Alternative Energy & Power 2020

Last Updated July 22, 2020

Finland

Law and Practice

Authors



HPP Attorneys Ltd is a leading independent Finnish corporate law firm advising both domestic and international clients on their Finnish corporate legal issues. HPP operates across all forms of generation from nuclear to biomass to solar to wind. The energy and natural resources team is one of the largest in private practice in Finland and is well placed to identify the key issues, from a developer, operator, sponsor or a lender’s perspective, to evaluate and report on the level of risk and to propose risk mitigation solutions where possible. HPP’s energy team is complemented by lawyers from HPP’s other legal specialist teams, including M&A, banking and finance, competition, land use and regulatory, real estate and dispute resolution to handle a full caseload of energy-related assignments.

Overall responsibility for the preparation of energy regulation in Finland lies with the Ministry of Economic Affairs and Employment, with specific authorities responsible for regulation of different parts of the energy industry.

The authorities responsible for monitoring the distribution of electricity and natural gas, and partly district heating, are as follows. Unless otherwise stated throughout this chapter, there are no English versions available.

Generation

The main sources of electricity generation are nuclear power, hydroelectric power, wood fuels, wind power, coal and natural gas. The proportion of wind power is still relatively small, but it has significantly increased in recent years while the proportion of coal has decreased.       

Wind Power

At the end of 2019, Finland's installed wind power capacity was 2,284MW. Statistics by Finnish Energy show that wind power production set a new record for annual production during 2019 at 6,1TWh. Before COVID-19, even further growth was expected for 2020 since the production volumes of some 79 new wind turbines which became operational during 2019 were not yet fully reflected in the statistics. Even though the temporary negative effect on demand for electricity due to COVID-19 may effect the statistics of 2020, the overall trend of annual production seems to be upwards.

In 2019, wind power’s share of the total electricity production was 9% and has now, for the first time, permanently settled above the total energy production from fossil fuels. By the end of 2019, there was a total of 754 installed wind turbines in Finland. Further significant growth is therefore both possible and anticipated.        

Nuclear Power

There are four reactors in operation: two in southern Finland, in Loviisa, and two on the west coast, in Olkiluoto. Another reactor is under construction in Olkiluoto which has been the subject of very significant delays and a dispute with the French multi-national building contractor, Areva, which estimated in December 2012 that the full cost of building the reactor will be about EUR8.5 billion, or almost three times the delivery price of EUR3 billion. It is now estimated that the reactor will enter commercial production in March 2021.

In addition, Fennovoima is currently planning a nuclear power plant with a planned capacity of 3,220MW of thermal power and about 1,200MW of electrical power. The plant will be built in Pyhäjoki in northern Finland and, according to the currently agreed schedule, it is estimated that the plant will enter commercial operation in 2028, although this is an amended schedule based on project delays.

Transmission

The Finnish national electricity transmission grid is monitored and developed by Fingrid Oyj. Fingrid is responsible for system supervision, operation planning, balance service, grid maintenance, construction and development, and promotion of the electricity market. Fingrid also holds and manages most of the international connections of the national grid.

Following an ownership change, in spring 2011, the Finnish State currently owns about 53% of Fingrid and Ilmarinen Mutual Pension Insurance Company about 20%. The rest (approximately 27%) is distributed among other shareholders, which are mainly Finnish pension insurance and insurance companies.

A total of about 100 electricity grids are maintained by high-voltage distribution networks and distribution systems operators. The transmission grid administered by Fingrid consists of approximately 14,600 km of transmission lines and nearly 120 substations.

The Natural Gas Market Act (587/2017), which has been in force since the beginning of 2018, resulted in opening of the natural gas market for competition as of the beginning of 2020. Among other things, the Natural Gas Market Act resulted in unbundling of the operations of Gasum Oy, which formerly held a monopoly in Finnish wholesale gas market. Gasum continues to operate as a wholesale market participant on the free market but its transmission operations have been handed over to Gasgrid Finland Oy.

The natural gas market is also supervised by the Energy Authority.

Distribution

Finland's largest distribution system operators (DSOs) are Caruna Oy, Elenia Oy and Helen Sähköverkot Oy, which each operate within a defined regional area and are privately owned.

DSO operations are primarily regulated by the Electricity Market Act (588/2013) and the Electricity Market Decree (65/2009). The purpose of the Electricity Market Act is to ensure the reliability of supply, competitive prices, and effective and equal service practices to end users in the electricity market. The Electricity Market Act is complemented by various other sector-specific regulations. DSO-specific regulations largely derive from the relevant EU regulations, mainly the Electricity Directive (2009/72/EC).

