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Investing in the Lithuanian Energy Sector
Lietuvos Energetikos Konferencija 2013
10.10.2013 Vilnius
Jaakko Vähä-Piikkiö, Vice President, Baltic Region
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Our geographical presence today
TGC-1 (~25%)Power generation ~7 TWhHeat sales ~8 TWh
OAO Fortum Power generation 19.2 TWhHeat sales 26.4 TWh
Russia
PolandPower generation 0.8 TWhHeat sales 4.3 TWh
Baltic countriesPower generation 0.4 TWhHeat sales 0.9 TWh
Nordic countriesPower generation 51.6 TWh
Heat sales 14.5 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 2012Sales EUR 6.2 bnOperating profit EUR 1.9 bnBalance sheet EUR 25 bn Personnel 10,400
Great BritainPower generation 1.1 TWhHeat sales 1.8 TWh
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Fortum's carbon exposure among the lowest in Europe
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Sta
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ft0
200
400
600
800
1000
1200
88
g CO2/kWh electricity, 2011
201268% of Fortum's total power generation CO2-free93% 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 2012Changement climatique et Électricité, Fortum
Fortum’s investment programme – Nordic region and Baltic countries
Project Electricity, MW Heat, MW Commissioned
Olkiluoto 3, Finland 400
Swedish nuclear upgrades 290
Refurbishing of hydro power 10 annually
Additional electricity capacity around 870 MW 100% CO2-free
Total ~870 ~380
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Blaiken, Sweden, wind power 30 Q1 2013
Brista, Sweden (waste CHP)
20 57 Q4 2013
23Järvenpää, Finland, biomass CHP 63 Q2 2013
Jelgava, Latvia(biomass CHP)
23 45 Q3 2013
Värtan, Sweden(biomass CHP)
130 280 Q2 2016
20Klaipeda, Lithuania, waste CHP 60 Q2 2013
Already commissioned:
New electricity capacity will require over 60 €/MWh power price
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Estimated lifetime average cost in nominal 2014 terms.Large variations in cost of new hydro and wind due to location and conditions.
Gas Nuclear Hydro Wind Cleancoal
EUR/MWh
0
10
20
30
40
50
60
70
80
90
100
110
Other costs ( variation)
CO2 cost
Coal0
10
20
30
40
50
60
70
80
90
100
110
Source: Nord Pool spot, NASDAQ OMX Commodities Europe
EUR/MWh
Futures2 September 2013
1995 2013 2023
Competitiveness of energy efficient CHP will increase driven by fuel prices and by need to reduce emissions
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• CHP is local, smaller scale production
– Resource efficiency compensates scale
– Possibility to use local fuels (bio, waste)
• CHP covers about 10% of world electricity supply with significant growth potential globally
• CO2 issue will increase CHP’s competitiveness
• EU’s Industrial Emissions Directive to drive new CHP investment potential further
• Synergy opportunities in the growing bio energy and bio fuel markets
• Organic growth potential in emerging markets
>100
Global new CHP potential 1,350 TWhe
From 2,000 TWhe up to total 3,350 TWhe by 2020
>250
>500
>500
Small scale CHP
Desalination
Industrial CHP
District heating
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Investments in Waste-to-Energy solution to many challenges
• Increases domestic electricity production
• Reduces heat prices to competitive level
• Resolves problem to comply with EU Landfill Directive
• Reduces CO2 emissions
• Replaces imported fuel and contributes to security of supply of energy
• Resolves a remarkable part of EU energy efficiency targets for district heating in Lithuania
Circular Economy
Heat regulation regimes vary across Europe – transition towards competitive heat markets and pricing
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Source: Fortum analysis based on benchmarking selected DH/CHP markets in Europe. KPMG survey 2012,
Alternative-based heat pricing as main pricing principle to promote DH against
other heating solutions
DH company sets competitive prices while authorities monitor pricing based on
competition law
Heavy-touch ex-ante price control based on established methodology and approval
of autonomous regulator
Heavy-touch ex-ante price control based on multi-level approval by state, regional
and local authorities
• Norway and Netherlands
• Sweden, Finland, Denmark, Germany, Austria, Belgium, France and UK
• Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Bulgaria and Macedonia
• Russia, Romania, Belorussia and Ukraine
Regime categories
Prospects for effective competition in local heat markets
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DH/CHPsystem
CO2 trading
Liberalized electricity markets
Heat\cooling
customers
Competitive pressure from
alternative space heating
solutions
Alternative heat production
sources
Competition in fuel supply (RES, waste)
Future CHP products
(eg. Pyrolysis, cooling)
Production Distribution
• Heat pump• Individual gas and coal boiler• Solar collectors
• Industrial waste heat• Existing other DH producers• New entrants based on
RES/CHP subsidy mechanisms
• Customer’s own heat production
• New base load capacity e.g. waste-to-energy
Towards competitive heat markets and pricing
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Fair and effective
competition in local heat
markets between space
heating alternatives and heat producers.
