The Nordic power market

Tapio KuulaSenior Vice PresidentFortum Corporation

Fortum Investor/Analyst day 200627 November, London

2

Disclaimer

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

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

3

Contents

• The functioning of the Nordic power market• Main drivers for Nordic power price• Integration to other European markets

4

Large customers

Market design is as important as infrastructure development

Retail marketRetail market

Retail companies

Competitive businesses

DistributionRegulated monopolies

Transmission and system services

Nordic wholesale

market

Nordic wholesale

market

Nord Pool and bilateral

Generation

Independent TSO Independent DSO

Small customers

5

Retail marketRetail market

Wholesale market price is a result of balance in liquid Nordic market – retail markets still mainly national

Large customers

Retail companies

Competitive businesses

Nordic wholesale

market

Nordic wholesale

market

Nord Pool and bilateral

Generation

Small customers

Supply DemandWholesaleprice

Supply DemandRetailprice

6

2005 figures; the effects of the structural changes in Denmark and in Finland have been taken into account.

Fortum

Dong Energy

Vattenfall

others

E.ON53%Hafslund

PlusenergiSEAS-NVE

HelsinkiFjordkraft

Östkraft

Fortum

Vattenfall

Dong Energy

others

Hafslund

E.ON51%

HelsinkiSEAS-NVE

StatkraftGöteborg

BKK

Fortum

Vattenfall

Dong Energy

others

Statkraft

29%

E.ON

PVO

E-CO Energi

Helsinki

Norsk Hydro

BKK

Still a highly fragmented Nordic power market

Distribution

14 million customers~ 500 companies

Retail

14 million customers > 450 companies

Generation

395 TWh> 350 companies

7

Price volatility on a year-to-year basis is driven by the annual generation mix - the system is hydro driven

Condensing power

0

50

100

150

200

250

300

350

400

450

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

TWh/a

Nuclear power

CHP

Wind power

Hydro power

0

5

10

15

20

25

30

35

40

Market price

EUR/MWh

Net import

Nordic total

production

8

Competitiveness demonstrated through power prices

Source: Eurostat 7/2006; prices for electricity and distribution excl. taxes 1/2006

€/MWh

020406080

100120140

Latv

iaEs

toni

aN

orw

ayFi

nlan

dC

roat

iaBu

lgar

ia

Aust

ria

Pola

ndLi

thua

nia

Swed

en

Gre

ece

Hun

gary

Rom

ania

Mal

taH

olla

ndC

zech

R.

Spai

nPo

rtuga

lSl

ovak

iaBe

lgiu

m UK

Ger

man

yIre

land

Italy

Cyp

rus

cent/kWh

05

10152025

Gre

ece

Finl

and

Swed

en

Fran

ce

Spai

n

Aust

ria UK

Den

mar

k

Nor

way

Belg

ium

Hol

land

Irela

nd

Portu

gal

Ger

man

y

Luxe

mbo

urg

Italy

Industry 50 GWh/a

Households 3,500 kWh/a

Source: Reuters, OMEL

Yearly moving average spot price Forwards

€/MWh

German

Spanish

Nord Pool

Dutch

UK

0

102030405060708090

100

2001 2002 2003 2004 2005 2006 2007 2008 2009Nov 17, 2006

9

The liquidity of the Nordpool financial market ensures the credibility of the forward-looking price signals

• Transparent price formation and market information

• Hundreds of actors, liquid market

• Physical spot trade60% of Nordicconsumption*

• Financial clearingmore than five timesthe Nordicconsumption

• Strict insider rules

Nord Pool volume development

TWh

400

300

200

100

0

400

300

200

100

0-93 -94 -95 -96 -97 -98 -99 -00 -01 -02 -03 -04

500

1.000

2.000

3.000

-05

Spot trade

Financial/bilateral clearing

Nord Pool members

2,658

3,108

1,764 1,797 2,156

Mem

bers

* Nord Pool 1-9/2006

10

Information on the status of generation and network (among other key facts) is publicly available

Nord Pool provides a multitude of information readily available online…

Planned outages in Finland 9.10. – 16.10.