DSO operations are supervised by the Energy Authority and require a DSO Licence issued by the Energy Authority. The licence sets out the geographical area of responsibility of the DSO and is non-transferable. Changes at the ownership level have no effect on the licence, although require notification of the change of control to the Energy Authority. The Energy Authority also issues interpretations and guidance if requested by the market operators or where it deems it necessary.

Supply

According to the Electricity Market Act, a retailer with significant market power within the distribution system operator's responsibility must supply electricity at reasonable prices to consumers and other end users with a maximum of 3 x 63 amp, or up to 100,000 kWh, of electricity purchased per year in the electricity outlet (delivery obligation).

In line with the EU unbundling obligations, according to the Electricity Market Act, any electricity company has to unbundle its grid and distribution activities from other elements of its business, such as generation and supply.

The system operator must unbundle the following elements of the electricity grid business:

  • grid operation and distribution network activities; and
  • distribution network activities carried out in geographically separate areas of responsibility with separate electricity distribution tariffs.

Generation Facilities

The main players are Fortum plc, a pan-Nordic producer; UPM Energy, a listed forestry company and energy producer; TVO, a public company that produces electricity at two units in the nuclear power plant in western Finland (with a third unit expected to come onstream in March 2021); and PVO, a regional electricity producer. In addition, there are a number of municipality-owned utilities that generate electricity in specific geographic regions.

At a national level, the Finnish electricity transmission grid is monitored, operated and developed by Fingrid Oyj, which is majority State-owned (see 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry).

Distribution Facilities

Electricity distribution is organised on the basis of local distribution monopolies in respect of geographical areas defined by the Energy Authority. Finland's largest distribution companies are Caruna Oy, Elenia Oy, Helen Sähköverkot Oy and EPV Alueverkko Oy.

Electricity Sales

The largest electricity sales companies are Fortum Oyj, Helen Oy and Vattenfall Oy. The electricity supply market in Finland is somewhat fragmented due to the large number of municipality-owned utilities that supply electricity and heat to local end users as well as a number of more recent entrants to the market (such as Enerfit, the sales division of the Estonian utility Eesti Energia) offering consumers electricity from renewable sources. Whilst the report for 2019 is not yet available, according to the Energy Authority’s National Report 2018 to the European Commission, most of the legally unbundled electricity retailers still belong to the same group of companies as a DSO or are owned by one or several DSOs.

At the end of 2018, there were 11 fully independent electricity retailers serving about 35% of electricity retail customers in Finland.

Gas Sales

As part of the opening up of the Finnish natural gas market which has deregulated the import of natural gas, the previous monopoly operator Gasum, has now unbundled the transmission part of its business by the formation of a gas TSO Gasgrid Finland Oy, a fully state-owned company. Gasum is still one of the main players in the Finnish natural gas market but new major market participants such as industrial players Stora Enso Oyj and Metsä Board Oyj as well as municipality-owned utilities such as Helen Oy have emerged alongside it since the opening of the market.  From 1 January 2020, Finland, Estonia and Latvia are part of the same gas market area.

The Balticconnector pipeline between Finland and Estonia, which was completed one month early and commissioned on 11 December 2019, will diversify the sourcing of gas supplies and further improve domestic Finnish energy security which has previously relied almost entirely on natural gas imports from Russia (although small amounts of biogas produced in Finland are also transmitted via the gas network). Finland is the largest gas market in the market area, consuming 23 TWh, followed by Latvia at 13 TWh and Estonia at 5 TWh.

The Act on Monitoring of Foreigners' Corporate Acquisitions (172/2012), the main legislative instrument governing the monitoring of foreign corporate investments in Finland has been in force since 2012. The Act provides for the monitoring of transactions and aims to restrict the transfer of influence to foreign owners in respect of key national interests. The Act is currently in the process of being amended to meet the requirements of EU regulation (2019/452) which provides a framework for the screening of foreign direct investment by non-EU investors.

According to the Ministry of Economic Affairs and Employment, there are, however, no plans to amend the scope of the Act, but rather clarify its application in practice and implement the co-operation mechanism between member states required by the EU regulation.

According to the Act, foreigners are essentially entities domiciled outside EU or the European Free Trade Association area (EFTA; ie, Iceland, Norway, Switzerland and Liechtenstein). Indirect acquisitions via EU or EFTA-domiciled acquisition vehicles are also potentially covered by the Act given that where a foreigner owns at least 10% of the voting rights in such EU or EFTA-domiciled acquisition vehicle or exercises control over such EU or EFTA-domiciled entity, the act will apply.

Ministry Approvals

Contemplated acquisitions that fall within the scope of the Act require the approval of the Ministry of Economic Affairs and Employment. The act applies to acquisitions of the following types of targets: defence industry companies; and other monitored entities, meaning companies and businesses that may be considered critical in terms of providing and maintaining functions fundamental to society due to their field of business, business operations or commitments.

