The EU energy and climate policy framework 2030 A way forward to harmonisation? College d´Europe, Brugge, Belgien 10th March 2014 Birgitta Resvik, Vice President Corporate Relations Fortum

Our geographical presence today

2

TGC-1 (~25%)

Power generation ~7 TWh

Heat sales ~8 TWh

OAO Fortum

Power generation 20.0 TWh

Heat sales 24.2 TWh

Russia

Poland Power generation 0.6 TWh

Heat sales 4.0 TWh

Baltic countries Power generation 0.5 TWh

Heat sales 1.1 TWh

Nordic countries

Power generation 46.5 TWh

Heat sales 13.9 TWh

Distribution customers 1.6 million

Electricity customers 1.2 million

Nr 3 Power

generation

Electricity

sales

Nr 2

Nr 1 Heat

Distribution

Nr 1

Key figures 2013 Sales EUR 6.1 bn

Operating profit EUR 1.7 bn

Balance sheet EUR 24 bn

Personnel 9,900

Great Britain Power generation 1.0 TWh

Heat sales 1.8 TWh

Listed at the Helsinki Stock

Exchange since 1998

More than 130,000 shareholders

Market cap ~14 billion euros

Fortum’s strategic route

3

Divestment of

non-strategic

heat business

Länsivoima

→100% E.ON Finland

Separation of

oil businesses

Elnova

50%→100%

District heat

in Poland 2003 →

Østfold

Shares in

Hafslund

Shares in

Lenenergo

Starting

TGC-1

Divestment of

Lenenergo

shares

TGC-10

Divestment of

Fingrid shares

Divestment of

heat operations

outside of

Stockholm

2008 2005 2006 2007 2002 2003 2004 1999 2000 2001 1996 1998 2009 2010 2011

Länsivoima

45% → 65%

2012

Stockholm

Energi

Gullspång

Birka Energi 50% Fortum

50% Stockholm

Gullspång

Skandinaviska

Elverk

Birka Energi

50% → 100%

Stora

Kraft

Lenenergo

shares 1998→

IVO

1997

Neste

Divestment

of small

scale hydro

Hydro power

47%

Coal 4%

Other 1%

Nuclear power 43%

Biomass 2%

European generation 53.9 TWh

(Generation capacity 11,271 MW)

Fortum's European

power generation in 2012

Natural gas 3%

European production 18.5 TWh

(Production capacity 9,035 MW)

Fortum's European

heat production in 2012

Peat 2%

Oil 2%

Heat pumps, electricity

18%

Waste 10%

Natural gas

21%

Coal 20%

Biomass

27%

Fortum's European power generation based on hydro and nuclear power – wide flexibility in heat production

4

Utility sector still has some way to go to meet the decarbonisation target:

Big gap overall - Fortum still some way to go

5

0

200

400

600

800

1000

1200

DE

I

Dra

x

RW

E

CE

Z

SS

E

Edip

ow

er

Vatt

en

fall

Enel

ED

P

E.O

N

GD

F S

UE

Z

Do

ng

Un

ion

Feno

sa

EnB

W

Iberd

rola

Fort

um

tota

l

Verb

und

PV

O

Fort

um

EU

ED

F

Sta

tkra

ft

88

g CO2/kWh electricity, 2012

2012

68% of Fortum's total power generation CO2-free

93% of Fortum’s power generation in the EU CO2-free

Close to 100% of the ongoing investment programme

in the EU CO2-free

Average 338 g/kWh

192

Note:

Fortum’s specific emission of the power generation in 2012 in the EU were 42 g/kWh and in total 171 g/kWh.

Only European generation except “Fortum total“ which includes Russia.