UnitEffect (MW)

* Fingrid, for example, reports all operational failures in transmission network online instantlySource: Fingrid; Nord Pool

Period

Inkoo B1

Kristiina B1

Inkoo B3

Meri-Pori B1

Tahkoluoto G1

230

210

230

565

240

10.10.-10.10.

9.10.-16.10.

9.10.-11.10.

9.10.-13.10.

9.10.-9.10.

… the Finnish TSO, Fingrid, also publishes all information online

Example from Fingrid’s state of the power system report*

11

Demand response to short-term price peaks is often the most efficient "reserve capacity" on the market

Source: SSB (Statistic Norway), Nord Pool

2,0

2,2

2,4

2,6

2,8

3,0

3,2

Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-060

100

200

300

400

500

600

Aug2002

Feb2003

Aug2003

Feb2004

Aug2004

Feb2005

Aug2005

Feb2006

Example from Norwegian metals industryEnergy consumption in metals production per month (TWh)

Average Nord Pool spot price per month (NOK/MWh)

12

Strong focus on market operations through organisation structure in Fortum

Physicaland

financial Nordic power market

Generation

Focus on technical, environmental and asset productivity issues of the generation portfolio.

Portfolio Management & Trading (PMT)Focus on market operations of the generation portfolio. Physical and financial trading.

13

Contents

• The functioning of the Nordic power market• Main drivers for Nordic power price• Integration to other European markets

14

An increasing trend in Nordic power prices

0

10

20

30

40

50

60

70

80

90

1995 1997 1999 2001 2003 2005 2007 2009 2011

EUR

/ M

Wh

System Price Forward Curve 21.11.2006

15

Fundamental Price Drivers

• Demand-Supply balance– Tightening all over Europe– Need for new capacity

• Weather: precipitation, temperature and wind• CO2-allowance prices - Kyoto period and beyond• Fuel prices• Convergence of power markets on European level

– Increasing interconnection capacity– Common need for new capacity; common cost for building it– Increasing dependence on condensing power - coal and gas?– EU-wide CO2-trading increases correlation between markets

16

Spot price is based on supply and demand balance

SUPPLYHydro production

• Uncertain future volumes• Long term profit maximisation sets the

value• Storable and run of river hydro power

Thermal production• CHP, nuclear, condense• Available capacity• CO2 price changes• Fuel price changes

Exchange with Europe• Price difference between Nordic and

European market

DEMAND• Seasonal variation, hourly profile• Temperature dependence• Price elasticity

Volume

PriceOil condense

NuclearHydro

CHP

Demand Supply

Coal condense

17

Electricity demand in Nordic countries 1980-2005

GWh/a

Source: Nordel

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

SwedenNorwayFinlandDenmark

18

0

20

40

60

80

100

120

140

160

Denmark Norway Sweden Finland

Other

Households

Retail and services

Industries

TWh/a

Source Nordel

Electricity demand in Nordic countries 2005

19

GWh/a

Lähde:: Nordel

Power generation and procurement 2000-2005

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 00019

80

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Imports

Wind

Condensing and CHP

Nuclear

Hydro

20

TWh/a

* )

*) incl. condensing productionSurce: Nordel

Power generation in Nordic countries 2005

Total 395 TWh

0

20

40

60

80

100

120

140

160

Denmark Norway Sweden Finland

Wind

Gas

Condensing

CHP, industry

CHP, districtheatingNuclear

Hydro

21

European wide ...

0500

1,0001,5002,0002,5003,0003,500

2000 2005 2010E 2015E 2020E

TWh

900 TWh

New capacity will be needed to meet the demand growth

... and in the Nordic market

Existing/remaining capacity DemandSource: Eurprog 2005; Europe: EU25

TWh

0

100

200

300

400

500

2000 2005 2010E 2015E 2020E

80 TWh

22

Forward prices reflect the foreseeable supply-demand balance and are indicators of future electricity price

0

10

20

30

40

50

60

70

80

Source: IEA "World Energy Outlook 2006"; Elforsk "El från nya anläggningar", 2003. Adjusted to indicate nominal costs year 2011.Large variations in cost of new hydro and wind due to location and conditions

Source: Nord Pool, Fortum

Coal Gas Nuclear Hydro Wind

EUR/MWh

Fuel costsFixed costs( variation)