The Act may therefore apply to a transaction involving grid and distribution assets. It is worth noting, however, that the guiding principle to the application of the act is a positive one to foreign ownership. On that basis, no approval application has ever been denied and all requests for approval of foreign ownership have been granted since the initial implementation of the predecessor of the Act in 1992.

Real Estate Investments

In 2019, a legislation package concerning foreign real estate investments was introduced. As of the beginning of 2020 direct real estate acquisitions by foreign investors are also monitored and require a permit. The Ministry of Defence may deny the permit if the target property is located in an area considered strategic to national defence, territorial integrity, border control, border security or security of supply.

The state may also use its redemption right or right of first refusal if the property is located in an area considered strategic to national defence, border control, security of supply, etc. It should be noted, however, that the permit requirement does not apply to indirect acquisitions of real estate, which are effected, eg, by acquisition of shares in an entity owning a real estate.

See 1.3 Foreign Investment Review Process. In respect of regulated distribution networks, a notification must be made of any change of ownership in a company holding a licence from the Energy Authority, but there is no effect on the licence holder itself.

The electricity market is regulated by the Electricity Market Act and government decrees based on the Electricity Market Act. The Energy Authority monitors compliance with the electricity market legislation and promotes the operation of competitive electricity and natural gas markets. In addition, the national transmission system operator (TSO), Fingrid, undertakes some supervisory function in terms of balancing responsibility.

Electricity network operations are a natural monopoly where the construction of competing electricity networks within a local geographic area is not commercially feasible. The Energy Authority handles applications for DSO licences, monitors compliance with DSO licences and is the supervising authority in relation to the administration of the DSO regulatory framework, including calculation of a reasonable rate of return for each DSO.

Compliance

In addition to granting network licences, the task of the Energy Authority is to monitor DSOs’ compliance with the obligations imposed on them by legislation and the Energy Authority’s own guidelines, such as the fulfilment of the obligation to connect qualifying generation units, reasonable pricing, ensuring that the DSO’s connection conditions and technical requirements are impartial and non-discriminatory, and that the conditions concerning the reliability and efficiency of the electricity system are being satisfied.

Under the Electricity Markets Act, the Energy Authority is responsible for monitoring DSO’s compliance with its obligation to maintain, operate and develop the DSO’s electricity system and the connections to other systems in accordance with the DSO’s customers' reasonable needs, and to secure the supply of sufficiently high-standard electricity to its customers (obligation to develop the electricity system). In addition, the Energy Authority ensures that DSOs are complying with the obligation to connect qualifying generation installations and that the connection conditions and technical requirements shall be impartial and non-discriminatory, and that they take note of the conditions concerning the reliability and efficiency of the electricity network (obligation to connect).

Natural Gas Market Act Reform

The Finnish Natural Gas Market Act was reformed in 2017 which, among other things, means that the Finnish gas market has been deregulated and is now open for competition from 1 January 2020. As a result, the operations of Gasum Oy, which formerly held a monopoly in the Finnish wholesale gas market, have been unbundled. Transmission operations have been handed over to Gasgrid Finland Oy, a new TSO for the natural gas market. Gasgrid Finland is responsible for the transmission system and for offering transmission services to market participants.

In addition to the opening of the gas market, the Balticconnector gas pipeline between Finland and Estonia was commissioned on 11 December 2019, earlier than originally estimated. 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.

Power Exchange Operator Market Opening

The market for power exchange platforms is going to be opened for competition which will end the long-standing regional monopoly of Nord Pool as the sole power exchange operator. The competition between platforms for spot electricity trading was scheduled to begin on 10 March 2020 but, according to the 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.

As a result of this change, the Nordics will become the second area in Europe, after Central Europe, to allow competition between power exchange operators.

Coal Ban

The Act on Prohibiting the use of Coal in Energy Production entered into force on 1 April 2019. According to Section 5 of the act, the use of coal as a source for electricity and heat production will be prohibited from 1 May 2029. The act will naturally have a very significant impact on generation facilities as well as promoting the growth of electricity renewable energy sources.

PPAs

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 on market terms.

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 there have been a number of completed PPA processes:  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; and 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.

Government Programme

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. A support scheme for projects accelerating the replacement of coal in energy production has already been announced (see 3.2 Principal Laws and/or Policies Relating to the Early Retirement of Carbon-Based Generation). In addition, the government is planning to remove some of the administrative, zoning-related and other barriers to offshore wind power construction and to undertake general reform of energy taxation at a rapid pace.

