FORTUMExperiences in district heating andCHP business operations

EPHA 15: District Heating For the Cleaner Future12th of May 2010

2

Disclaimer

This presentation does not constitute an invitation to underwrite, subscribefor, or otherwise acquire or dispose of any Fortum shares.

Past performance is no guide to future performance, and persons needingadvice should consult an independent financial adviser.

Fortum today

European power markets

Russia

Baltic Rim

Heat service at competitive conditions

What makes investors to invest: ... legal framework, credibility of the localpolicy, price regulations, subsidies, EU targets, market conditions, ...?

Content

4

TGC-1 (~25%)Power generation ~6 TWhHeat sales ~8 TWhOAO FortumPower generation 16.0 TWhHeat sales 25.6 TWh

Russia

PolandHeat sales 3.7 TWhElectricity sales 20 GWh

Baltic countriesHeat sales 1.3 TWhElectricity sales 0.1 TWhDistribution cust. 24,100

Our geographical presence today

Nordic countriesGeneration 48.1 TWhElectricity sales 54.9 TWhHeat sales 18.0 TWhDistribution cust. 1.6 millionElectricity cust. 1.2 million

Nr 1

Nr 3

Heat

Electricitysales

Distribution

Powergeneration

Nr 1

Nr 2

TotalElectricity 77 TWh/aHeat 53 TWh/a

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Foreign investors 30.5%Finnish State 50.8%

Other Finnish investors 8.9%

Households 7.1% Financial and insurance institutions 2.7%

• Listed at the Helsinki Stock Exchange 1998• Approximately 90,000 shareholders• Among the most traded shares in Helsinki stock exchange• Market cap ~17 billion euros

A power and heat company

28 February 2010

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Climate change is the most imminent challengeof our planet

We, at Fortum, don't want to be part of the problem,but

part of the solution

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Fortum's carbon exposure among the lowest in Europe

Source:PWC & Enerpresse , 2009Changement climatique et Électricité

0

200

400

600

800

1000

1200D

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ish

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Verb

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Fortu

m

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tkra

ft

g CO2/kWh electricity, 2008

Average 350 g/kWh

41

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Fortum’s investment programme– Nordic region, Poland and Baltic countries

Electricity capacity over 900 MW~95% CO2-free

Project Electricity, MW Heat, MW Commissioned

Olkiluoto 3, Finland 400 2012Swedish nuclear upgrades 260 by 2013- Forsmark 3 upgrade (to be decided) 30 post 2013Refurbishing of hydro power 20-30 annuallyCzęstochowa, Poland 65 120 Q3/2010(coal/biomass CHP)Pärnu, Estonia 20 45 Q4/2010(coal/biomass CHP)Brista, Sweden (to be decided) 20 60 2013?(waste CHP)Klaipeda, Lithuania 20 50 2013(biofuel/waste CHP)

Total by ~2013 >900 ~300

Fortum today

European power markets

Russia

Baltic Rim

Heat service at competitive conditions

10

Competitiveness Sustainability

Securityof supply

• Implementation ofinternal energy markets

• Energy efficiency +20%(2020)

• Increased resources fortechnology development

• Development of cross-border transmission• Increase in own production• Enhancement of external energy relations

• Minimum reduction of EUCO2 emissions 20% (2020)

• Renewables 20% (2020)• Development of CO2

capture and storage

Key EU objectives by 2020

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New capacity, except nuclear, will requireover 60 EUR/MWh power price

Other costs ( variation)CO2 cost

Coal Gas Nuclear Hydro Wind Cleancoal

EUR/MWh

Estimated lifetime average cost in nominal 2014 terms.Large variations in cost of new hydro and wind due to location and conditions.

0102030405060708090

100110

0102030405060708090

100110

Source: Nord Pool

EUR/MWh

Futures28 April 2010

1995 -97 -99 -01 -05 -07 -09 -11 -13-03 -15

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New interconnections coulddouble the capacity to over

8000 MW by 2020

Nordic and Continental markets are integrating –interconnection capacity could double by 2020

Additional 700 MW cableNO-NL, as well 1400 MW

NO-DE links studied

EU financial support for 700MW DK-NL link to connect

offshore wind, too

EU support to connect KriegersFlak offshore wind area to

DK&DE; new 400 kV AC cableSE-DK by 2017

Jylland – DE capacity to beincreased by 500 MW in 2012

and by further 500 MW by 2018 LitPol Link of 1000 MWto connect the Balticmarket to Poland by

2015/18. It would opena new transmission

route from the Nordicmarket to the Continent

New internal Nordic gridinvestments provide for

increased availablecapacity for export to the

Continent and Baltics

EU’s European EnergyProgramme for Recovery tocofinance to Estlink 2 and

NordBalt

1400 MW link to the UK could connect offshorewind, too; North Seas Countries’ Offshore GridInitiative launched for supergrid development