CO2 cost 15 €/ton

1995 -97 -99 -01 -03 -05 -07 -09 2011

EUR/MWh

0

10

20

30

40

50

60

70

80

Futures23 Nov 2006

23

Hydro remains a key driverW

ater

+ S

now

com

pare

d to

nor

mal

-50

-40

-30

-20

-10

0

10

20

30

0

10

20

30

40

50

60

70

80

Nor

dic

spot

pric

e

EUR/MWhTWh

Nordic spot price

Water + snow balance

2000 2001 2002 2003 2004 2005 2006

24

100

120

140

160

180

200

220

240[TWh]

0

10

20

30

40

50

60

70

80

90

100[EUR/MWh]

Yearly average inflow 1990-2000Water inflow 52 cum weeksHydro production 52 cum weeksWeekly System Price

2003 2004 2005 2006

Cumulative inflow below normal due to poor snow accumulation last winter plus dry summer and autumn this year

25

Norpool spot prices clearly above 2004-2005 levels

0

10

20

30

40

50

60

70

80

90

1/1 1/2 1/3 1/4 1/5 1/6 1/7 1/8 1/9 1/10 1/11 1/12

Day

Avg

Pric

e E

UR

/ M

Wh

2004 2005 2006 44,24 EUR / MWh November 22, 2006

26

NordPool year forwards

27

Nordic water reservoirs

Source: Nord Pool - Norway and Sweden reservoirs

28

Hydro power production in Norway and Sweden

0

1

2

3

4

5

6

1 5 9 13 17 21 25 29 33 37 41 45 49 53

Prod

( TW

h / w

k )

0

40

80

120

160

200

240

Cum

Pro

d ( T

Wh

)

2004 2005 2006 cum. 2004 cum. 2005 cum. 2006

29

CO2 important in short and long term

• Weather: temperature, wind and precipitation - e.g., weather in Spain affects all European CO2 and power markets

• Fuel prices: coal to gas switch (gas linked to oil, too), biomass• Kioto mechanisms in acquiring additional emission allowances:

CER-credits (Certified Emission Reductions) from CDM projects in developing countries (Clean Development Mechanism); from year 2008 ERU credits (Emission Reduction Units) from JI projects (Joint Implementation) mainly in Eastern Europe and Russia, as well as AAU allowances (Assigned Amount Units) from states being under their Kyoto caps ("hot air")

• Allocation of emission allowances for the period 2008-12: tightness to existing plants, free allowances to new plants, purchases by governments

• Possibilities to develop CO2-free energy production

30

0

10

20

30

40

50

60

70

01/05 03/05 05/05 07/05 09/05 11/05 01/06 03/06 05/06 07/06 09/06 11/06

EUR/MWh

CO2 price was driving both Nordic and German power forwardprices until May 2006

2005 2006

German price Year 2007

CO2 price Year 2007

Nordpool Price Year 2007

31

Emissions trading impacts marginal costs of generation and the European merit order

With carbon at € 20/tCO2Without carbon constraint

Source: Projected Costs of Generating Electricity, 2005 Update; OECD/IEA

32

CO2 prices for 2007 have declined clearly more than for 2008

0

5

10

15

20

25

30

35

Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06

EUR

/ to

n of

CO

2

CO2 price 2007, ECX CO2 price 2008, ECX

33

Phase I Phase II

- 6%

1920

1960

2000

2040

2080

2120

2160

2005 2006 2007 2008 2009 2010 2011 2012

National Allocation Plan 2005-2012

Phase IThe realised emission in 2005 was 90 Mton less than the yearly average allocation in Phase I

The market price is currently ~8 EUR

Phase IIThe guideline from European Commission is a reduction of 6% between the phases. The final allocation plan is expected to be published in December

Emission Market - tighter allocation plan in phase II

- 6%

CO2 price

Phase I Phase II

2005 2006 2007 2008 2009 2010 2011 2012

Forward

0

10

20

30

40

50

EUR

/t C

O2

34

05

101520253035

EUR

/ tC

O2

020406080

100120

GB

p / t

herm

01020304050607080

USD

/ bb

l

0102030405060708090

USD

/ t

Gas price (UK)

CO2 priceCoal price

Oil price

2004 2005 20082006 20072004 2005 20082006 2007

2004 2005 20082006 20072004 2005 20082006 2007

Fuel prices affect the CO2 price

Source: ; market prices 17 November 2006; 2006-2008 future quotations

Markets expectcoal price to stayabove 60 USD/t

Futures show a slightly decreasing trend?