Energy Tax Reform and Removal of Wind Power Barriers

The Ministry of Finance has established a working group to prepare amendments to energy tax legislation based on the environmental objectives of the Government Programme. According to the Ministry of Finance, the reform shall include, among other things, eliminations of some energy tax refund mechanisms, electricity tax rate reductions for industrial companies and increases in heating fuel tax rates. The government proposals regarding energy tax reform are scheduled to be published in the autumn 2020.

With a very shallow nearshore sea depth, the Baltic Sea and the Finnish coast would be an attractive location for the development and operation of offshore wind farms. However, one of the biggest barriers to offshore wind development has been the relatively high tax burden which would face offshore wind developers given that the size of offshore wind farms will be significantly larger than their onshore counterparts. As a result of the need for more sturdy foundations, the resulting real estate tax for an offshore wind park in Finland would be approximately three times that of a similar-sized onshore wind park.

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 real estate tax relief is expected to be provided for offshore wind farms, with the aim of improving their economic viability to encourage further development of the offshore sector.

On a commercial and investment level, the Finnish energy industry is proving to be a potentially interesting target sector for private investors due to the following:

  • Finland being part of a larger market with the highest energy consumption in the world, due to the long and cold winters;
  • the relatively fragmented nature of the electricity and district heating markets, due to the large number of small municipality-owned utilities; the market is ripe for consolidation, as witnessed by some recent transactions in the sector;
  • a healthy ex ante regulatory environment in the DSO market that allows for "reasonable rates of return" against clearly defined metrics allowing investors to financially model their potential investment against some clearly defined assumptions with a fixed regulatory model until 2023; and
  • a maturing renewables market in terms of wind that must continue to be developed in order to ensure the Finnish State achieves its emissions reduction targets and is in line with one of the most ambitious programmes for the transition to a clean energy market in the world.

Industrial demand for energy has significantly decreased because of the pandemic. As a result of the warm winter weather in southern Finland, which is the most inhabited part of Finland, reducing domestic demand, good water situation allowing for high level of hydropower production and strong winds leading to high production it has resulted in low electricity prices. In early February, according to data from power exchange Nord Pool, for the first time ever the electricity prices in Finland fell into negative territory during the early morning period when demand was at its lowest.

Prices bottomed out at between 2am and 3am when they fell to minus 20 cents per megawatt hour. However, the demand for energy by households will not decrease over the longer term, which is why the energy sector has been viewed as less vulnerable to the effects of the COVID-19 pandemic and less volatile than many other sectors.

In terms of future impacts, the projects and investments on the energy sector are generally planned over a longer-term investment period and are unlikely to be affected by few months of slow economy. However, since the duration of the pandemic is still unknown, so are the long-term effects on the energy sector. The Finnish government has announced that the economic recovery programme following the COVID-19 pandemic aims to promote the transition to green economy and thus it is expected it will also include means to support the transition towards fossil-free energy production.

No doubt, 2020 will be a slow year for the energy sector but it is still likely to be among industries least affected by the pandemic.

The key acts on a European and domestic level that govern the Finnish wholesale electricity market are:       

Nord Pool runs the leading power market in Europe, the Nordic region included. The day-ahead and intraday markets at Nord Pool are auction-based exchanges for the trading of prompt physically delivered electricity. Finland is a defined geographic region subject to its own area price for the purposes of Nord Pool trading.

The market for power trading operators is going to be opened for competition which will end the long-standing regional monopoly of Nord Pool as the sole power exchange operator (see 1.6 Recent Material Changes in Law or Regulation). For the time being, Nord Pool still holds a monopoly over the electricity exchange market in Finland.

Nord Pool

Imports and exports of electricity are permitted. Energy is traded mainly on Nord Pool, which provides pricing for electricity sales in the Finnish price area, although delivery may be from outside the Finnish price area.

Finland’s main grid is part of the synchronous inter-Nordic system, which includes the transmission grids of Sweden, Norway and eastern Denmark, in addition to Finland. The Nordic system is interconnected with other countries through several direct current (DC) transmission connections. There are a number of DC connections to western Denmark (Jutland) from Sweden, Norway and Eastern Denmark. DC connections run from Sweden to Germany, Poland and Lithuania, and there is a DC connection from Norway to the Netherlands, and from Finland to Estonia and Russia.

Finland’s main grid is connected to the Swedish grid via two 400 kV alternating current (AC) connections in northern Finland. Finland also has a 220 kV AC connection to Norway. In addition to the AC connections, DC links have also been built: Fenno-Skan 1 from Rauma (400 MW) to Dannebo, Sweden, and Fenno-Skan 2 (800 MW) from Rauma to Finnböle, Sweden. There is a 100 MW DC connection from Naantali to the Åland Islands that is owned and operated by Kraftnät Åland.

