Finnish energy companies face windfall tax ambush

Within weeks of Finnish industry seeking assurances that no new taxes would be introduced, the government announced a windfall tax on the profits of large hydro-electric and nuclear power generators. Gerald O'Dwyer reports.

Finland's leading business and employer groups had a clear message for their government when the two sides met in mid-March to talk about how to speed up economic recovery. Industry said that if the government wanted employers to maintain employment at current levels, despite the sharp monthly decline in industrial production and exports, it needed firm assurances that no new taxes would be introduced that could undermine profitability and balance sheet performance.

A lot can happen in two weeks. On 31 March, Mauri Pekkarinen, Finland's economic affairs minister, incensed the nation's largest industries and energy producers by announcing the introduction of a windfall tax on the profits of "large-sized" hydro-electric and nuclear generators.

The windfall tax will be charged on plants built before the adoption of the Kyoto Protocol in 1997, and where revenue has increased due to the European Union's Emissions Trading Scheme (ETS).

Pekkarinen said the tax, which will come into force in 2010 or 2011, will claw back 10 to 50 per cent of "unearned extra income". The estimate of what it will raise is equally wide, from €33 million to €330 million. The minister said the tax "would not raise consumer electricity prices", but this is roundly disputed by utility chiefs and industry.

Some types of generation will not be subject to the tax, such as wind, small hydro and combined heat and power plants.

The Federation of Finnish Industries (FFI) was scathing in its verdict. "The windfall tax will hurt energy companies. It will hurt industrial companies' profits because energy companies will pass on the costs to industry. Electricity prices will increase and industry will face the grim prospect of losing more competitiveness. The government must not have listened to industry," said the FFI in a statement.

The Finnish Energy Industries Association (EIA) was also critical, predicting that the move would trigger a multi-layered tax system for power producers.

"Nuclear and hydro-electric power ends up paying significantly higher property taxes than other forms of production. The property tax was increased in 2006, and the reason given for that was the competitive edge that hydro-electric and nuclear energy have as a result of climate policy. So here we go again," said EIA's director general Juha Naukkarinen.

The power sector has been under a tax assault since 2007, Naukkarinen said. "The industry is faced with feed-in tariffs, a windfall tax, and before that we have had more forms of energy taxation. All these decisions add to companies' costs. In this economic climate, it is not really possible for companies operating internationally to pass these costs on to their prices."

The government is not expected to back down despite strong industry criticism. Pekkarinen promised that "a large amount" of the tax raised would be reinvested in subsidy and support programmes to promote capital investments in the building and operation of small, medium and large-scale onshore and offshore windfarms.

"The time is right for a feed-in wind power tariff. We need a system to guarantee price from these units. Our ambition is to boost annual wind power capacity to 6TWh from the current 0.3TWh by 2020. This is part of the government's renewable energy strategy," he said.

Large segments of the industrial and energy landscape in Finland are unimpressed with the government's renewable energy strategy and question the wisdom of investing in high-cost production solutions. The contribution of wind to annual power supply is the lowest of any Nordic country. Wind production contributed just 0.3 per cent of total energy consumption in 2008.

A draft of the windfall tax proposal is expected during the second half of 2009. Preliminary figures from the finance ministry suggest that a tax rate of between €1/MWh and €10/MWh will be imposed.

All four of Finland's nuclear reactors were built in the 1970s and the early 1980s. Together they account for 28.5 per cent of Finland's total energy production.

An unhappy Fortum, operator of the two Loviisa 448MW reactors, described the tax as running contrary to the government's own climate and energy policies. The windfall tax will increase production costs and consequently electricity prices, said Timo Karttinen, senior vice president of corporate development at Fortum.

"Furthermore, the government's plan would be against the EU Energy Directive, under which energy is to be taxed based on consumption, not production," said Karttinen.

The fundamental idea behind the ETS is to direct investment towards emissions-free power production. It is a steering mechanism to penalise generators who emit and reward those who do not, said the Fortum chief. "A special hydro and nuclear tax is against that idea and will punish carbon-free production. At the same time, it would increase uncertainty in the markets and endanger new investments."

Fortum's operations are hurting from the tax even before it is implemented. The financial markets responded to the announcement of the windfall tax by selling Fortum shares and wiping €2 billion off its capitalisation. The government owns 50.8 per cent of Fortum, and the exodus reduced the value its holding by €1 billion, three times as much as it hopes to raise from the tax.

The windfall tax means that Finland becomes the latest Nordic country to tax nuclear and hydro power. In Sweden, hydro is subject to a property tax and nuclear power to a capacity-based tax. Those taxes were raised at the beginning of 2008 due to higher "windfall profits".

In Norway, the government began 2009 by imposing a ground rent tax on hydro-electric power plants to reduce their profits by 30 per cent. Hydro provides 99 per cent of Norway's power.

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