In the EU's Second Strategic EnergyReview the Commission focuses

strongly on interconnecting the Balticstates and Poland to form an electricity

market around the Baltic Sea

Fortum today

European power markets

Russia

Baltic Rim

Heat service at competitive conditions

14

"Power industry law" approved 2003Establishment of Russian power exchange (ATS) 2001Launch of the free-trade sector of the wholesale market

in European & Urals 2003in Siberia 2005

Launch of balancing power segment 2006Launch of new wholesale market model 2006Restructuring of regional "energos" (P&H companies) completeFormation of new companies completeCapacity market – transitional model 2008Long term capacity market model 2010Competitive market of ancillary services 2010Financial derivatives market 2010Full liberalisation of the wholesale market 2011 onwards

Key steps in the reform Time

Russian power industry reform has progressed well

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• Further liberalisation of energymarket increased to 60% inJanuary 2010

• 80% in 1 July 2010

• 100% in 1 January 2011

• The sales to households willremain regulated still after2011

Share of liberalised trade for existing capacity

5 %10 %

15 %25 %

30 %

50 %60 %

80 %100 %

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Jan2007

100 %

July2007

Jan2008

July2008

Jan2009

July2009

Jan2010

July2010

Jan2011

Power market liberalisation– wholesale power market will be 100% liberalised in 8 months

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.... major foreign investments in Russia as a result

Fortum in Russia

TGC-10

Surgut

Tyumen

TobolskMoscow

St. Petersburg

Chelyabinsk

NyaganKhanty-Mansisk

TGC-1

OAO Fortum

SurgutSurgut

TyumenTyumen

TobolskTobolskMoscow

St. Petersburg

MoscowMoscow

St. PetersburgSt. Petersburg

ChelyabinskChelyabinsk

NyaganNyaganKhanty-MansiskKhanty-Mansisk

-1

OAO Fortum (former TGC-10)• OAO Fortum operates in the heart of Russia’s oil and gas

producing region• OAO Fortum’s power generation ~16 TWh/a and heat

generation ~26 TWh/a

TGC-1• Slightly over 25% of territorial generating company TGC-1

operating in north-west Russia• ~6,250 MW electricity production capacity (appr. 50% hydro),

~24 TWh/a electricity, ~30 TWh/a heat

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Over 80% increase in power generation capacity by2015 through the investment programme

Power generation capacity (MW)

Plant Fuel type Existing Planned Total

Tyumen CHP-2 Gas 755 450 1,205Tyumen CHP-1, Q3/2010 Gas 472 190 662Tobolsk CHP, Q3/2010 Gas 452 210 662Chelyabinsk CHP-3, Q4/2010 Gas 360 220 580Chelyabinsk CHP-2 Coal, gas 320 320Argayash CHP Coal, gas 195 195Chelyabinsk CHP-1 Coal, gas 149 149Chelyabinsk GRES Gas 82 82Nyagan GRES Gas 3x400 1,200Boilers -

Total 2,785 2,270 5,055

(CHP/Condensing)

(CHP/Condensing)(Condensing)

(Condensing)

(Condensing)2007 2015

MW

+82%+2,270 MW

2,785

0

1,000

2,000

3,000

4,000

5,000

6,000

5,055

Fortum today

European power markets

Russia

Baltic Rim

Heat service at competitive conditions

19

Fortum's heat business in the Baltic countriesOutsourced energy service (BtoB) and district heating• Customers

– industry– services and commerce– public buildings– real estates

• Energy sales in Estonia– heat 1.1 TWh/a– electricity 140 GWh/a– gas 200 GWh/a

• Energy sales in Lithuania– heat 64 GWh/a– fuels 50 GWh/a

• Energy sales in Latvia– heat 210 GWh/a– electricity 32 GWh/a

• Personnel: 400

• Production capacity– 144 heating plants– Fuels: natural gas, oil, biomass,

peat– CHP power plant of 25 MWel/ 50

MWth in operation in Tartu,Estonia, by peat and bio fuels

– CHP power plant of 4 MWel/ 4,8MWth in operation in Jelgava,Latvia, by natural gas

– CHP power plant underconstruction in Pärnu, Estonia, 23MWel/45 MWth by bio fuels andpeat

– CHP power plant underconstruction in Klaipeda,Lithuania, 20 MWel/50 MWth bymunicipal and industrial wastes

– CHP development in Jelgava,Latvia, 23 MWel/ 45 MWth by biofuels and peat

– CHP development ...

