalize? Would be my question. Thank you.
Okay, hi, Vincent, and thanks for the question. First, about the capital allocation and the Uniper. As, as you may remember from the past, we have the right of first offer if Uniper were to put, put these Swedish assets for sale, consisting of, of indeed, nuclear and hydro. These are, these are in the core of our strategy and businesses, so if such assets would become available, we would normally look at that, in, in normal course of business. It's a question of, what, what would be the price and terms and conditions of such a, such a possibility. The, the thing I have heard so far with regards to Uniper is that in their strategic update, they have said that, these businesses are, are important for Uniper strategically.
I'm not aware of any, any activity from the Uniper side that, that these assets would be coming to the market. If they were, we would surely, surely look at them. On the Consumer Solutions margin pressure, indeed, there was switching from higher cost contracts, whether, whether these are regularly resetting or then fixed-term, one-year, two-year contracts. We can, we can see the challenge that our customers are facing if they have had contracts with EUR 0.25, EUR 0.30, even EUR 0.40, EUR 0.40 or over, per kilowatt hour fixed contracts. People are then changing, changing away from these contracts. They may be changing addresses or so on, or contracts are being changed for, for various reasons.
I, I'm not surprised with such high prices when, when these contracts have been made and now prices being much lower. I wouldn't be surprised in the long run if we would see extremely high prices, that this kind of phenomena would repeat itself, at least to some extent. We would be even better prepared than we are today. We would continue to develop contract types that are better suited for the customer's needs, so that we wouldn't have this challenge or the customers wouldn't have this challenge. The other part is that we will continue to develop our hedging for the contract. We need to find also ways to hedge that possibility that the customers have certain possibility to change this contract.
We need to find matching hedging products, which will not be easy, but we are developing that all the time. I would not, I would not expect, in these market conditions that such a phenomena would repeat itself to the extent today. I look back at last year, I think, we, we saw the, profit levels of about EUR 90 million, comparable operating profit for Consumer Solutions. That, I think, is representative more of what Consumer Solutions can do in normal market conditions, not, not forecasting what it could be in the future, but I think that's representative of the organization's capability.
Just to follow up on that one, regarding the timeline of normalization, because that, that was the, the specific question there. These clients have moved away, and they seem to have an optionality to move away from these contracts. You have an idea of how long this could last until a contract renewal. Potentially some level of visibility on the normalization timeline. Should we expect another 3 months, 6 months before this normalize? When you have normalization, will you just remove this type of optionality because you have to commit on the supply side, and you've just been squeezed and now arbed against. Just, just coming back to, to get further precision there. Thank you.
It's honestly hard to say that, how many months would this phenomena still continue? That I cannot exactly say. I would say that the impact now is a result of the extremely high prices that we experienced last year and last winter. People were really considering when prices for consumers were at EUR 0.30 or EUR 0.40 per kilowatt hour, that do they take the risk of spot prices going even higher and being really squeezed, or do they fix some certainty? Then for the development of the products, I think this is truly something we need to think about.
We need, we need to have products that both help our customers to deal with their energy needs, but are also manageable so that they create the margins we need to, to run a, a profitable, successful business where we can also deliver good service. We are, we are developing on, on both fronts. There, there, there is some optionality. All of that we, we cannot and even don't want to remove, but then we need to have such products wh-which are hedgeable so that we can be competitive for the customers. This is not. This solution at the moment is not ideal, as we can see from the results. It's not good for the consumer, it's not good for us either, but coming from a from very unusual conditions also.
Thank you.
The next question comes from Deepa Venkateswaran from Bernstein. Please go ahead.
Thank you for taking my questions. I had two questions. I think the first one is, could you talk a bit more about how you've managed to optimize and use the flexibility of your hydro, given that, you know, you also had flooding and so on, and the spot prices have been weak? If you could talk about that and maybe at a later occasion, maybe do a deep dive on this topic, given that I think it's underappreciated by the market. The second question is on the heat project in Espoo that you announced in June. Could you maybe explain what's the revenue model underpinning those investments? Is it...
I know it's to replace your coal, but, you know, can we model some incremental revenues from those investments, or how should we think about that particular EUR 225 million investment to 2027? Yeah, those are my two questions.
Okay. Hello, Deepa. Thank you for the questions. I can start with the, with the Espoo, and, and, Tiina, if you want to comment on the, on the optimization, as you know that business extremely well. The idea behind the, the Espoo Clean Heat project is that, that we have the, district heating system, for the, for the Espoo area, and, and we have, good visibility into what our customers are paying for the heat. So the pricing is stable, and it, it does not change very frequently. The question for us is that how, how can we, in a, in a low emission and, and competitive way, provide that heat? Historically, the, the way to do it has been to combine heat and power.
