Risks and sensitivities

Fortum’s operations are exposed to a number of financial, operational, strategic and sustainability-related risks. Fortum is exposed to these risks both directly and indirectly through its subsidiaries, associated companies and joint ventures. The principal associated companies and joint ventures are Teollisuuden Voima Oyj, Forsmarks Kraftgrupp AB, OKG AB and Kemijoki Oy. For more information, see Fortum’s Financials 2023.

Fortum’s strategy, launched in March 2023, was developed partly in order to reduce the Group’s business risks. With Fortum’s core business consisting mainly of outright generation assets in the Nordics, the Nordic power price exposure remains the single largest key driver and financial risk for Fortum. It is a key priority for Fortum to successfully mitigate this market risk, including managing the related credit and liquidity risks from hedging this exposure. 

The main strategic risks are that the business and/or regulatory environment develop in ways that have not been foreseen and prepared for. The current geopolitical uncertainty continues to pose material operational and business risks for Fortum as the owner and operator of power and heat generation in the Nordics and Poland. Future energy market, regulation and climate scenarios as well as scenarios for how the current geopolitical situation develops, including the impact of these to Fortum’s existing and potential new businesses, are regularly updated and used in the development of the strategy. 

Sustainability-related risks, including exposure to climate change, continue to be a focus area for Fortum and we are well-positioned with our existing portfolio of largely CO2-free assets to take advantage of opportunities in the green transition.   

Business operating environment

Fortum operates in a global business environment, with a main operational focus in the Nordics, and is therefore exposed to political and other risks that affect the macroeconomic development and consumer behaviour in Fortum’s markets.

The global landscape has experienced a further escalation of conflict and increasing geopolitical uncertainty. Several regional and territorial disputes have worsened, increasing instability and insecurity in energy-producing regions, potentially disrupting energy supply chains and raising concerns about energy security. Russia’s attack on Ukraine in February 2022 severely impacted Fortum’s businesses. A number of geopolitical risks have realised, while other risks remain on an elevated level as a result of the ongoing Russian aggression. Following the unlawful seizure by the Russian authorities and loss of control of the Russian operations in spring 2023, the Russian assets were fully written down, deconsolidated and discontinued. Fortum sent notices of dispute to the Russian Federation in order to protect its legal position and shareholder interests. In February 2024, Fortum initiated legal proceedings against the Russian Federation due to the violations of international investment treaty protection. A further escalation of the war may increase the risk of hostile actions by the Russian Federation against foreign companies. This could have severe implications, such as an increased risk of sabotage, including direct physical or cyber-attacks on, for example, energy infrastructure in Fortum’s operating countries. 

The current geopolitical uncertainty has also intensified the trend of nationalistic policies and protectionism, which may lead to further trade restrictions or sanctions, which, in turn, could affect demand for Fortum’s products and services, production capabilities, asset values and access to financing. The EU, US and UK have implemented a broad range of sanctions on Russia, the scope of which may be further increased. The unpredictable nature of sanctions remains a risk for Fortum, despite having lost control of the Russian business.

Regulatory environment

The energy sector is heavily influenced by national and EU-level energy and climate policies and regulations. The overall complexity and possible regulatory changes in Fortum’s operating countries pose risks and create opportunities for the generation and consumer businesses. Fortum analyses and assesses a number of future market and regulation scenarios, including the impact of these on different generation forms and technologies, as part of its strategy. Fortum maintains an active dialogue with different policymakers and legislators involved in the development of laws, policies and regulations in order to manage these risks and to proactively contribute to the development of the energy and climate policy and regulatory framework in line with Fortum’s strategic objectives.

Nordic power price exposure and related risks 

The earnings capability and profitability of Fortum’s outright power generation, such as hydro, nuclear and wind power generation, are primarily exposed to fluctuations in the Nordic power prices. In the Nordics, power prices exhibit significant short- and long-term variations on the back of several factors, including, but not limited to, weather conditions, outage patterns in production and transmission lines, CO₂ emission allowance prices, commodity prices, energy mix and the supply-demand balance. An economic downturn, lower commodity prices, warm weather or wet hydrology could lead to significantly lower Nordic power prices, which would negatively impact earnings from Fortum’s outright power production. The increased geopolitical uncertainty and fears of escalation of other conflicts may impact power and other commodity prices and volatility, especially in case of disturbances to other sources of power or gas supply. In general, price volatility is expected to continue also with the increasing share of intermittent generation and the occasionally re-emerging concerns over security of energy supply. This also increases the risk of further political market interventions going forward. Fortum hedges its exposure to commodity market prices in order to improve predictability of future results by reducing volatility in earnings while ensuring that there is sufficient cash flow and liquidity to cover financial commitments.

