mikael lilius 23 may 2006 deutsche bank · fortum investments in the nordic production oskarshamn...
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Fortum - a leader in the Nordic power markets
Mikael Lilius23 May 2006
Deutsche Bank
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Fortum today
Fortum's view on electricity market development
Russian electricity market
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Internationalinvestors 34.4%
Finnish State 51.2%
Other Finnishinvestors 7.2%
Households 5.0% Financial and insuranceinstitutions 2.2%
• Leading power and heat company in Nordic• Founded and listed at the Helsinki Stock Exchange 1998• More than 50,000 shareholders• Among the most traded shares in Helsinki stock exchange
Fortum - a listed company
30 April 2006
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Fortum's strategy
Benchmark business performance
Fortum focuses on the Nordic and Baltic Rim marketsas a platform for profitable growth
Become the leadingpower and heat
company
Become theenergy supplier
of choice
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Leading market positions in the Nordic area
Electricitydistribution
Powergeneration
Retail sales of electricityHeat
Nro 1 Nro 2
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Baltic countriesHeat sales 1.2 TWhDistribution cust. 22,000Poland
Heat sales 3.9 TWhElectricity sales 20 GWh
NW Russia(in associated companies)Generation ~6 TWhHeat production ~10 TWh
NordicGeneration 51.2 TWhElectricity sales 58.2 TWhDistribution cust. 1.4 mill.Electricity cust. 1.2 mill.Heat sales 19.4 TWh
Presence in focus market areas
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Large customers
Market Structure - Business Value Chain
Small customers
Retail marketRetail
marketRetail companies
Competitive businesses
DistributionRegulated monopolies
Transmission and system services
Nordic wholesale
market
Nordic wholesale
market
Nord Pool and bilateral
Generation
Independent TSO Independent DSO
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Fortum Markets
Large customers
Fortum Business structure
Small customers
Other retail companies
Fortum Distribution
Transmission and system services
Nordic wholesale
market
Nordic wholesale
market
Nord Pool and bilateral
FortumPower
Generation
Power Generation
62 %Heat 18 %
Distribution18 %
Markets 2 %
Fortum's operating profit in 2005
EUR million 1,334
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Fortum's power and heat generation by source
20.6 TWh in 2005Total production capacity 8,252 MW
Fortum’s Nordic heat production
Oil 10%
Peat 7%
Heat pumps, electricity16%
Waste 6%
Biomass fuels24%
Natural gas 9%
Other 11%
Coal 17%Hydro power 42%
Peat 1%
Coal 3%
Other 2%
Nuclear power 50%
Biomass 2%
51.2 TWh in 2005Total generation capacity 11,136 MW
Fortum’s Nordic power generation
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Excellent share performance
Market valueEUR billion
4.05.3
6.9
11.8
31 Dec2001
31 Dec 2004
31 Mar2005
Neste Oil as
dividends
22 May 2006
13.1
-3.3
31 Dec2000
3.4
31 Dec2002
31 Dec2003
15.8
Share priceIndex
1/01 1/02 1/03 1/04 1/05 1/06
Dow Jones 600Utilities Index
Fortum
100
200
300
400
500
600
700
Source: Reuters, 22 May 2006, adjusted for Neste spin-off
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Fortum today
Fortum's view on electricity market development
Russian electricity market
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Towards an open European power market
• Market-based development • Increased competition• Increased efficiency
EU Directive: Market liberalisation, i.e., free choice of supplier
EU Commission Integration of national powerstrategy: markets through regional
markets into one European power market
1990's 2000 - 2010 -
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Nordic market becoming more integrated into Europe
• Several transmission projects ongoing and discussed
• Nordel priority projects• more connections to continental Europe
• Nordel report on enhancing market functionality:
• Increased harmonisation• TSOs' role• balance settlement• intra-day trading• market monitoring
• Congestion management development• more market based methods
• Increased transparency
PresentUnder construction
DiscussedPlanned
2750 1500
1300
300
5060
900
2200
900
1200600
1000 200
125
600
10001600
2500
35001700
1500800
500
2050
70
1040630 (490)+901600
550600
1200
3800
700
350
600
+100
100+ 200
1000
600
600
+200
1000
550
+300
+800
1000
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Requirements of a Functioning Electricity Market
• Legislation and regulation• stability and predictability• non-discriminatory
• Transmission connections• cooperation between TSOs• market based congestion management
• Power exchange• reliable price• liquid market - both physical and financial• international intraday and balancing markets
• Market transparency• information affecting market price available
at the same time for all market participants
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Spot history and forwards in Europe
Source: Reuters, OMELSource: Reuters, OMEL
EUR/MWhYearly moving average spot price Forwards
EUR/MWh
UK
Dutch
German
Nord Pool
SpanishMay 2, 2006
2001 2002 2003 2004 2005 2006 2007 2008 20090
10
20
30
40
50
60
70
80
90
100
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EU 15~ 300 GW new capacity by 2020~ 500-600 GW new capacity by 2030
A huge need for new capacity in Europe...
Source: VGB PowerTech 2004
EU commission:"Green Paper on Secure, Competitive and Sustainable Energy for Europe"
... total need for investments in new and replacement capacity appr. 1000 billion euros by 2030100 000 MW
200 000 MW
Other
Natural gas
Coal
Nuclear
Hydro
Capacity EU 15GW
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... in Nordic countries ... ... in the UK and Germany ...