It's been biomass-fired in the history, gas-fired, also, also some coal-fired capacities. The idea for us is, is that we move over to actually utilizing waste heat from various sources: shopping centers, hospitals, all, all kinds of different real estate and, and processes, thereby, basically electrifying the system. The idea now with the, with the Microsoft Corporation is that Microsoft is building big data centers in Espoo, Kirkkonummi, and Vihti. They produce, of course, they use a lot of electricity, produce a lot of excess heat, and this will be the world's largest heat offtake project, actually. This will take the cost of the procured heat down compared to, for example, producing with, with solid fuels. Price will be lower.
This will be CO2-free, and, and then, also Microsoft gets some income actually for the, for the excess heat that they are, they are producing. Cost down, CO2 footprint down, we will, we'll be completely, coal-free very quickly. In Espoo, we still have some, some left there, then by 2030, we will be totally carbon net, net zero with carbon overall in our system. That is our target, but the coal-free in Espoo, much faster. I hope that gives, gives an idea of, of what is happening.
Do you have any carbon? Do you have any carbon pricing included in the heat? So is that another saving? Do you have to pay carbon for the heat generation?
Uh, for-
When you-
Yeah. If, if there has been, if there has been CO₂ content, yes. If there is.
Okay
... CO₂ in the fuels, yes. This will be definitely a saving. Of course, historically, we know where the CO₂ emission prices were and where fossil fuel prices were, so historically, fossil fuels have been very competitive. We started already 10 year plus ago to shift very determinedly into, into biomass and then, then into heat offtake. The, the long-term idea is that we're not incinerating anything, but really using the electrification of the society and taking then waste heat and utilizing that, circulating that through the district heating systems.
Okay, thank you.
Tiina, on the-
Yep.
On the optimization of hydro.
Hydro optimization, so we have said that, that hydro optimization usually is 1-3 EUR per MWh, and of course, the optimization potential is, is really related to the volatility in the market. Last year was extremely volatile, which at the same time, in a way, gave us opportunity to, to maximize, maximize the profit. This year, the volatility has been lower, so clearly, what we see that it is, it is also impacting, and those kind returns were not possible but still above the average. I think the capability of our people, I think it is to optimize the...
in a way, the seasonal, where we, in a way, allocate the reservoir levels in the seasonal level, and then now, more and more, it's coming the granular, granular to the between the quarters and now even the daily, daily balances. This is something what we have done for the long time, and our people, in a way, constantly are on the pulse where to, where to and how to, how to, in a way, in the safe way, operate the hydro plants.
Okay. Thank you.
The next question comes from Artem Beletsky from SEB. Please go ahead.
Yes, hi, and thank you for taking my questions. I actually have 2 to be asked. The first one is just continuing on a discussion regarding optimization premium. As the power prices have been normalizing, you are still able to generate above, so say, historical levels premium. On that front, is it fair to say that this kind of EUR 1-3 guidance is not valid anymore, even if power prices go back to historical levels, given the fact that, for example, share of renewables in the system is increasing and it increases volatility? The second question what I had was relating to Circular Solutions, a business that is put under strategic review. Could you maybe provide some further color on business performance?
It appears to be struggling to some extent, so what are key reasons behind it, and how, how do you see it in coming quarters, so to speak, so should situation be improving due to some aspects? Thank you.
Okay, I can start with Circular Solutions, and again, I maybe ask Tiina to continue to -
Yep
... to take the optimization part. Circular Solutions, the, the, the background and strategic logic is, is quite clear. If we go back, several years, then, we had, we had multiple, expansion opportunities, Circular Solutions business and recycling business was, was one of those. That was in a business environment where there was, there was hardly any growth foreseeable, in the Nordic market, and electrification was, was not on its way. When we look at the, our strategy, our geographical focus, and where we could deploy capital in significant amounts and actually, work with our customers, we see massive, massive, growth opportunity in electrification and decarbonization, and that's why our strategic focus is on renewables.
It is on potentially new baseload, potentially on hydrogen, but this provides us massive opportunities, and we have a, we have a big pipeline of customers who are interested in discussing long-term PPAs with us. The Circular Solutions business is doing about EUR 70 million EBITDA, the main part being the recycling and waste solutions. Compared to the original expectations that we had when, when we did acquisitions in the space, from my point of view, these expectations have been well fulfilled, and we have developed actually new business areas also, like battery recycling. We have expanded in plastics recycling. We are in the Bio-to-X solutions. In, in this business, we have the turbines and generators business. There are, there are several avenues that provide very interesting opportunities in this space.
