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London — Stronger CO2 and weaker gas prices going into 2019 has increased the likelihood of coal-to-gas switching in Europe's power and heat generation market, with evidence that it was already happening, Fortum CEO Pekka Lundmark said Friday.

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"There was very little switching in 2018. Our very rough estimate was of 20-30 million mt CO2 avoided by switching last year," he said.

"If we look at the whole switching channel, there is 150-200 million mt CO2 of potential avoidance. We are well within the channel now, and it is starting to happen. The market is pricing in quite a bit more switching this year," he said, adding the whole channel represented around 20% of European heat and power generation emissions.

Lundmark said Fortum's switching channel calculation assumed "a very narrow band" of efficiencies, with gas plant efficiencies set in a range of 49%-52% and coal plant efficiencies in a range of 34%-36%.

The decision to strengthen the Market Stability Reserve and subsequent tripling of CO2 allowance prices last year was having "a clear positive impact" on spreads, Lundmark said, supporting Fortum's "long-term belief in the need for large-scale decarbonisation".

Fortum reported its achieved Nordic nuclear and hydro power price increased 16% to Eur37.2/MWh ($42.7/MWh) in Q4 2018 as winter demand combined with reduced hydro reservoir stocks.

For full-year 2018, Fortum's achieved power price rose 9% to Eur34.6/MWh. At end-2018 the utility had hedged 75% of 2019 Nordic nuclear and hydro output at Eur31/MWh, and 45% of 2020 out at Eur29/MWh. Both were up Eur1/MWh on the company's last report for end-Q3.

"The generation segment's total [Q4 2018] power generation in the Nordic countries decreased as a consequence of 0.8 TWh lower hydro power generation caused by continued low inflows and low reservoir levels," the company said.

"The year was very dry and hydro inflows and reservoir levels are still lower than normal," Lundmark said, noting a 9 TWh deficit in Nordic hydro reservoir stocks at year-end. "The dryness has continued into January with the deficit now at 11 TWh."

Reduced hydro generation was partly offset by improved nuclear generation, while automation modernization at the Loviisa nuclear power plant was now complete after several years of work, he said.

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Closing the offer on Uniper shares in June 2018 was the most significant event of the year, Lundmark said, noting that since then Fortum had increased its holding to 49.99% of Uniper shares and voting rights.

"To our disappointment, talks with Uniper have not yet proceeded as anticipated, but the fundamentals of our investment case are intact and we remain committed," he said, a reference to Uniper's continued resistance to Fortum's unsolicited offer.

On Datteln 4, Uniper's unfinished German coal plant, Lundmark said Fortum supported Uniper's position that, if coal-fired generation is to be phase out in Germany to 2038, it would be sensible to have the most efficient units operating in the interim.

Looking ahead, Nordic electricity demand was forecast to grow at 0.5% per year on average, Fortum said. Investment this year was put at between Eur600million-650 million.

-- Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com

-- Edited by Dan Lalor, newsdesk@spglobal.com