Fortum’s liquidity and refinancing risks are primarily related to the need to finance its business operations, including margining payments and collaterals issued to enable hedging of commodity market risk exposures. Higher and more volatile commodity prices increase the net margining payments toward clearing houses and clearing banks. Fortum mitigates this risk by entering into over-the-counter (OTC) derivatives contracts directly with bilateral counterparties without margining requirements. Consequently, credit exposure from hedges with OTC counterparties has increased. Due to Fortum’s net short position in Nordic power hedges, the credit exposure would increase in line with the value of hedges if Nordic power prices decrease. OTC trading also exposes the Group to liquidity risk in case of a counterparty default. A default could trigger a termination payment in cases where the net market value of the bilateral contracts is positive for the counterparty.

Fortum targets to maintain a solid investment-grade rating of at least BBB. A lowering of the credit ratings, in particular to below investment-grade level (BB+ or below), could trigger counterparties’ rights to demand additional cash or non-cash collateral. In March 2024, S&P Global Ratings upgraded Fortum’s long-term credit rating to BBB+ with Stable Outlook (previously BBB with Stable Outlook). Also in March 2024, Fitch Ratings affirmed Fortum’s BBB rating with Stable Outlook. Fortum continues to constantly monitor all rating-related developments and to regularly exchange information with the rating agencies. In 2023, Fortum deployed a new risk management framework to manage credit, liquidity and market risks holistically and to support the maintaining of its rating under different market scenarios. 

Operational Risks

Fortum’s business activities include energy generation, storage and control of operations, as well as the construction, modernisation, maintenance and decommissioning of power plants or other energy-related industrial facilities. Any unwanted operational event (which could be caused by, e.g., technical failure, human or process error, natural disaster, sabotage, failure of key suppliers, or terrorist attack) can endanger personal safety or lead to environmental or physical damage, business interruptions, project delays and possible third-party liability. The associated costs can be high, especially in Fortum’s largest units and projects.

Climate change

Fortum believes that the growing awareness and concern about climate change will increase the demand for low-carbon and resource- and energy-efficient energy products and services. The company is leveraging its know-how in CO2-free hydro, nuclear, wind and solar power by offering its customers low-carbon energy solutions. The electrification of energy-intensive industry, services and transportation is likely to increase the consumption of low-carbon electricity in particular. The development of the hydrogen economy, and especially clean hydrogen produced with CO2-free power, will potentially offer future business opportunities for Fortum. 

Driving the transition to a lower-carbon economy is therefore an integral part of Fortum’s strategy. Fortum’s strategy includes ambitious sustainability and decarbonisation targets. However, the transition to a low-carbon economy poses a number of strategic and operative risks related to changes in energy and climate policy and regulation, technology development and the business environment in which Fortum operates.

Fortum’s operations are exposed to the physical risks caused by climate change, including changes in weather patterns that could alter energy production volumes and energy demand. Fluctuating precipitation, flooding and extreme temperatures may affect, e.g., hydropower generation, dam safety, availability of cooling water, and the price and availability of biofuels. Hydrological conditions, precipitation, temperatures, and wind conditions also affect the short-term electricity price in the Nordic power market. In addition to climate change mitigation, we also aim to adapt our operations, and we take climate change into consideration in, among other things, the assessment of growth projects and investments as well as in operation and maintenance planning. Fortum identifies and assesses its assets’ resilience towards different acute and chronic physical climate-related risks within different Intergovernmental Panel on Climate Change (IPCC) climate scenarios and creates adaptation plans for the most material risks. 

Commodity market and fuel risks

Fortum’s business is exposed to fluctuations in prices and availability of commodities used in the production, transmission and sale of energy products. The main exposure is toward electricity prices and volumes, prices and volumes of emission allowances, and prices and availability of fuels. Fortum hedges its exposure to commodity market risks in order to improve predictability of future result by reducing volatility in earnings while ensuring cash flow risk is at an acceptable level. For further information on hedge ratios, sensitivities and outstanding derivatives contracts, see Note 4 in the Financial Statements.

Electricity price and volume risks

Fortum is exposed to electricity market price movements and volume changes mainly through its power and heat generation.