Finland and Estonia

The Russian and Estonian grids do not have AC connections with the Nordic grid. Finland and Estonia are connected by the DC links Estlink 1 (350 MW) and Estlink 2 (650 MW). There are three 400kV transmission links from Finland to Vyborg, Russia. Russia and Finland are also connected by 110 kV connections from Ivalo and Imatra in Finland. These enable the connection of hydropower plants in Russia to the Finnish grid.

Transmission Between Finland and Sweden

It should be noted that electricity transmission between Finland and Sweden is among the most congested in Europe. The import of electricity from Sweden has steadily increased in recent years, and in the past few years, sufficient cross-border transmission capacity has been available to the electricity market for only around half of the time. In order to resolve this issue Fingrid and Svenska Kraftnät, the Swedish transmission system operator, are preparing a new transmission line from Pyhäselkä in Muhos via Keminmaa to Messaure in Sweden.

The 400 kV cross-border AC connection is scheduled to be completed in 2025. The project has been included on the European Commission’s list of Projects of Common Interest (PCI). As part of the PCI procedure the Finnish and Swedish TSOs submitted investment requests to their respective energy authorities.

On 12 March 2020 the Finnish Energy Authority and the Swedish Energy Market Inspectorate issued decisions on the project’s cost allocation. Since Finland will benefit the most from the project, Fingrid shall be fully responsible for the investments that take place in Finland and for 80% of the investments on the Swedish side of the border.

The supply mix for electricity production in Finland in 2019 was:

  • nuclear power 35.0%;
  • hydro 19.0%;
  • biomass 18.0%;
  • wind 9.0%;
  • coal 7.0%;
  • natural gas 6.0%;
  • peat 4.0%;
  • waste 1.0%;
  • oil 0.3%; and
  • solar 0.2%.

A total of 47% was renewable energy, a total of 82% was carbon neutral and a total of 51% was domestic.

This is not applicable in this jurisdiction.

The Energy Authority monitors compliance with applicable electricity market legislation and promotes the operation of competitive electricity and natural gas markets. The Energy Authority is responsible for supervising the wholesale energy market in accordance with the applicable investigative and enforcement powers of REMIT regulation (EU 1227/2011). According to the REMIT regulation, the Energy Authority may conduct an investigation (or a dawn raid) if it detects abuses in the wholesale energy market.

The energy market participants’ compliance with the Competition Act (948/2011) and the competition articles of the Treaty on the Functioning of the European Union is monitored by the FCCA.

The Consumer Ombudsman, under the jurisdiction of the FCCA, is also involved in ensuring that the prices charged by DSOs from end users for transmission services are reasonable and may negotiate with DSOs to persuade them to reduce planned price increases in the interests of consumers. The FCCA may, if necessary, conduct a dawn raid to investigate potentially anti-competitive behaviour, including potential cartel investigation.

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.

The Climate Change Act (609/2015) is the main legislative instrument governing the prevention of climate change. The process of amending the Climate Change Act is currently underway.

The Climate Change Act is a framework legislation and is directly applicable only to authorities. For specific provisions relating to energy sector, see 3.2 Principal Laws and/or Policies Relating to the Early Retirement of Carbon-Based Generation and 3.3 Principal Law and/or Policies to Encourage the Development of Alternative Energy Sources.

The Act on Prohibiting the Use of Coal in Energy Production (419/2019) entered into force on 1 April 2019. The act prohibits the use of coal in energy production starting in May 2029. Furthermore, the Finnish government has prepared an incentives package for energy producers that commit to phasing out coal use by 2025. According to the Government Decree on Investment Aid for Projects Accelerating the Replacement of Coal in Energy Production for the Years 2020-2025 (129/2020), such producers may receive investment support for projects which contribute to energy savings or the production or use of renewable energy.

The budget for the year 2020 is EUR30 million.

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 wind power 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.

According to the Government Decree on the General Terms and Conditions of Granting of Energy Aid for the Years 2018–2022 (1098/2017), so-called "energy aid" may be granted to projects which contribute to the production or use of renewable energy, energy savings or optimisation or otherwise contribute to the transition towards a low-carbon energy system. Typical projects eligible to receive energy aid include, among others, solar power, small-scale wind power, biogas and small-scale hydro power projects.

Energy aid is also granted for large-scale demonstration projects which demonstrate new technology. For 2020, categories for demonstration support are:

  • biorefinery projects;
  • projects related to substituting coal and other fossil fuels in urban areas; and
  • other large-scale demonstration projects for new energy technology.

The budget for such aid for the year 2020 is EUR40 million.