Oil futures at a highlevel

In combination of high coal

price and low gas price the coal to gas switch is

preferable

35

Summary on power price drivers

• Main prices drivers are supply/demand balance, hydrological situation and prices for CO2 allowances

• In the Nordic area year 2006 hydrological balance has turned into deficit due low inflows resulting in higher prices than previouscouple of years

• During 2006 prices for emission allowances have dropped to lowest levels since early 2005 when the market opened. The emissions allowance market faces a discontinuity point when the Kyoto period starts in the beginning of 2008. Negotiations on Post-Kyoto are ongoing

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Contents

• The functioning of the Nordic power market• Main drivers for Nordic power price• Integration to other European markets

37

Today, physical constraints in transmission divide Europe into price regions – "regional markets"

Nordic

UK

IberiaCore Central

Europe

Italy

South-EastEurope

Centrel

High congestion from Central Europe to

Nordic, UK and Iberia

NL/BE

High congestion from Core Central Europe to BENELUX.

Integration of BENELUX to Core Central Europe is first in

line to proceed.

High to medium congestion from Centraland South-East Europe

to Central Europe

Medium to high congestion from Central

Europe to Italy and particularly within Italy

Baltics

Sources: Nord Pool, EEX, Powernext, EXAA, OMEL,GME, POLPX, Reuters

50

52

50

52

63

59

53

75

30

29

46

47

47

57

52

55

58

28

0 20 40 60 80

Nord Pool

Germany

France

Austria

UK

TheNetherlands

Spain

Italy

Poland

EUR/MWh

2006 (1-10) 2005

Average wholesale electricity prices 2005 and 2006, EUR /MWh

38

European integration continues - Market coupling between Denmark and Germany

PRESS RELEASE 16/2006, (Lysaker, 02 November 2006) Market coupling between Denmark and GermanyThe European Energy Exchange AG, Nord Pool Spot AS, Energinet.dk, Vattenfall Europe Transmission GmbH and E.ON NetzGmbH have adopted a Memorandum of Understanding concerning market coupling.The companies agree that the integration of wholesale electricity markets requires a more efficient utilization of existing interconnectors. During the next three months an implicit auction concept shall be developed. The aim is to introduce an implicit auction, i.e. the joint allocation of energy and capacity, for the daily cross-border capacity allocation for both interconnectors between Denmark and Germany (i.e. the connection between E.ON Netz and Jutland as well as the KONTEK interconnector).

39

Nordic market is becoming more integratedinto Europe

• NorNed (Norway - The Netherlands) by2008

• Estlink (Estonia - Finland) by 2007• Nordel priority projects enhance Nordic

power market integration– Snitt4, Sweden. Technical solutions under

investigation. In operation 2011– FennoSkan 2 (800MW), decided. Operation 2010– Nea-Järpströmmen (200MW), decided. Operation

2009– Skagerrak (600MW). To be investigated further– Store Baelt (600MW). Applications before year-end

2006 (operational ~2010)

• In 2005, Nord Pool introduced a spot market area "KONTEK" to facilitate market coupling on the Kontek cable

2750 1500

1300

300

5060

900

2200

900

1200

600

1000200

125

600

10001600

2500

3500

1700

1500800

500

70

1040

1600

550600

1200

3800

700

350

600

+100

100+ 200

1000

600

600

+200

1000

550

+300

+800

1000

PresentUnder construction

DiscussedPlanned

Nordel priorityprojects

630 (490)+90

2050

40

Summary on integration to other European markets

• Integration of the Nordic market to other European markets continues via new grid investments and improved congestion management

• The Emissions Trading System also contributes to the integration

• European level market liberalisation and integration continues.Almost all Member States are opening the national markets next year. Security of European energy supply is high on agenda and nuclear is brought back as feasible solution

41