In the Nordics and Poland, market prices and the amount of profitable production exhibit significant variation due to weather conditions, outage patterns in production and transmission lines, CO2 allowance prices, fuel prices, as well as the amount of electricity demand. Electricity price risks in the Nordics and Poland are mainly hedged by entering electricity contracts on exchanges such as Nasdaq Commodities, ICE, the European Energy Exchange and TGE (Towarowa Giełda Energii S.A. i.e., Polish commodity exchange) as well as directly with counterparties active in the energy markets. The ability to efficiently implement hedging strategies is dependent on a well-functioning and liquid derivatives market.

During 2023, the liquidity of Nordic electricity derivatives traded on Nasdaq Commodities improved slightly compared to the low levels of 2022.

Alternatives, including the use of OTC derivative contracts and correlated products are used to mitigatederivates market liquidity risk. Hedging strategies are continuously evaluated as electricity and other commodity market prices, the hydrological balance and other relevant parameters change. Hedging of the Generation segment’s power sales is performed in EUR on a Nordic level, covering both Finland and Sweden, and the currency component of these hedges in the Swedish entity is currently not hedged.

Commodity derivatives

Fortum Group's commodity derivatives for which hedge accounting according to IFRS 9 is applied are electricity derivatives and gas derivatives. Receivables and liabilities against commodity exchanges arising from standard derivative contracts with same delivery period are netted.

Sensitivity arising from electricity derivatives

The table below presents how a 1 EUR/MWh change in the electricity forward and futures quotations for the period Fortum has derivatives would impact Fortum’s profit before income tax and equity. Hedge accounting is applied to most of the hedging strategies using financial commodity derivatives, with impact of the market price changes of derivatives recognised in equity.

Impacts are calculated based on the electricity position as of 31 December. Positions are actively managed in the day-to-day business operations and therefore the sensitivities vary from time to time. Sensitivity analysis includes only the market risks arising from derivatives i.e. the underlying physical electricity sales and purchases are not included.

Sensitivity is calculated with the assumption that electricity forward and futures quotations would change 1 EUR/MWh for the period Fortum has derivatives. Different price change assumptions can be used to assess the impact on sensitivity analysis analogously, relative to 1 EUR/MWh change presented in the table below.

Emission and environmental value risks

The EU has an emissions trading scheme in place to reduce the amount of CO2 emissions. In addition to the emissions trading schemes, there are other trading schemes in environmental values in place in Sweden, Norway and Poland. Part of Fortum’s power and heat generation is subject to requirements of these schemes.

The main factors influencing the prices of CO2 emission allowances and other environmental values are political decisions, and the supply and demand balance. Fortum hedges its exposure to these prices and volumes through the use of CO2 derivatives and environmental certificates.

Fuel prices and volume risks

Power and heat generation requires use of fuels that are purchased on global or local markets. The main fuels used by Fortum are uranium, coal, waste-derived fuels, biomass fuels, and natural gas. The main risk factor for fuels that are traded on global markets, such as coal and natural gas, is the uncertainty in price.

Prices are largely affected by demand and supply imbalances that can be caused by, for example, increased demand growth in developing countries, natural disasters or supply curtailments/fuel purchase constraints from political, social or labour unrest. For fuels that are sourced on local or regional markets, such as biofuels, the volume risk in terms of availability of the raw material of appropriate quality is more significant as there may be a limited number of suppliers. The exposure to fuel price risk is mitigated through fixed-price physical delivery contracts as well as derivative contracts. Due to the current geopolitical situation, there is an increasing risk related to especially nuclear fuel imports from Russia. Fortum continues to monitor the situation closely and prepares adapted mitigation measures to minimise the negative impacts to Fortum.

Liquidity and refinancing risks

Fortum's business is exposed to liquidity and refinancing risks primarily through the need to finance business operations, including margining and collaterals issued for hedging activities. Trading derivative financial instruments exposes the Group to a liquidity risk associated with having to provide financial collaterals like cash or bank guarantees. Trading over-the-counter also exposes the Group to liquidity risk in case of a counterparty default. A default could trigger a termination payment in cases where the net market value of the bilateral contracts is positive for the counterparty. Higher and more volatile commodity prices increase the net margining payments toward clearing houses and clearing banks which are mainly settled in cash. Fortum mitigates this risk by entering into OTC derivatives contracts directly with bilateral counterparties without margining requirements. The exposure to margining requirements and termination payments is continuously assessed and monitored so that adequate liquidity is available to cover expected future cash collateral required for margining. There are strict limits in place which ensure that there is sufficient liquid funds and credit lines available to cover margining requirements, termination payments, working capital changes as well as contingent collaterals in extreme market scenarios.