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Fortum's heat business in PolandDistrict heat to 30 cities and towns

• Heat sales volume 3.6 TWh• Heat and electricity production in

• 100 heating plants• One gas engine CHP power plant• Fuels: coal, natural gas, oil

• Personnel: 800• Past acquisitions:

• DZT, a privately owned DH company in2004

• Czestochowa, a state owned DH companyin 2005

• Wroclaw, a stock listed DH company in2006

• Plock, a municipal DH company in 2006• CHP plant of 65 MWel/130 MWth under

construction in Czestochowa Fortum DZT and Fortum CzestochowaFortum WrocławFortum Płock

Płock

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Fortum's heat business in Finland

• Energy sales– heat 10.7 TWh– electricity 3.2 TWh– industrial cooling 0.05 TWh– gas 0.9 TWh

• Personnel around 400

• Production capacity– 199 heating plants– 9 CHP plants

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Fortum's heat business in SwedenDistrict heatCHPIndustrial co-op.City gasDistrict cooling

Igelstaverket

HMC

HögdalenverketHammarbyverket

SkogåsFarsta

VärtaverketHässelbyverketLidingö

Järfälla

SundbybergSolna

Bollmora

Drevviken

Fittja

Akalla

BristaverketValsta

Vilunda

Rotebro

80 percent of business in the great Stockholm area

Delsbo Näsviken Sörforsa

Hudiksvall IdenorIggesund

Hofors

Torsby

ArvikaAvesta

Kopparberg/BångbroHällefors/Grythyttan

Stockholm

Nynäshamn

Örebro

LaxåGullspång

Grums/Gruvön

Säffle/NPKristinehamn

Karlskoga

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Case Stockholm: District heating an environmentalsuccess story

Fortum Värme's reduced emissions in Stockholm since 1980:

-60% of CO2 >95% of SO2 >80% of NOx

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Case Stockholm: Key issue is change of fuel mix

Production 5202 GWh (4432 heat, 771 electricity)CO2 1200 KtRenewable 20 % (EU's goal 2020!)

Production 10200 GWh ( 8565 heat, 1635 electricity )CO2 400 KtRenewable > 70 %

Fossil oil 44%

Electricity 12%

Waste 10%Sea water 12%

Coal 22%

Coal 14%

Fossil oil 3%Electricity 11%

Bio oil 13%

Waste 12%Seawater 16%

Industrialwaste 9%

Bio fuel 22%

1986 2006

25

050

100150200250300350400

1994

1996

1998

2000

2002

2004

2006

Case Stockholm: Energy efficient District Cooling ispart of the sustainable development

GWh

The largest system in the world for districtcooling with 7 000 000 m2 connected

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Case Stockholm: New waste to energy CHP-plant atBrista, sister plant to Klaipeda

• Fuel 240 000 ton waste

• 57 MW heat

• 20 MW electricity

Bristaverket"Waste to energy a win win solution for business and society"

Fortum today

European power markets

Russia

Baltic Rim

Heat service at competitive conditions

28

Fortum's experiences of heat service at market conditionsMarket based District Heat service in Finland, Sweden and Norway• No centralized price regulation• Consumer protection and competition laws protect Customers against misuse of the

dominant market positionDH companies are in good shape; financially, technically and environmentally• Profitable and able to invest for future competitiveness

– ... in productivity improvements, growth, heat production with optimal fuel mix (bio fuels, wastes,peat, natural gas, coal), and co-generation of heat and power; Competitive service (customerservice, quality, price)

Profitability of investments is based on market conditions– Opportunities to benefit from high efficiency of the CHP plants, optimal fuel mix, reduction of CO2

emissions priced by CO2 allowances market, green and CHP certificates priced at marketInvestment decisions are based on understanding the future market and competitiveness of

the DH service– All opportunities to improve competitiveness of the service will be utilised, for benefit of the

customers and investorsPrice of heat is competitive towards customers' own alternatives (natural gas, electricity, heat

pump, wood, pellets, ...)– Prices are transparent and price changes are reasoned by the DH companies to the Customers

• ... if not competitive, no-one can help but the market is lost for alternatives!!!

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Indifferent, market conditions or regulated market!!

Source: Oil prices SCB, Electricity prices Nordpool, Woodchips STEM

SEK/MWh1 200

1 000

800

600

4001996 1998 2000 2002 2004

Electric boiler

Oil

Woodchips

Heat pump

District heating

2006

Total heating cost, normalbuilding with new installation (193 MWh)

Price development of district heating in Stockholm

Anyway1.) product must be competitive towards Customers' own alternatives and2.) price must not be much lower to enable DH companies to invest in the futurecompetitiveness

Congratulations to theEstonian Power and Heat Association

due to the 15th anniversary