Low-carbon transportation: urban experiences and market solutions

1. 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

2. 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
DistributionNr 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

3. 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
20082005 2006 20072002 2003 20041999 2000 20011996 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

4. 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

5. 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
DEI
Drax
RWE
CEZ
SSE
Edipower
Vattenfall
Enel
EDP
E.ON
GDFSUEZ
Dong
UnionFenosa
EnBW
Iberdrola
Fortumtotal
Verbund
PVO
FortumEU
EDF
Statkraft
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 %

6. 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
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
CO2IntensityEURoadMapScenarios
(gCO2/kWh)
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
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

7. Transition towards Solar Economy Solar Economy
Solar based production with
high overall system efficiency
Resource&systemefficiency
Finite fuel resources Large CO2 emissions Infinite fuel resources Emissions free production
HighLow
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

8. 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
Coal
condensing
Onshore wind Nuclear Gas Solar PV,
ground mounted
in Italy
Large hydro Offshore wind Solar PV,
rooftop in
Germany
€/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 per
MWh of RES-E generated in
2011*

9. 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
salesHeating salesElectricity 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

10. 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
Overlapping
instruments
International credits
Distribution of
allowances by member
states
Source: GreenStream, Bloomberg, Fortum Industrial Intelligence

11. 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

12. 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)

13. 0
50
100
150
200
250
300
EUR/MWh
EEG, KWKG, Article 19
levy, offshore liability
charge, 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
Offshore
levy
§19 levy
KWKG
EEG
Concession
fee
VAT
5,28
6.30 **)
0
1
2
3
4
5
6
7
2008
2009
2010
2011
2012
2013
2014
2015
c/kWh
RES levy
EEX spot + fwd
Renewables levy up nearly +20% for '14

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**
€/MWh
*2013 and 2014 figures are the German government plan
**Grid cost excluded
* *
Source: BDEW, Swedish energy agency, Fortum Industrial Intelligence

15. 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
Trillioneuros(2012prices)
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.

16. 16
Decarbonisation requires European energy markets integration
Source: Fortum
Wave energy
Wind energy
Bioenergy
Solar energy
Hydro energy
Transmission
Needs:
Natural production areas
of renewables:

17. 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

18. 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

19. 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

20. Milestones of the international and EU climate policies
20
202020152010
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

21. 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
21

22. 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
22

23. Next generation energy company
23