Competitive and value-added DH
through alternative-based heat
pricing.
Attractive, risk-adjusted
returns on refurbishment of privatized
DH assets and on green field
CHP investments.
Effectivecompetition
Competitivepricing
Attractivereturn allowance
Incentives forbenchmark
performance
World-class DHC\CHP
operators can earn higher
than average returns.
Clear responsibility and incentive mechanisms for long-term DH system
optimization.
DH systemoptimization
Position on District Heating and Cooling
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CONTRIBUTION TO SUSTAINABLE DEVELOPMENT
LIBERALIZED HEAT MARKETS
COMPETITIVE PRICING FOR CUSTOMERS
• Renewable and efficient District Heating and Cooling are vital contributors for Europe’s targets for combating climate change and resource efficiency
• DHC are most simple, safe and sustainable ways of providing heating and cooling
• Combined heat and power (CHP) is most energy efficient way of producing heat and electricity
• Utilization of waste heat sources - as an energy otherwise lost - should be highly promoted
• Local heating market where DHC competes with alternative solutions should be deemed as ‘relevant market’.
• Effective competition is the most functional platform to develop the heat market, for customers, suppliers and society
• Customers should have the freedom of choice between different alternatives in heat market
• DHC should be treated as normal, profit making business
• Main steering mechanisms (energy taxation, ETS) should drive behavior towards resource efficiency and combating climate change i.e. sustainable developments
• Competing heat sources such as waste heat should enter heat market on commercial merits
• DHC pricing should be value-added• Competitive towards alternatives• Non-discriminating; equal customers to
be treated equally• Transparent
• Price comparisons of all heating alternatives should reflect full operational and capital costs to give effective and correct signals for customers, suppliers and relevant public stakeholders
• Price comparisons should be transparent, traceable and easily accessible
• When DH prices are being ex-ante approved by regulators or ex-post reviewed by competition authorities, prices should also reflect effectively incurred costs and risk-adjusted return on capital employed so that high efficiency will be incentivized
FORTUM’S POSITION ON DHC IS FULLY ALIGNED WITH EU’S ENERGY POLICY
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Market challenges in district heat sector in LithuaniaEnergy investors expectations
• Relatively high DH prices – heavy-touch regulatory environment – missing long term prospects for the needed heavy investments – natural gas based production as a result
• Heavy-touch regulatory involvement
– District heating sector needs to develop significantly to remain competitive in the future – how does current regulation support these developments?
– Competition between DH and main alternatives will anyhow grow regardless of regulations
• Investors expect high predictability of the long term legal and regulatory framework - possibility to rely on key investment incentives when making the investment decision – no retroactive and sudden changes
Long-term system optimization – targeting improved capacity utilization
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Figure. Annual production curve of a DHC system
Base load
Middle load
Peak load
Cooling load
Condensing mode and new products
i.e. cooling, bio-oils
“Open district heating”
• Optimizing the cost of peak heat load through heat trading between customers having own capacity and DH operator – Fortum is running a pilot program on ‘’Open DH system” in Stockholm, Sweden
• Improving CHP capacity utilization – Fortum will start industrial scale bio-oil production in Joensuu CHP plant, Finland
Waste/biomass/coal/gas
Biomass/coal/gas
Biomass/coal/gas
Gas/oils
DH
system specific priority order
Tartu, Estonia bio/peat CHP 25 MWel/50 MWth in operation since 2009
Pärnu, Estonia bio/peat CHP 23 MWel/45 MWth in operation since 2010
Fortum’s recent investments in the Baltics in local fuel based CHPs
Klaipeda, Lithuania WtE CHP 20 MWel/50 MWth in operation since May 2013
Jelgava, Latvia bio CHP 23 MWel/50 MWth
in operation since September 2013
How to gain public acceptance – the Klaipeda Waste to Energy plantEHP Congress, May 27 – 28 2013, Vienna
Kristian Rehnström
How to gain public acceptance – the Klaipeda Waste to Energy plant
EHP Congress, May 27 – 28 2013, Vienna
Kristian Rehnström
Thank you!