Source: PWC & Enerpresse, Novembre 2012 Changement climatique et Électricité, Fortum Industrial Intelligence

EU2050

target at

20gCO2/kWh

by 2050

-~95 %

EU 2050 energy roadmap emission targets: Starting point - we target 20gCO2/kWh by 2050*

6

0

50

100

150

200

250

300

350

400

450

500

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

CO

2 I

nte

nsity

EU

Ro

ad

Ma

p S

ce

na

rio

s

(gC

O2

/kW

h)

0

50

100

150

200

250

300

350

400

450

500

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

CO

2 In

ten

sity

EU

Ro

ad

Ma

p S

ce

na

rio

s

(gC

O2

/kW

h)

Scenario 1: Reference

Scenario 1bis: Current Policy Initiatives

Scenario 2: High energy efficiency

Scenario 3: Diversified technologies

Scenario 4: High RES

Scenario 5: Delayed CCS

Scenario 6: Low nuclear

CO2

Intensity,

~80-90

gCO2/kWh

CO2

Intensity,

~5-20

gCO2/kWh

Source: EU Commission 2050 roadmap impact assessment 2012

*Power sector target a 93-99 % reduction in CO2 emissions from 1990 level by 2050

Transition towards Solar Economy

Solar Economy Solar based production with

high overall system efficiency

Reso

urc

e &

syste

m e

ffic

ien

cy

Finite fuel resources Large CO2 emissions Infinite fuel resources Emissions free production

Hig

h

Lo

w

Geothermal

Hydro

Wind

Sun

Ocean

Bio

Coal Gas

Oil Nuclear

today

Nuclear

tomorrow

CHP

CCS

Traditional energy production

Exhaustible fuels that burden

the environment

Advanced

energy production Energy efficient and/or

low-emission production

Copyright © Fortum Corporation

All rights reserved by Fortum Corporation and shall be deemed the sole property of Fortum Corporation and nothing in

this slide or otherwise shall be construed as granting or conferring any rights, in particular any intellectual property rights

7

Levelized cost of electricity (LCOE) in Europe Current market prices hardly justify any investments into new generation, but still we over- subsidise renewables

8

LCOE (=CAPEX+OPEX) shows the achieved price required for an investment into a power plant to break even over the lifetime of the project.

Disclaimer: The presented figures do not represent Fortum’s own view on the levelized costs of electricity. The figures are based on recent external publications. Key assumptions: real discount rate 5%, corporate tax 20% (irrelative to country for comparability reason).

Overnight costs, €/kW 5330 for nuclear, 1840 for gas, 1390 for coal, 1130 for onshore wind, 1880 offshore wind, 2770 for hydro, 1220 for ground mounted solar,

1700 for rooftop solar. Peak load factor for ground mounted solar in Italy 18.5%; for rooftop in Germany 11.4%. Economical lifetime: 30 years for solar, 40 years

for nuclear and hydro, 25 years for others. Fuel price prices are the market forward prices as of October 2013 extended by applying inflation of 2% as well as cost

of carry for coal and CO2 2%. Note, there are large variations in cost of hydro, wind and solar depending on location and conditions.

Sources: Sähkön tuotantokustannusvertailu. Vakkilainen Esa, Kivistö Aija, Tarjanne Risto. Lappeenrannan teknillinen yliopisto. 2012.

Re-considering the Economics of Photovoltaic Power. Bloomberg New Energy Finance. 2012.

PV Status Report 2013. Arnulf Jäger-Waldau. EC, DG Joint Research Centre, Institute for Energy and Transport. 2013.

Connecting the sun. Solar photovoltaics on the road to large-scale grid integration. EPIA. 2012.

Projected Costs of Generating Electricity: 2010 Edition. International Energy Agency. 2010.

* Lessons learnt from the current energy and climate framework. Frontier Economics. May 2013.

