Finland to Tax Nuclear, Hydropower to Cut “Windfall” Utility Profits

Finland’s government has proposed to enact a tax on nuclear and hydro power plants that were built before adoption of the 1997 Kyoto Protocol to cut “windfall profits” that have resulted from the EU’s carbon emission trading program.

The nation’s ministries of finance and employment are preparing the tax proposal, following a cabinet decision last week. It expects to collect €33 million to €35 million ($44 million to $46 million) per year if the proposed tax rate of between €1/MWh to €10/MWh ($1.32/MWh to $13/MWh) is imposed. The new tax is expected to be established no later than the beginning of 2011.

“In spite of tax accrual, taxation of windfall profits will not have a direct influence on the consumer prices of electricity,” the government said.

All four of Finland’s operating reactors, two owned by Fortum and two by Teollisuuden Voima Oyj, were built before 1997. Fortum, which quickly issued a statement reacting to the government’s proposal last week, said that the tax would be against climate and energy policies and would increase production costs and thus electricity prices. It also pointed out that the tax would benefit energy imports and distort competition, because it would be based on estimation and levied on specific production sources.

“Furthermore, the Government’s plan would be against the EU’s energy directive according to which energy shall be taxed based on consumption, not production,” the utility said.

“The very idea of the emissions trading scheme was to direct investments to emissions-free power production. The emission cost is a steering mechanism; producers who emit will pay and producers who don’t will benefit,” Fortum’s SVP of corporate development said in a statement. “A special hydro and nuclear tax would work against that idea and would, in fact, punish CO2-free production. At the same time, it would increase uncertainty in the markets and endanger new investments.”

The EU-wide Emission Trading Scheme, introduced in 2005, has had a significant impact on the electricity market. According to the Finnish government, wholesale electricity prices rose markedly last year, though generation costs did not show any major changes in the Nordic countries.

“Windfall profits” resulting from emission trading are based on the impact of the emission trading system on electricity wholesale prices, it explained. In the Nordic electricity market, the wholesale price—calculated and changing by the hour—is based on electricity production costs of the most expensive power station. This is referred to as the “marginal production form.”

“In Finland, coal condensate power is, most of the time, a marginal production form, so the market price is based on its varying production costs,” the government said. “In a system based on marginal cost pricing, production technologies with lower prices, hydro, and nuclear power in the Nordic market in particular, produce significant economic advantages. Most of the Nordic power generation is emission-free hydro and nuclear power, and the prices of these production types will not change as a result of emission trading.”

Finland is not the first Nordic country to tax nuclear and hydropower. In Sweden, hydropower is subject to the real estate tax and nuclear power to a capacity-based tax. These taxes were raised at the beginning of 2008 due to the increased “windfall profits” these generation sources had been making.

Even Norway—which is not an EU member and has no nuclear power—this year began imposing the “grunnrenteskatt” tax on hydropower plants in order to cut their profits by 30%. Almost 99% of the nation’s power is hydro-based.

Sources: Finland government, Fortum, Norway government

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