Power plants of at least one megavolt ampere (1 MVA) must be registered with the Energy Authority, which maintains a register of such power plants. New planned infrastructure to be commissioned, changes in production capacity and decommissioning of power plants must also be notified.

The Energy Authority relies on the power plant register, for example, for evaluating peak load capacity during winter periods in Finland. The power plant register is based on the Electricity Market Act and the related Electricity Market Decree (65/2009). The Energy Authority does not verify the validity of the information given by producers.

In addition, normal land use, planning and environmental legislation (such as that concerning the need for an environmental impact assessment and building permits) must also be complied with in the development and construction of power plants of all types.

Nuclear and Wind Power

The principal law that governs the construction and operation of nuclear power plants is the Nuclear Energy Act (990/1987).

The construction of wind power plants is subject primarily to the same provisions as for other construction. The implementation of large wind turbines should in principle be based on the Finnish Land Use and building Act (132/1999). This means that areas suitable for wind power construction are defined in the land use plan which allows granting of a building permit or and the potential need for environmental impact assessments should be considered early in the planning process.

According to the Land Use and Building Act (132/1999), a building permit is required for the construction of a generation facility. In order to obtain the permit, an environmental impact assessment (EIA) process must  be separately conducted in relation to the project, if it meets the criteria of the Act on the Environmental Impact Assessment Procedure (252/2017). All projects consisting of ten or more turbines or with a nominal capacity exceeding 45 MWs require an EIA, but also smaller projects may require an EIA if the environmental impacts are deemed likely significant.

In addition, most projects require a valid land use plan which allows for granting of a building permit. In Finland, municipalities have a monopoly in land use planning, and the public’s right to participate is a key element in the land use plan process. Meetings with the officials and locals are arranged during the process, and local residents, organisations and authorities also have the right to submit objections regarding the plans.

Furthermore, the EIA is an integral part of the land use planning process. The intention of the EIA process is to assess different alternatives and their impacts on the environment before carrying out the project.

See 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

In order to obtain a building permit for a generation facility, one should have ownership or right of possession based on a land lease agreement. Compensation is usually agreed on by bilateral agreements. According to the Land Use and Building Act (132/1999), the owner or the possessor of the property is obliged to allow the construction of a cable in an area owned or controlled by it unless the investment can otherwise be arranged in a satisfactory manner at a reasonable cost.

According to the Act on the Expropriation of Immovable Property and Special Rights (603/1977), if one does not have ownership or right of possession, an expropriation permit can be obtained, if the general need so requires. The application authority for the permit is the National Land Survey, if the matter is not opposed or it is related to a less important expropriation in terms of the public or private interest.

When the expropriation permit has been granted, the expropriation will be executed by the National Land Survey in a specific expropriation procedure where the exact areas and compensations payable will be determined. The compensation to be paid is calculated by using the market price statistics of the National Land Survey. An expropriation permit decision issued by the National Land Survey can be appealed in the Administrative Court.

The design of a nuclear facility must provide for the facility’s decommissioning (Nuclear Energy Act 990/1987 – Section 7 g – Decommissioning), with an obligation to keep the related decommissioning plan up to date. When the operation of a nuclear facility has been terminated, the facility shall be decommissioned in accordance with a plan approved by STUK. Dismantling the facility and other measures taken for the decommissioning of the facility may not be postponed without due cause.

Regarding wind power, decommissioning of the plant is generally something that is agreed between the owner of the property on which the wind farm is located and the project owner. In some lease agreements, decommissioning bonds are required although bonds are still relatively rare and rarely required as part of the senior debt package.

Real Estate

The general application of real estate law obliges a tenant, upon the termination of a lease agreement, to restore the land to its original condition if nothing has been specifically agreed in the lease agreement. In addition, if a user of a land area has caused any contamination to such land area, the user will remain liable for remediation and clean-up costs, meaning that an energy producer causing contamination will remain liable even after the decommissioning of the relevant power plant or termination of a lease agreement. Further, for activities requiring an environmental permit the obligation of decommissioning and rehabilitation of the operation site stems from the permit regulations.

The operator must comply with the permit regulations, which can concern, among other things, rehabilitation of the land areas, closure of possible waste areas as well as long-term monitoring of the impacts on environment.

There is no specific legislation concerning funding of decommissioning, although in most projects undertaken based on land leased on a long-term basis, the provisions of the Real Estate Code (540/1995) require the tenant to restore the land to its original condition at the expiry of the lease term.

Grid operations are a natural monopoly where the construction of competing electrical power networks is not feasible with regard to the national economy. In electricity market legislation, grid operations have been regulated as operations subject to a licence from the Energy Authority. In addition to granting network licences, the task of the Energy Authority is to monitor compliance by system operators with their regulatory obligations.