0

20

40

60

80

100

120

140

160

Coalcondensing

Onshore wind Nuclear Gas Solar PV,ground mounted

in Italy

Large hydro Offshore wind Solar PV,rooftop inGermany

€/MWh

Projected levelized cost of electricity (including taxes)

LCOE without CO2 cost

CO2 cost with EUA annual average price of €9/t in 2014-2040

Additional CO2 cost if EUA annual average price was €25/t in 2014-2040

Nordic forward for 2014(17.10.2013)

Nordic forward for 2023(17.10.2013)

Average achieved price perMWh of RES-E generated in2011*

9

Production optimisation: Success in production optimization requires mastering the complexity of the power market

Global factors

European factors

Nordic factors

Mainly Commodity

Commodity and weather

Transmission sales

Heating sales Electricity sales

Nordic elec. price

Nordic weather

European weather

European elec. markets

Industrial activity

Coal market

CO2 market

Biofuel & peat market

Oil market

European gas market

Fuel costs

Shipping market

Emission rights

Subsidy - certificate

market

Power costs Transmission

costs Mainly Weather

Dependency

Source: Fortum Industrial Intelligence

Today EU Emission Trading System (ETS) does not steer decarbonisation due to multiple environmental targets

• The current low CO2 EUA prices do not provide incentives for

– Low emitting generation to run

– Market based RES investments

• There is currently a considerable oversupply of EUAs

– Oversupply is seen in the price level

• Four factors explaining the oversupply:

1. Overlapping policy instruments

2. Economic recession / lack of growth

3. International credits

4. Distribution of allowances by member states

• In phase 2 (2008-2012) lack of growth and use of international credits were found to be the main reasons; I

• In phase 3 (2013-2020) overlapping policy instruments have become the main reason for the oversupply

10

Share of factors behind the oversupply

Source: GreenStream: Oversupply and structural measures in the EU ETS,

September 24, 2013

* efficient coal to gas switching

0

5

10

15

20

25

30

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

EUA Price

Economic Recession

Overlappinginstruments

International credits

Distribution ofallowances by memberstates

Source: GreenStream, Bloomberg, Fortum Industrial Intelligence

Competiveness; European prices increasing compared to US: We need to study the underlying price components

11

0

20

40

60

80

100

120

140

160

2003 2005 2007 2009 2011 2013

€/MWh

Industrial energy prices* (nominal)

Germany USA

Source: BDEW, U.S. Energy Information Administration, Bank of Finland, Fortum Industrial Intelligence

*For industrial consumer of 0.6 - 20 GWh/a

Wholesale prices in real term tells something different: Europe is in parity with the US and wholesale electricity prices have decreased over time in real terms

12

Sources: Eurostat, U.S. Energy Information Administration, Bank of Finland, Fortum Industrial Intelligence

• Wholesale energy prices in the US (including both electricity and capacity components) are close to the European prices.

• Clearly higher end-user electricity prices in Europe are explained by other factors than costs of generation, in particular, higher taxes which include RES

support mechanisms

GE: y = -1,9031x + 58,846

SE: y = -0,2412x + 45,305

30

40

50

60

70

80

2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD

€/MWh Annual average wholesale electricity prices (real 2012)

GE FI SE FR US Linear (GE) Linear (SE)

0

50

100

150

200

250

300

EU

R/M

Wh

EEG, KWKG, Article 19levy, offshore liabilitycharge, electricity tax,concession fee, VAT

Other generation,transmission, sales

Average wholesale price

Case Germany: Energiewende leads to increasing costs for the end consumer energy bill:

although wholesale prices are decreasing, end-user costs go up

Source: BDEW, Fortum Industrial Intelligence, October 2013

13

Cost of electricity has increased despite

lower wholesale prices

Cost of electricity for a three person household with consumption at 3500 kWh/annum

Source: BDEW, May 2013; 2013 wholesale price calculated as weighted average from spot and forwards

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Electr. Tax

Offshorelevy

§19 levy

KWKG

EEG

Concessionfee

VAT

5,28

6.30 **)

0

1

2

3

4

5

6

7

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

c /

kWh

RES levy

EEX spot + fwd

Renewables levy up nearly +20% for '14

Comparing market based and regulated way to promote non-hydro RES:

Sweden vs Germany - striking differences in end-user costs

14

0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sweden Germany

Consumer cost for RES support**

€ / M

Wh

*2013 and 2014 figures are the German government plan

**Grid cost excluded

* *

Source: BDEW, Swedish energy agency, Fortum Industrial Intelligence

Decarbonisation is expensive in all scenarios: We should seriously discuss the most cost efficient alternative

15

0

1

2

3

4

5

6

2010-2020 2020-2050

Tri

llio

n e

uro

s (

20

12

pri

ce

s)

Required investments in power generation to meet the EU decarbonisation agenda

Source: Fortum Industrial Intelligence

ILLUSTRATIVE

Figures are sums of needed CAPEX for new generation in various

scenarios in Europe needed to reach the EU2050 targets.