With regards to the, strategic review itself, there are no foregone conclusions yet, what that outcome would be. We are looking at how would this business best fulfill its potential and, and what, what would be the good, good, future for this business. We will come back to this when we, when we are going forward then with the strategic review. Back to the optimization premium.
Thank you. The physical optimization, there is a direct link to the volatility, volatility of the market. As more renewables are coming to the market, you could assume that there is more, more potential to do that. Of course, what is the, in a way, constant level, it remains to be seen. In general, I think hydro asset, in general, in this market environment is very valuable, valuable, and, and therefore we are also developing, maybe the short term, the batteries or the technical solution that, that the hydro, hydro can really flex, flex and take those opportunities. What comes to the new guidance, we need to see a bit, bit longer how the, how the market, market goes forward.
Okay. This is very clear. Thank you.
The next question comes from James Brand, from Deutsche Bank. Please go ahead.
Hi, thanks for the presentation. I'm a bit croaky 'cause I've got a cold. So excuse, excuse that. I had a few questions, actually, on optimization again, to home to, overdue on that topic, but it, it's clearly kind of a big focus area. Firstly, I was just trying to understand a bit better Q2. In Q2, you've, you've told us that you've-- the spot price was EUR 44.5. It looked like the hedge price was just over EUR 50, given that you obviously told us what the hedge price was previously and what it is for the rest of the year now, and you achieved EUR 57.5.
It looks like your optimization is, is potentially very, very material in the order of EUR 8 or so on the achieved price. Is there anything else going on there, or does that sound reasonably sensible as a way to think about it? Secondly, you made a comment in your discussion in the results release about the achieved price. You said the SE2 area price difference had no impact on the achieved power price. I was just wondering why that was. Thirdly, you talked about the flexibility of the hydro. Quite, quite a bit of your hydro is run-of-river.
I was wondering whether there's any way you could just quantify for us how much of your hydro generation is flexible in the sense that you could hold production back from one day to the next? Thank you very much.
Okay. If I start with the optimization and flexibility and run-of-river versus reservoir, Tiina's area of expertise, but I think your logic is correct that there was nothing, nothing else, nothing special there. Overall, we try to keep things very clean and simple on the hedging and optimization front. It is so that with these price levels and this volatility, the historical EUR 1-3 was in a very different market environment. But I think this is an area that going forward, we will need to open this up more, that what is the value of the flexibility in a market which we expect to be more volatile?
Take example, Finland. I think renewables is something at the level of 6 gigawatts.
Yep
... or, or the like. There in Finland, overall, there is hydro capacity of about 4, 4 gigawatts. Things are pretty well working today, but if renewables multiply by 3, or 4, or 5, the whole question about flexibility will become... It will, it will get different magnitude. We, we will discuss this, but also this is an issue that needs to be discussed on EU level, Nordic level, regulation overall, and what kind of an energy system do we, do we think we will need? On the how much is flexible and how much is not, if you wanna, Tiina-
Yes
... comment on that.
Basically, our hydro, hydro, we could say that maybe 1/3 is, is, is very flexible, 1/3 semi-flexible, and 1/3 run, run-of-river. Of course, we are all the time developing, developing, and it's very difficult to say the exact, exact value, but roughly 1/2, if we will say so, has a already now very, very good flexibility. Then I think the question about the price area 2.
Mm.
That related last year when the system price versus the price area two really differed a lot. This year, this kind of distortion was not that visible, so it was slightly down, but basically all the area prices were closer together. Last year, the challenge was that if the hedging was done with the system price, and then you sold to the area prices, there was a negative impact to the achieved power price, but this year this was not the case.
Great. Thank you very much.
The next question comes from Louis Boujard from ODDO BHF. Please go ahead.
Yes, good morning. Thank you for taking my question. I will come back on, on, on two topics, maybe to try to get a bit more detail on this, notably regarding first of all, Circular Solutions strategic assessment. Maybe my first question would be on, on this topic to try to understand better why do you put it into strategic assessment? I have the feeling that in the beginning of the year, you made some acquisition and development notably into the battery recycling systems. At the same time, you seem with EUR 70 million of EBITDA to get a relatively good critical mass here. Also it looks like, according to other operation performance, that probably currently on the conjunctural point of view, so performance is not that good.