Source: Fortum
~55 TWh
0100200300400500
2005 2010 2020
TWh
DemandSupply
0200
400
600TWh
2005 2010 2020
~180 TWh
Source: Eurprog 10/2005: 2005 generation, capacity closures by 2010 and 2020 included
0200
400
600
2005 2010 2020
TWh
~170 TWh
... in practically all European countries
... and in Russia
Source: Ministry of Energy; Russian Energy Strategy 2020
Demand growth~300-400+ TWh before 2020
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New capacity will be needed in the Nordic market
Demand and capacity development in the Nordic market
Existing/remaining capacityCommitted new capacity
0
100
200
300
400
500
2000 2004 2005 2010 2015 2020
TWh
• Electricity demand is expected to increase by around 55 TWh to 2020
• Committed plans of new capacityapprox. 20 TWh
• Additionally:– effect increases in Swedish nuclear
may bring up to 8 TWh morecapacity
– possible closures of currentcapacity may take away up to 10 TWh by 2020
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New capacity will require an EUR 35+ price
Source: Nord Pool, Fortum Source: NEA & IEA "Projected Cost of Generating Electricity", 2005 update (average of European projects); Elforsk: "El från nya anläggningar", 2003.
Coal Gas Nuclear Hydro Wind0
10
20
30
40
50
60
70
80EUR/MWh
Fuel costs, excl. CO2 costs
Fixed costs( variation)
FuturesMay 18, 2006
EUR/MWh
0
10
20
30
40
50
60
1995 1997 1999 2001 2003 2005 2007 2009
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0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
Denmark Norway Sweden Finland
Wind power
Other thermal
Nuclear power
Hydro power
MW
Nordic capacity structure
Total 91 100 MW (2004)
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Fortum investments in the Nordic Production
Oskarshamn
LoviisaForsmark
Olkiluoto
Decided and planned investments in additional capacity by 2010
2 7001 350Sum500540CHP and Thermal600150Hydro1600660Nuclear
MEURMWFortum's share*
* Fortum's pro rata share of associated companies' investments included
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Development of the European Emission Trading System
Future challenges• EU committed to emission trading• Improving the market by increasing
market transparency• information available to all market
participants at the same time• common procedures -
harmonisation• stability and predictability
• Expansion of emission trading during the Kyoto period
• JI and CDM utilisation• National allocation plans for second
trading period (NAP 2)
ETS Prices 2005-2006
€/tC
O2
0
5
10
15
20
25
30
35
1 /05 4 /05 7 /05 10 /05 1 /06 4 /06
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Fortum today
Fortum's view on electricity market development
Russian electricity market
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The large Russian power market is undergoingmajor change
Source: IEA
• A major need for new capacity
• Big potential for efficiency improvement
Power generation 2003
0
500
1 000
1 500
2 000
USChin
aJa
pan
Russia Ind
iaGerm
any
Canad
aFran
ce UKNord
icBras
il
> 4,000TWh
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-6-4-202468
10
-96 -97 -98 -99 2000 -01 -02 -03 -04 -05F
Sweden, Finland, Norway
More favourable business environment is developingin Russia
GDP, USD billion (ppp) Real GDP growth rate, %
1.4SwedenFinland
0.250.15
Norway 0.18
Russia
0
2
4
6
8
10
-96 -97 -98 -99 2000 -01 -02 -03 -04
Foreign direct investments into Russia, USD billion
In relation to GDP, accumulated foreign direct investments are still only a fifth of the average level of the other European transition economies
Exports to Russia USD ~100 billion/a; from Germany, China, Ukraine, Italy, Finland, France, Japan …
• from Finland USD 5 bn• from Sweden USD 2 bn
In Q3 of 2005, measured by trade volume, Russia became Finland’s overall largest trading partner.
Russia
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Russia is a large country – power market twice the size of Nordic
Generation 931 TWh377 TWh
Demand 923 TWh389 TWh
Capacity 216 700 MW91 300 MW
Population 143 million24 million
Consumption/capita 5 525 kWh15 138 kWh
RussiaNordic power market
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• Power and heat sector reform
• Need for huge investments
• Need for efficiency improvement
• Strong growth potential
From a western industry actor's perspective Russia is an emerging opportunity
0
200
400
600
800
1000
1200
1400
1990 1995 2000 2005 2010 2015 2020
Electricity production, TWh
Low
High
Russian Energy Strategy
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Development of Russian power industry –a Nordic/Western analogy
Unbundling of businesses by type of activity
Competitive businesses:
Market liberalisation in competitive businesses
• Generation• Sales
Pricing model reform – from tariff regulation to competitive pricing
Regulated monopolies:
• Transmission• Distribution
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Fortum's current operations in Russia
• A ~1/3 stake in companies spun-off from OAO Lenenergo, the largest utility company in northwest Russia;
• Agreement to acquire a 24.8% stake of Kolenergo from Norilsk Nickel
• Operation & maintenance services
• Electricity imports
• Nuclear fuel and coal imports
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Fortum's strong foothold in NW Russia today originates from stake in Lenenergo
• Largest utility in northwest Russia• 9 thermal and 6 hydro plants• Power generation
• capacity ~3,240 MW • production ~13.4 TWh/a
• Heat generation • capacity ~13,900 MW • production ~25.2 TWh/a
• Personnel ~12,500 • Fortum's share of the company about one
third
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TGC-1 operating as of 1 October 2005
Finland 16,500
Installed capacityMW
Norway 28,300
Sweden 33,600
Denmark 12,700
Territorial Generating Company TGC-1• Production capacity ~ 5,750 MW,
of which hydro 2,874 MW • Third largest territorial generation
company in Russia• Started operation on 1 October 2005
based on a leasing model• Transfer of assets into TGC-1's owner-
ship targeted at the beginning of 2007• Fortum's calculated share ~26% *)
• On TGC-1's Board of Directors Fortum has 3 representatives out of a total of 11 members
*) Direct owners of TGC-1 are initially Lenenergo 63%, Kolenergo 25%, Karelenergo 12%
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