Fortum bemoans 'inferior position' for hydropower, nuclear under EU taxonomy

The planned exclusion of hydroelectric and nuclear power from the EU's flagship framework for sustainable finance would make it much harder for the bloc to achieve its climate targets, according to one of Europe's largest utilities.

Markus Rauramo, president and CEO of Finland's state-controlled Fortum Oyj, said the European Commission should include both energy sources in its sustainable finance taxonomy, a rulebook for defining climate-friendly investments that is supposed to guide financial institutions and help steer hundreds of billions in private money into sustainable projects over the coming decade.

The EU executive is currently drafting criteria for what should be included in the taxonomy, a process that has already sparked a lobbying blitz from the natural gas industry. News outlet Euractiv reported on March 11 that the commission is now reconsidering the role of gas and could potentially allow the green label for efficient gas power plants that only fire up intermittently to stabilize the grid.

But Rauramo said excluding emissions-free sources like nuclear and hydropower, as well as biomass and energy from waste, makes no sense in light of the EU's net-zero ambitions. Several utilities have pointed to the Nordic countries' vast hydropower reserves, in particular, as an important power source to balance out varying wind and solar production.

The draft rules for the taxonomy exclude the technology because of its potential impact on natural habitats, according to Rauramo. One of the taxonomy's requirements is that any sustainable activity does no "significant harm" to environmental objectives, including the protection of biodiversity and ecosystems.

"We believe all CO2-free technologies should be accepted as contributing to climate change mitigation and included in the taxonomy," the CEO said March 12 on Fortum's fourth-quarter earnings call. "As it looks like right now, the significant amounts of hydro in the Nordics could be put in an inferior position."

Rauramo said Fortum is still engaging with the commission on the issue and emphasized that the utility is "ready to spend money" to mitigate its impact on the environment.

Aside from EU institutions, financial market participants and large companies will have to apply the criteria of the taxonomy in their disclosures from December this year.

Fortum has said it is unlikely to make significant investments in new hydropower plants, but warns that it could face difficulty getting financing for the large-scale refurbishments and upgrades it undertakes on its dams every year once financial institutions align their credit decisions with the taxonomy.

The International Hydropower Association last year also criticized the draft rules, pointing particularly to the exclusion of open-loop pumped storage facilities, which would "limit the continent's clean storage options."

Fortum owns more than 4.5 GW of hydropower, as well as around 2.8 GW of nuclear capacity. Together, the two sources make up approximately half of its generating capacity. Fully state-owned utilities Vattenfall AB and Statkraft AS also own significant hydropower assets across the Nordics and elsewhere.

Rauramo said the EU should also recognize the transitional role of natural gas. Fortum burns the fuel in its combined heat-and-power plants and recently acquired German power generator Uniper SE, which is particularly reliant on gas and significantly boosted Fortum's financial results in 2020.

According to Reuters, several countries have urged the commission not to give in to industry demands for laxer rules. The newswire reported on March 11 that the commission is rewriting the criteria after its draft published in November 2020 came under fire from countries like Bulgaria and Poland for effectively excluding gas altogether.

The treatment of nuclear power, another highly controversial topic between member states, was deferred for a later stage by the commission when it published its initial draft. Reuters said the commission now plans to finish the climate portion of the taxonomy in April.