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Decarbonisation requires European energy markets integration

Source: Fortum

Wave energy

Wind energy

Bioenergy

Solar energy

Hydro energy

Transmission

Needs:

Natural production areas

of renewables:

Towards a functioning European power market

17

• Wider market area - more competition - increased service level

• Increased utilisation of existing power production capacity

• Increased security of supply and less volatile price development

• Environmental targets reached in a most efficient way (CO2, renewables etc.)

National Nordic

European

Today / Tomorrow

Earlier

Yesterday

European internal energy market is fragmenting: Diverse RES-support schemes and capacity market proposals distort the energy market integration

Capacity mechanisms in Europe RES-support schemes in Europe

18

Quota obligation

Feed-in tariff

Feed-in premium

Energy Only

Proposal for new

capacity elements

Partial capacity

mechanisms

Major capacity

mechanism

Source: Fraunhofer ISI, Ecofys, Fortum Industrial Intelligence

Commission proposal for 2030 energy and climate framework

Targets of the 2030 package compared to 2020 in a nutshell;

19

Year GHG – greenhouse

gas

RES –

renewable

energy

EE - energy

efficiency

2020 -20% (ref 1990) 20% binding –Shared to member

states

-20% from BAU

Divided in two sectors (ref 2005);

ETS -21%

Non-ETS -10%

2030 -40% (ref 1990) but

no international offsets

ETS -43%

Non-ETS -30%

27% binding – Not to be shared

No targets yet,

to be assessed

Milestones of the international and EU climate policies

20

2020 2015 2010

International

EU

Kyoto period

Target to reach a new

international agreement

The new international

agreement into force

2011 2012 2013

2. trading period

- free allocation

3. trading period

- auctioning (a default for power generation)

- free allocation (a default for industries)

Early

auctions

Full linking of EU

and Australian ETS

Partial linking of EU

and Australian ETS

Doha

COP

Durban

COP

2014

Kyoto target -8% for EU

2016 2017 2018 2019

EU target -20%

Warsaw

COP

Kyoto 2 period

Revision of ETS - Backloading ?

- Structural changes

- Re-definition of carbon leakage sectors

2030 target setting – will have a direct effect

on prices and measures

EU target for

Kyoto 2 to be fixed

IPCC-reports

media & political

attention

California ETS

linking with Quebec

During 2013-2014 the parties (incl. USA and China)

decide their emission pledges for the global negotiations CDM to continue, JI only for the Kyoto 2 countries

Fortum a forerunner in sustainability

• Dow Jones Sustainability World Index

– Included for ten consecutive years

– Fortum the only Nordic power and heat company

• Carbon Disclosure Leadership Index

– Fortum globally the first company in the utility sector

2013

– Fortum the only Nordic power and heat company

• SAM Sustainability Yearbook

• STOXX® Global ESG Leaders indices

• oekom

• OMX GES Sustainability Finland Index

• Storebrand SRI

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Challenges

Overall;

• The big challenge: Target 20gCO2/kWh by 2050,

• The cost efficiency; Decarbonisation requires enormous investments

Technical;

• Cut the cost of different technologies,

• Find the sustainable resources,

Policies;

• The market development: European internal energy market is fragmenting,

• The competitiveness - EU towards US and other regions,

• The most cost effective measures – more globally and harmonised,

• The interaction and the complexity of the market: requires having a systemic approach and a consumer perpespective

• The transparency – how to work to get confidence among society

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Next generation energy company

23