Taxes account for one third of total electricity price

A fixed-price electricity contract is an option if you do not want to use spot electricity with a variable price, says Jukka Leskelä, the Managing Director of Finnish Energy.

Which factors affect the total price of electricity?

Customers pay for two different products; electric energy and the distribution network of electricity. The third component of the total cost is the electricity tax which is added to the network service charge. The tax has been designed to curb the consumption of electricity and bring revenue to the government. Value Added Tax is imposed on all three components, including the electricity tax. In the electricity bill, taxes account for about one third.

How is the price of electric energy established and why does it vary?

Remotely read electricity meters have made it possible for consumers to buy electricity at wholesale price with the supplier fee added. The spot price of electricity varies by the hour. Going forward, the frequency will increase and prices can change every fifteen minutes.

Spot price electricity has gained in popularity in recent years and about one third of consumers have opted for a spot price contract. This has increased interest in the fluctuation of spot prices.

In the spot price market, the price of electricity is at each moment established based on demand and supply. The range of electricity price variations has increased as the production structure of electricity has changed. Previously electricity production was regulated according to consumption by burning fossil fuels. Now production varies depending on wind and sunshine. Fossil fuels are hardly used at all for electricity production in Finland.

Demand also affects the price more than before: when the price rises, many consumers choose a different time of the day for their consumption of electricity. The price of electric energy rises when supply is scarce and demand increases. The biggest factors influencing this include wind conditions, availability (faults) of production plants, availability of imported electricity. Electricity consumption is affected by heating needs as well as the utilisation rates of industrial facilities and differs between the days of the week and times of the day.

How much of Finnish electricity production is dependent on weather?

Nearly half of the installed production capacity is wind power (almost 8,000 MW) and solar power (more than 1,000 MW). Nuclear production capacity totals 4,400 MW, hydropower 2,500 MW and fossil fuel-driven production about 5,000 MW. The national grid company also has reserve capacities for abnormal conditions.

The production of hydropower needs to be kept at a certain level to allow water to flow in the rivers and the total amount of water depends on precipitation. Some of the heat generating power plants are dependent on heating needs, i.e., weather. These power plants produce electricity according to the consumption of heat, fortunately their production is at its highest in cold weather. As we have moved away from fossil energy, we are taking a large part of the energy from nature. This is why weather conditions play such a significant role.

What is the significance of nuclear power as a price stabilising factor?

Nuclear power is a key factor stabilising the price due to the large and stable production volumes of electricity regardless of weather conditions. Nuclear power can also offer some flexibility in case of a surplus of other production forms.

It is much easier to build a fossil free electricity system with nuclear power than without it.

Owing to Olkiluoto 3, dependence on import was reduced and the transfer connections to neighbouring countries can now be used to regulate the electricity system. Previously we imported electricity for much of the time at full transfer capacity. We will need versatile electricity production also in the future. This translates into cost-effectiveness and reliability.

How would the price of electricity and price fluctuation be affected if Finland had no nuclear power?

This is quite an insane idea. If we had no nuclear power, we would probably be dependent on fossil fuels and the effects of Russia’s war of aggression would be much more severe on Finland as a whole.

Electricity would be much more expensive than now and this would significantly impair our economy and buying power.

According to the statistics of Finnish Energy, the average electricity price has been affordable in Finland in recent years. In 2023, the electricity price was the second lowest in Europe, and in 2024, the third lowest. What explains the low price in comparison with the rest of Europe?

The price is the lowest in countries with a small share of fossil energy and functioning cross-border markets. Such areas include the Nordic countries and the Iberian Peninsula. Many countries have much less hydropower than the Nordic countries and regulation is to a large extent based on gas power. The war in Ukraine has resulted in a significant increase in the price of gas, which is one of the factors contributing to the higher electricity price in Europe compared to Finland.

For us, the low price is also the result of a competitive production structure (nuclear, wind, hydro and CHP, or combined heat and power production) as well as our good opportunities to purchase low-cost import electricity if our own production is not sufficient.

Nuclear power plays a significant role in the production of low-priced electricity. Germany relinquished nuclear and now struggles with impaired competitiveness of the industry due to it. In Finland, public confidence in nuclear power is gigantically strong. That is why it comes as news that a fault may occur in a nuclear power plant. As an operator in the nuclear power sector, this set-up would make me very proud.

Text: Timo Sillanpää
Photo: Vesa Marjanen/Finnish Energy

This article was first published in News from Olkiluoto Magazine which was released in November last year. The story has been updated with the figures of 2024.