Why is it a good time now to go to the potential strategic assessment, which could mean a disposal of these assets? This question is linked to the next one, because at the meantime, we have the feeling that on a debt, net debt point of view, you are of course pretty clear. You have a very good cash flow generation, no short-term issue on the liquidity point of view, and you have also a relatively limited CapEx plan in the relatively short term. Is it really needed to do this kind of disposals?
Because if we look at the currently the prospect that you have in the longer term, we understand the nuclear that could be potentially an option for growth, hydrogen, that could be also an option, but it looks a bit far away. We understand as well in the answer that you provided, that for the time being, the options of Uniper on Scandinavian assets are also pretty unlikely, at least in the very short term. Why don't you want to start or speed up a little bit more your organic growth pattern at this point in time? Do you need to acquire any developer in order to be more aggressive into the traditional wind and the photovoltaic or eventually battery systems in the Nordic area? Can you do it on your own on an organic basis?
This is my second question. Thank you very much.
Okay. Thank you. Thank you, Louis, for the questions. The background for the strategic review is, again, our strategic focus. Really deciding what, what are the areas we are focusing on, and then, if something is not in the core of the strategy, like we indicated already with the strategy update, then we look at what would be the best way to develop these businesses going forward. How do we make sure that, that, that these businesses fulfill their best possible potential? This is what, what we are doing now. The businesses are in, in good shape. They have good growth prospects, in, in various areas. Like we indicated, our strategic focus is on the electrification, helping our customers with their decarbonization, growth in renewables, growth potentially in base load and, and hydrogen.
This is about the continuous focusing of strategy and then finding the best possible paths for every business, whether they are part or not, not of our business portfolio. For the, for the renewables and how... What are the growth prospects there? One aspect at least we, we need to take into account there is that typically a lot of the value is created in the development phase of renewables. This is the approach we have taken so far. We, we are developing from site identification, from wind or solar irradiation measurements, doing the land contracts ourselves, making PPAs with various parties.
Starting from the, from the very, very beginning of these processes, and with this, we have developed already historically multiple gigawatts of solar and wind capacities, and today we have, at different stages of development, also several gigawatts of wind and solar development. The question is that these investments, potential investments, they have to meet our financial criteria, and if they do, we will invest, and obviously, as you can all see, we have also the balance sheet capacity today to make investments, but we will only do it if they are profitable.
For the, for the developers, if, if we were to look at development companies, then I'd, I'd rather say that they should be early-stage development, because if they're very far developed, then typically the, the premiums would start to be high and thereby also the expected returns lower, as we have seen in the market.
Thank you very much.
The next question comes from Sam Arie from UBS. Please go ahead.
Hi, good morning, everybody. Markus and Tiina, thank you for the presentation. Markus, I was going to say, I know you had some, some time out earlier this year, so can I also just say, you know, welcome back. It's good to have you back, and of course, we hope everything is 100%, good, good with you. On to my questions, and I think probably 2 questions at this point. We've been through a lot of the detail with the Q&A so far, which has been very helpful. Markus, one thing that I haven't picked up on, and perhaps I missed some detail, at the AGM, but can you just confirm for us if the board has now renewed your contract as CEO?
Should we expect you to stay in the CEO seat for the next two years, or are we still waiting for the chairman and board to make a decision out there? Apologies if that's been announced already, but I, I'm not sure I'd, I'd picked it up anywhere. Secondly, I, I guess we're probably, as I say, suddenly near the end of the call, but I just wondered if we could take a few minutes to think about just more broadly, performance of the share price this year, which has been very weak and obviously, at least in my view, seems to reflect the uncertainty people have about the commodity environment and where, you know, general macro factors and where, where this all goes next.
I suppose from our side, we were hoping that when you finally got out of Uniper, got out of the Russian assets, set out the new strategy, explained the new dividend policy, that there would be some kind of clearing, clearing effect there, some recovery in the shares. You did all those things earlier this year, and there has been no recovery. In fact, things have kind of got worse. It seems that the street is now looking at the businesses sort of 80% generation and nearly a pure commodity play and applying a discount to reflect that.
What I'm interested in, and to make sure that's clear as a question, can you just spend a minute to, to share your thoughts about how this plays out going forward, and if you see any way you can change the way the market thinks about the company now in the sort of post-Uniper, post-Russia phase? Or if essentially, the shares are going to be just tied to the power price for the foreseeable future. Thank you.
Okay, hi, Sam, and thank you for the question. Thanks, first of all, for the nice, nice words. I was actually working remotely because of the treatment I had for 3 weeks, so that was it. Actually, with everything that was going on, I was really working remotely.
