The value of nuclear and hydro capacity in the future energy system

Capital Markets Day

Tiina Tuomela / Executive Vice President Generation / 16 November 2016

Loviisa nuclear power plant, Finland

2

Agenda• Generation asset portfolio

• Key priorities

– Value drivers

• Nordic power market

• Hedging

• Productivity

• Nuclear liabilities

• New revenue streams

• Summary

Xxx, Xxx

Imatra hydro power plant, Finland

3

Generation – balanced portfolio of hydro and nuclear

2015 figures Total Sweden (share of total)

Finland (share of total)

Capacity

Hydro

Nuclear

Thermal

4,623 MW

3,004 MW

376 MW

67%

51%

-

33%

49%

100%

Production

Hydro

Nuclear

Thermal

25.0 TWh

22.7 TWh

0.3 TWh

66%

48%

-

34%

52%

100%

Net assets* 5,913 M€

Investments* 203 M€

Personnel* 1,341

*Power and Technology segment

Olkiluoto NPP

Loviisa NPP

Forsmark NPP

Oskarshamn NPP

Meri-Pori TPP

Hydro plants

Nuclear reactors

Thermal plant

Productivity

Fleet flexibility

New revenue streams

Industry transformation

Fair regulation

People performance

and safety

4

Generation’s key priorities

• Drive industry transformation and consolidation

• Drive productivity: cost and capex efficiency

• Increase value creation and find further fleet flexibility

• Enhance fair regulation

• New revenue streams from nuclear service and origination business

Fortum Generation – Most competitive and flexible clean power generator

Revenue drivers

• Power price

• Production volumes and availabilities

• Trading and optimisation

• New revenue streams

Cost drivers

• Production cost

• Investment level

• Taxes and transmission fees

5

Generation value drivers

• Nordic power price is determined by the supply and demand balance

• Supply is driven by hydrological variation, available RES, Nordic & Baltic coal condense prices as well as Continental and Russian imports

• Demand is driven by industrial activity, household electrification and export

6

Price drivers in Nordic power marketNordic power price setters

SE1

SE4

EE

LV

LT

PL

FI

SE3

Continentalcondense

DK1

DK2

Russiancondense

NO2

NO5 NO1

NO3

NO3

SE2

Fortum Generation division assets

Fortum other divisions’ assets under

Generation trading operations

Scandinavianhydro

availability

Scandinavian wind

Baltic condense

Nordiccondense

Continental nuclear

availability

Continental Wind and solar

Danish wind

Polish condense

CO2, coal prices

Nordic power prices and hydro reservoir levels 2005–2016

0

10

20

30

40

50

60

70

80

90

100

-30

-20

-10

0

10

20

30

Syste

m P

rice (

€/M

Wh

)

No

rdic

Hyd

ro R

eserv

oir

Su

rplu

s/D

efi

cit

(T

Wh

)

Nordic hydro reservoir balance SYS price

7

Nordic prices driven by weather (hydrology and temperatures), coal SRMC and Continental prices

Source: Nord Pool Spot

Weather has turned drier lately and dry outlook continues for the near term

0

10

20

30

40

50

60

70

80

90

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

TWh

Week

NO reservoir content

5 - 95% Average 2016 2015

0

5

10

15

20

25

30

35

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

TWh

Week

SE reservoir content

5 - 95% Average 2016 2015

8

Norwegian reservoirs currently close to normal levels, while a clear deficit in Swedish reservoirs

Source: MKOnline

9

Electricity demand is seasonalFlexible production is valuable, in the Nordics it is primary hydro

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Germany Nordic France

Production mix in 2015

Other renewables

Fossil fuels

Hydro

Nuclear

60

65

70

75

80

85

90

95

100

105

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

Demand seasonality of selected markets in 2015

Germany

Nordic

France

Source: ENTSO-E Statistics

Jan indexed t

o 1

00

• Natural variance on annual availabilities

due to varying outage scopes

• Loviisa and Olkiluoto located in Finland,

are consistently among top NPPs globally

in terms of availability

• In recent years good development in

Swedish plants

10

Nuclear fleet availability improved

Futures:

days, weeks

Forwards:

months,

quarters and

years

2008: ~2,500 TWh

Nasdaq financial

trades

2014: ~1,500 TWh

Nordic power market, several trading places– base load generation hedged long prior to delivery, while reservoir based hydro has optional value closer to delivery

11

Elspot (day-ahead) Elbas (intraday)

System

responsible:

Derivatives market

Nasdaq Commodities OMX/OTC

Physical deliveries

Nord Pool

Balancing

markets

Po

wer

deli

veri

es

Nord Pool

intraday

market

2015:~5 TWh

Statnett

Balancing

Market

2015: ~1,230 GWh

Svenska Kraftnät

Balancing

Market

2015: ~1,260 GWh

Fingrid

Balancing

Market

2015: ~230 GWh

Energinet.dk

Balancing

Market

2015: ~280 GWh

Time before

delivery: 10 y… 1 d 12 h…36 h 36 h…1 h 1 h…

Nord Pool

day-ahead market

2015: ~374 TWh

12

Wide toolbox for hedging but liquidity limits usability of some products

Nord Pool system

forwards and options

• Cash-settled, cleared

instruments against system price

• The main instruments for

hedging

• Good liquidity in the front end

Electricity Price Area

Differences (EPADs)

• Forwards used for hedging area

price difference vs. system

• Cash-settled

• Liquidity decreases quickly with

time

Forwards for variable cost items

• Variable cost components are mainly in coal and CO2

• Used for securing price premium against cost of coal fired power plants

Very liquid

*OTC trades not included.

0%

10%

20%

30%

40%

50%

60%

deliveryyear

Y-1Y-2Y-3Y-4

Tra

de

d v

olu

me

per

ye

ar

of to

tal vo

lum

e (

%)

YR-15 product traded volume per year*- Market liquidity on the market grows towards

delivery

Helsinki (26 TWh)

Stockholm (30 TWh)

Sundsvall (3 TWh)

System (725 TWh)

0%

20%

40%

60%

80%

100%

Q3-2 yearsahead

Q4-2 yearsahead

Q1-1 yearahead

Q2-1 yearahead

Q3-1 yearahead

Q4-1 yearahead

Q1-Current Q2-Current Q3-Current

Average hedge ratio (and 20% and 80% percentiles) before delivery

Fortum Reported Hedge Ratios 2008-2016

Interim report Q3/16

The blue pipeline consists of Fortum reported historical hedge levels (20-80% range)

13

For Fortum’s hydro and nuclear dominated fleet the hedge ratios have been around 60–80%

Reported hedge ratios in Interim reports 2008-2016.

Q3/16 current year 80%, next year 2017 50% and two years ahead 2018 30%.

20

25

30

35

40

45

50

55

60

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Achieved power price vs Spot area price (SYS+FI&SE) 2005-2015

Achieved power price Spot area price (SYS+FI&SE) Average achived power price Average spot area price (SYS+FI&SE)

14

Fortum’s hedging has reduced volatility and increased achieved power price over time

Spot area price = SYS + (40 % FI + 40 % SE3 + 20 % SE2)

Average achieved power price

• Outsourcing of O&M

– Hydro

– Thermal

• Constant portfolio optimisation

• Procurement savings

• Flexible use of resources

15

Focus on productivity – Operative fixed cost trend downwards

-12%

*Operative fixed costs excluding taxes

• Swedish energy policy agreement in June 2016

– Nuclear capacity tax will be reduced to 1,500

SEK/MW per month from 1 July 2017 and

abolished on 1 January 2018.

– Decrease the hydropower real-estate tax rate over

a four-year period beginning in 2017, from todays

2.8% to 0.5%.

• Real estate taxation in Finland

– Power plants subject to higher real estate tax rate

(3.1%) than other properties (~1%)

• Water framework directive

– Possibly could mean additional costs in Sweden

• Nuclear waste management

16

Positive progress in taxation but still need for active influencing

0

50

100

150

200

250

300

2012 2013 2014 2015 2016 FC2017 FC2018 FC2019 FC2020

Real estate and capacity taxesMEUR

In Finland and Sweden

• Infrastructure for waste management well-established

• Cost estimates based on detailed technical plans,

experience, scientific findings and tenders received

from suppliers

• Funds transparently accumulated in segregated

external funds

• Liabilities based on annual cost estimates and

technical plans updated every third year

• Finland: Plan & estimates updated Jun 2016,

Government decision by the end of 2016

• Sweden: Plan & estimates to be submitted Jan 2017,

Government decision Dec 2017

– Impact of Oskarshamn unit 1 and 2 closures

– Calculation period likely to increase from 40 to 50 years

17

Nuclear waste management

Nuclear assets

& total liabilitiesstatus 30 Sep 2016

Liability,MEUR

Available

funds,MEUR

Coveragefrom IFRS

perspective

Loviisa 836 1,094 131%EUR +258 million

TVO 962 1,369 142%+407 M€

Fortum’s net share

EUR +108 million

OKG and Forsmark 3,125 2,976 95%-149 M€

Fortum’s net share

EUR -61 million

New revenue streams and growth

Nuclear services

• Continue building a strong new leg in addition to

nuclear generation business

• Focus on scalable offerings in selected niche

areas where strong nuclear expertise is a

necessity

• Several orders received and significant additional

sales pipeline built

• Increased scalability through strategic

partnerships, potential acquisitions

Origination

• Provide commodity market products and services to

B-to-B customers

• Expand existing origination offering in home markets

• Green products

• Virtual power plants

• Asset management

• Demand response

• Risk management tools and support for customers’

investments

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www.fortum.com/investors