The Finnish electricity grid is monitored and developed by Fingrid Oyj which also holds most of the international connections to the Finnish grid. Fingrid is responsible for the functioning of the Finnish electricity transmission grid at the national level. The transmission grid administered by Fingrid encompasses approximately 14,600 km of transmission lines and nearly 120 substations.

On a regional level, local DSOs also need to obtain and comply with a DSO licence from the Energy Authority. A permit from the Energy Authority is required to build a high-voltage power grid. A permit is required for wires, boundary lines and connecting lines with a nominal voltage of at least 110 kV per grid or high-voltage distribution grid. However, no permit or licence is required for the construction of an internal electricity line for the property or its corresponding real estate unit. For lines with a voltage of less than 110 kV, no permit is required.

A grid licence is granted if the applicant fulfils the technical, financial and organisational requirements concerning the electricity grid in accordance with the licence application. The grid licence is granted permanently until either revoked or given up by the grid operator, or, for a specific reason, for a limited period.

The Energy Authority must inform the European Commission of the licence granted to the TSO, Fingrid, but not regional DSO licences.

A permit from the Energy Authority is required to build a high-voltage power grid. A permit is required for wires, boundary lines and connecting lines with a nominal voltage of at least 110 kV per grid or high-voltage distribution grid. However, no permit is required for the construction of an internal electricity grid even if it exceeds 110 kV

The relevant permit must be obtained before the construction of a power grid. The project licence is valid for five years from date of the decision, and construction of the relevant infrastructure must be completed within this period.

The Ministry of Economic Affairs and Employment is the relevant permit authority for cross-border high-voltage power lines with nominal voltage of 110 kV or more.

Compensation is usually agreed in easement or right of use agreements between the landowner and constructor of the generation facility or grid operator. In cases where agreement is not possible, an expropriation procedure can be used to secure the right to place cables and other infrastructure on or under the surface of relevant land areas. The necessary rights of use are almost always granted through an expropriation procedure.

The compensation is, on a general level, determined following the principle of full compensation meaning that the compensation is calculated based on the actual land prices of the areas. However, it is possible, and also very common, to enter into a voluntary agreement regarding the compensation payment between the parties.

Fingrid has a national monopoly in respect of the main national grid transmission services. On a regional level, local DSOs have the monopoly right to construct and operate the grid for the geographic area defined in the DSO license granted to such DSO by the Energy Authority.

The principal law regarding the provision of transmission service and the regulation of transmission charges and terms of service is the Electricity Market Act. The application of the Act and compliance by DSOs in providing transmission services is monitored by the Energy Authority.

According to the Electricity Market Act, Fingrid and DSOs must offer the services of their electricity grid to parties on the electricity market in a fair and non-discriminatory manner. There must be no unfair or restrictive terms of competition in the provision of services. The Energy Authority also monitors the prices of electricity transmission during four-year periods, although retrospectively at the end of such four-year regulatory period and not during it.

After each monitoring period, the Energy Authority issues decisions regarding all grid companies obliging the companies to return any potential overcharge to clients through amended pricing applicable during the next regulatory period. According to the Act on the Supervision of the Electricity and Natural Gas Market (590/2013), the Energy Authority’s decisions regarding electricity pricing may be appealed to the Market Court.

A transmission entity must provide transmission services to all parties that request transmission service, provided that they meet the technical requirements for such service and pay the relevant fees on the principle of open and non-discriminatory access to the grid.

DSO operations are primarily regulated by the Electricity Market Act and the Electricity Market Decree. The Electricity Market Act is complemented by various other sector-specific regulations. DSO-specific regulations largely derive from the relevant EU regulations, mainly the Electricity Directive. DSO operations are supervised by the Energy Authority.

DSO operations require a DSO licence issued by the Energy Authority. The licence sets out the geographical area of responsibility of the DSO and is non-transferable, although changes at the ownership level of the DSO will have no effect on the licence. The Energy Authority also issues interpretations and guidance if requested by the market operators or if it deems it necessary.

The Electricity Market Act was designed to improve the security of electricity supply and overall quality of DSO customer service, including quality of service during major weather-related and other disturbances, and to encourage a high level of security of supply and technical quality of the network. As a result, DSOs are increasingly constructing lines and cables underground rather than overhead in order to minimise disruption caused by high winds, snow and ice. Financial incentives for innovation, investment into and proper maintenance of the grid as well as penalties for long periods of outage are administered by the Energy Authority.

In addition, DSOs are subject to the unbundling requirements imposed at an EU-wide level and implemented by the Energy Authority.