Okay
... throughout, throughout that whole, whole period. But, thank you for, for noting that, and very happy to have been in the office already for, for a long time. With regards to, to the CEO contract, so actually in the Finnish context, the, any contracts, anybody of us, we do not have time-limited contracts. So, these are, always for the time being, and then it's up to the board to decide, if they are, if they are satisfied with the interaction and, and performance interaction with, and performance of the management. So it's, this evaluation happens on a continuous basis.
I would say that, that from my point of view, we are working very well and very closely with our board, and I interact with our chairman on a very, very regular basis. Everything that we discussed here, we have discussed at length with our board, most recently, of course, yesterday, but very good, very good relationship from my point of view. On the share price, of course, we follow the markets and we follow the share price. That's not something per se that we would start to comment, but what we focus on is our strategy and our strategy execution. Like I said, earlier, the Nordic backdrop for an energy utility is very good.
Our portfolio, CO₂ free, flexible, really enabling our customers to, to run their businesses successfully and very competitive, by the way. We are really well positioned to help our customers today, and the Nordic backdrop is very strong for, for growth in energy-intensive industries. We are-- we would like to think that we are very well positioned actually to grow in renewables, to grow in baseload, and to potentially grow in, in hydrogen as well. This, this is our focus: staying cost competitive, being able to create a growth pipeline. What else we have observed is the, is the inflation, volatility, geopolitical turbulence that has been in the market. Just generally speaking, and of course, you, you know all these things, but this is what, what we, at least pay attention to.
Despite all this, I think the, the Nordic backdrop, the drive to, to curb, climate change and thereby electrification and decarbonization are very positive, strong trends for us.
Okay. Thank you. Thank you. Thank you so much for the answer. Also, Markus, just, just to be clear, you know, we're very pleased to see you continuing in your role, and there was no negative connotation to my question. I think, and also I pick up in our conversations, lots of support for you personally. You know, we wish you good luck with everything that you just laid out.
Yeah, thank you. Thank you very much for that. I would say also, credit, credit to our great team, and the newly appointed FLT, also the former, and earlier members of the team. We have seen the performance in the, in the turbulent markets, and we see the drive to develop this growth pipeline and good performance, so I, I, I feel, I feel very energized, and I think we have a great team in the company, so very good spirit.
The next question comes from Olavi Kaskisaari from Arvopaperi. Please go ahead.
[Foreign Language] Hey, tota, voinko vetää suomeksi, vai, tota, vedetäänkö in English?
[Foreign Language] Ihan kumpi vaan sopii. Mä voin-
[Foreign Language] Joo.
[Foreign Language] Jos otat suomeks, niin mä, teen pienen englanninkielisen, summaryn. Olavi may ask in Finnish or English. I said Finnish is okay, but once he asks, I will do a short English summary of the question also.
Yeah. I'll just do it in English.
Okay.
Yeah. Could you just go a bit over on the possible investments in Sweden, on the timeline, and also on the magnitude? Essentially, you had around EUR 7 billion in capital right now. What would be around the amount that you would be comfortable of spending on the Swedish investments?
Okay, of our business, about half and half are in. Of the electricity generation, little bit more than 50% is in Sweden, a little bit less than 50% in Finland. We know the Swedish market really well. We are a large hydro and nuclear producer, and we have also been developing renewables. In the short term, it would be natural that we would make renewable investments. The nuclear feasibility study is actually addressing potential to grow in nuclear, both in Sweden and in Finland. This is, this is a possibility that we are looking at, and this feasibility study should be ready next year.
For the hydrogen part, for the decarbonization and electrification of industries, for example, steelmaking, and chemicals, hydrogen would play an important part, and this is something we are interested in looking at, in the, in the whole of the Nordics. Sweden, for us, is a very, very core market, and we have invested a lot in that market and continue to look at it with high interest.
Yeah. Could you still comment on the like, the magnitude of the investments? What kind of sums are we actually talking about? What would you be willing to commit new investments in Sweden?
Overall, we have said that, during the years 23 to 25, we have growth CapEx potential of EUR 1.5 billion.
Mm-hmm
... if we have good projects that fulfill our financial criteria. We haven't given geographical guidance on which markets that would happen in, so that depends then on the business potential. We have not defined that how much would go into, into any geographical area.
Okay. Thank you.
Thank you.
Okay. With this question from Olavi, we don't have any further questions now, so thank you all for your interest and for your questions, and for your participation here with us today. On behalf of Fortum, we wish you all a nice rest of the day. Thank you.
Thank you.
Thank you!