Fortum maintains a diversified financing structure in terms of debt maturity profile, debt instruments and geographical markets. Liquidity and refinancing risks are managed through a combination of cash positions and committed credit facility agreements. The credit risk of cash positions has been mitigated by diversifying the deposits to high-credit quality financial institutions and issuers of corporate debt.

Fortum is targeting to have a solid investment grade rating of at least BBB. A lowering of credit ratings, in particular to below investment grade level (BB+ or below) could trigger counterparties’ rights to demand additional cash or non-cash collateral. That may affect the access to the capital markets and increase the cost of new financing.

Currency and interest rate risks

Fortum’s debt portfolio consists of interest-bearing liabilities and derivatives on a fixed- and floatingrate basis with differing maturity profiles. Fortum is exposed to cash flow risk from changes in interest rates mainly from interest-bearing liabilities and derivatives on a fixed- and floating rate basis. Fortum manages the interest rate exposure through a duration mandate of the loan portfolio, excluding leasing liabilities and provisions, and a cash flow at risk limit. Fortum uses different types of financing contracts and interest rate derivative contracts to manage the interest rate exposure and evaluates and develops the strategies in order to find an optimal balance between risk and financing cost.

Fortum has cash flows, assets and liabilities in currencies other than EUR and is therefore exposed to fluctuations in exchange rates. Currency exposures are divided into transaction exposures (foreign exchange exposures relating to contracted cash flows and balance sheet items where changes in exchange rates will have an impact on earnings and cash flows) and translation exposure (foreign exchange exposure that arises when profits and balance sheets in foreign entities are consolidated at the Group level).

The main translation exposure is toward EUR/Swedish Krona (SEK) arising from Fortum's extensive operations in Sweden. Fluctuations of the SEK against the EUR could have an adverse effect on future results and equity when consolidating and translating results and net assets in Swedish affiliates into euros. Translation exposures in Fortum are generally not hedged as the majority of these assets are considered to be long-term strategic holdings.

Transaction exposure arises mainly from physical and financial trading of commodities, existing and new investments, external and internal financing and shareholder loans within Fortum. Fortum hedges major transaction exposures on a local level in the reporting currency of each legal entity in order to avoid exchange differences in the profit and loss statement. An exception is the Generation segment’s hedging of power sales in Sweden where the currency component is not hedged.

A centralised treasury function coordinates currency risk management and executes external hedges consisting of currency derivative contracts which are matched against the underlying future cash flow according to maturity. Derivatives are used exclusively to hedge existing foreign exchange risks, not for proprietary trading.

Credit risk

Fortum is exposed to counterparty risk whenever there is a contractual arrangement with an external counterparty including customers, suppliers, partners, banks, clearing houses and trading counterparties.

Credit risk exposures related to hedging arise through physical delivery contracts and financial derivative instruments. These credit risk exposures are volatile and include both the replacement risk and the settlement risk. Exchange-traded derivatives are cleared through central clearing parties (CCPs) or through clearing banks, while OTC derivative contracts are concluded directly with a number of different counterparties including energy wholesalers and retailers, utilities, trading companies, industrial end-users and financial institutions active in the financial and energy markets. Due to Fortum’s net short position in Nordic power hedges, credit exposure tends to increase with the value of hedges if Nordic power prices decrease.

Due to the Group’s financing needs and management of liquidity, Fortum has counterparty credit exposure toward a number of banks and financial institutions. The majority of the exposure is toward Fortum's key relationship banks, which are highly creditworthy institutions.

Credit risk exposures relating to customers and suppliers are spread across a wide range of industrial counterparties, energy companies, government and municipal entities, utilities, small businesses, housing associations and private individuals over a range of geographic regions.

Fortum has routines and processes to identify, assess and control credit exposure. Credit checks are performed before entering or renewing commercial obligations and exposure limits are set for larger individual counterparties as well as for counterparty groups. Creditworthiness is monitored through the use of internal and external sources so that mitigating actions can be taken when needed. Mitigating actions include demanding collateral, such as guarantees, managing contract terms and contract length and the use of netting agreements.

For detailed information on financial risk management at Fortum, see Note 4 of Financial Statements on Fortum Financials 2023.