The DSO has the exclusive right to build a distribution network within its area of responsibility as set out in the DSO licence issued by the Energy Authority.

In recent years, there has been a trend towards more frequent and informal discussions between the DSOs and the Energy Authority, for example, regarding the preparation of new reasonable return methodology for future regulatory periods, in order to reduce the number of appeals by DSOs and build better relationships with them.

Compensation is usually agreed in easement or rights of use agreements between the landowner and constructor of the generation facility. In cases where agreement is not possible, it is possible to use an expropriation procedure to secure the right to place cables and other infrastructure on or under the surface of relevant land areas. The expropriation procedure almost always grants the necessary use rights against a fixed compensation calculated according to a formula set out in the Act on the Expropriation of Immovable Property and Special Rights (603/1977).

DSOs are assigned a geographic area of responsibility, where the DSO has the exclusive right to build a distribution network. According to the general requirements set out in the Electricity Market Act, the DSO must comply with its statutory obligations on a non-discriminatory basis and treat its customers, electricity suppliers and other electricity market participants in an equal and non-discriminatory manner. Consequently, transfer prices are fixed within the DSO’s area of responsibility. The DSO is also required to apply similar terms and conditions, and to offer its network services to all its customers on an equal basis; to arrange its customer services in a manner that secures non-discriminatory and equal treatment of its customers, electricity suppliers and other market participants; and to ensure that its third-party service providers also commit to non-discriminatory practices as part of the provision of services relating to the DSO’s operations.

DSO Licences are granted by the Energy Authority upon application by a DSO prior to the construction of its distribution network.

The principal law that governs the provision of electric distribution service and regulation of electric distribution system charges and terms of service is the Electricity Market Act.

In accordance with the Electricity Market Act, the Energy Authority regulates reasonableness of pricing (turnover) in four-year regulatory periods. The methodology for the four-year regulatory periods 2016-2019 and 2020-2023 have been fixed. The current model is a revenue cap, ex ante model in which a reasonable rate of return is calculated at the expiry of the four-year regulatory period by comparing the reasonable rate of return (using weighted average cost of capital and regulated asset base calculations) to the actual adjusted net profit for the relevant four-year period.

If the calculation of reasonableness of pricing concludes any overcharging of customers, this is adjusted through the pricing for the following four-year regulatory period. The reasonableness assessment for the regulatory period 2016-19 will be conducted in 2020.

DSOs set their own tariffs; however, they must be cost-reflective. Tariffs must be set in an impartial and non-discriminatory manner and presented to customers in a clear and understandable way. The regulatory calculations also take into account five incentives when calculating reasonable rate of return:       

  • efficiency incentive;
  • innovation incentive;
  • investment incentive;
  • quality incentive; and
  • security of supply incentive.

The incentives are designed to encourage investment in network infrastructure and to encourage quality and security of supply.

According to the Electricity Market Act, a DSO must offer services to electricity market participants in a fair and non-discriminatory manner. There must be no unfair or restrictive terms of competition in the provisions of services. Therefore, many DSOs use the market standard terms for connection and distribution agreements drafted by Finnish Energy, which is a private sector organisation that represents approximately 260 companies that produce, acquire, transmit and sell electricity, district heat and district cooling as well as offer related services.

Finnish Energy is responsible for the management of collective labour agreements for the personnel of its member companies, and it provides advice and training for its members, conducts studies and disseminates information.

It should also be noted that electricity sales to customers must comply with other general legislation that is applicable to sales of goods and services to consumers, such as the Consumer Protection Act (38/1978). The FCCA supervises the application of the Act and the Consumer Ombudsman has been involved in negotiations with DSOs, most publicly when Caruna proposed a significant price increase for transmission charges of up to 30% in March 2016, which resulted in an agreed settlement between the FCCA and Caruna in which Caruna agreed not to increase prices as drastically and quickly, but to even them out over a longer period.

HPP Attorneys Ltd

Bulevardi 1 A
FI-00100 Helsinki
Finland

+358 45 657 5758

andrew.cotton@hpp.fi www.hpp.fi
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Law and Practice

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HPP Attorneys Ltd is a leading independent Finnish corporate law firm advising both domestic and international clients on their Finnish corporate legal issues. HPP operates across all forms of generation from nuclear to biomass to solar to wind. The energy and natural resources team is one of the largest in private practice in Finland and is well placed to identify the key issues, from a developer, operator, sponsor or a lender’s perspective, to evaluate and report on the level of risk and to propose risk mitigation solutions where possible. HPP’s energy team is complemented by lawyers from HPP’s other legal specialist teams, including M&A, banking and finance, competition, land use and regulatory, real estate and dispute resolution to handle a full caseload of energy-related assignments.

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