Electricity market in the Baltic Sea area todayBaltic Sea area today

Simon-Erik OllusBaltic Energy Forum, Vilnius 20 November 2014

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. should consult an independent financial adviser.

2

Content

• Fortum today

• Development of electricity market in the Baltic Sea area

• Key take-aways

3

Fortum’s geographical presence

OAO Fortum Power generation 20.0 TWh

Russia

Nordic countriesPower generation* 46.5 TWhHeat sales* 13.9 TWhDistribution customers in Sweden 0.9 million

Electricity customers 1.2 million

Power generation

Electricity sales

Heat

Distribution

Key figures 2013*Sales EUR 6.1 bnOperating profit EUR 1.7 bnBalance sheet EUR 23 bnPersonnel 9,900

4

* incl. Fortum Värme; power generation 1.3 TWh and heat sales 8.2 TWh.

Power generation 20.0 TWhHeat sales 24.2 TWh

PolandPower generation 0.6 TWhHeat sales 4.0 TWh

Baltic countriesPower generation 0.5 TWhHeat sales 1.1 TWh

Great Britain (Sold in Oct ‘14)

Power generation 1.0 TWhHeat sales 1.8 TWh

IndiaPower generation ~9 GWh

In addition, ~25% share in TGC-1

Appr. 110,000 shareholders

• Power and heat company in the Nordic countries, Russia, Poland and the Baltics

• Listed at the Helsinki Stock Exchange since 1998

• Among the most traded shares on the NASDAQ OMX Helsinki stock exchange

• Market cap ~16 billion euros

Households 8.3%

5

31.10.2014

Foreign investors 32.2%

Finnish State 50.8%

Other Finnish investors 7.2%

Financial and insurance institutions 1.5%

Switzerland ~6%

Luxembourg ~10%

Rest of Europe: ~13%

Germany ~5%

Rest of the world ~7%

US ~44%

UK ~19%

Nuclear power 48%

Fortum's European power generation in 2013

Fortum's European heat production in 2013

Oil 1%

Coal22%

Biomass 28%

Fortum's European power generation based on hydro and nuclear power – wide flexibility and local fuels in heat production

Coal 7%

Other 2%

Hydro power 37%

Natural gas 3%

European generation 48.7 TWh(Generation capacity 10,873 MW)

Biomass 3%

European production 18.6 TWh(Production capacity 8,193 MW)

Peat 2%Oil 1%

Heat pumps, electricity 16%

Waste 12%Natural gas 19%

6

Incl. Fortum Värme; power generation 1.3 TWh (capacity 610 MW) and heat production 8.2 TWh (capacity 3,626 MW).

600

800

1000

1200

g CO2/kWh electricity, 2012

201363% of Fortum's total power generation CO2-free88% of Fortum’s power generation in the EU CO2-free

Close to 100% of the ongoing investment programmein the EU CO2-free

Fortum's carbon exposure among the lowest in Europe

0

200

400

DE

I

Dra

x

RW

E

SS

E

ED

P

E.O

N

Vat

tenf

all

Ene

l

Edi

pow

er

Uni

on F

enos

a

CE

Z

EnB

W

GD

F S

UE

Z

Don

g E

nerg

y

Iber

drol

a

For

tum

tota

l

ED

F

Ver

bund

For

tum

EU

PV

O

Sta

tkra

ft

42

Average 350 g/kWh

171

7

Note: Fortum’s specific emission of the power generation in 2013 in the EU were 70 g/kWh and in total 202 g/kWh.Only European generation except “Fortum total“ which includes Russia.

Source: PWC & Enerpresse, November 2013Climate Change and Electricity, Fortum

Content

• Fortum today

• Development of electricity market in the Baltic Sea area

• Key take-aways

8

Power generation in the Nordic and Baltic countriesDominated by hydro and nuclear, with wind and biomass increasing - fossil fleet in the margin and Baltics become an important price anchor for Nordics

80

100

120

140

160

Fossil fuels

Nuclear

Total generation in 2013

86

TWh %

48

23

13

Nordic383 TWh

Baltics22 TWh

-

TWh %

16

-

72

TWh

9

Source: ENTSO-E Statistical Factsheet 2013, Fortum Industrial Intelligence

*) Normal annual Nordic hydro generation 200 TWh, variation +/- 40 TWh.

0

20

40

60

80

Denmark Norway Sweden Finland Baltics

Biomass

Wind

Hydro *

Nordic net export in 2013: 0.4 TWhBaltic net import in 2013: 4.8 TWh

23

203

23

6

53

6

1

4

1

5

18

5

Still differences in hourly power prices in northern Europe

Prices on the peak loadhour (17-18 CET)of Wednesday 12 Nov 2014(€/MWh)Nordic systemprice €33.48/MWh

33.74

33.74

63.20

Congestedcommercialpower flows(MW)12 Novat 17-18

1510

1200

10

68.9833.74

29.7633.74

63.20

74.06

60.70 181.73

1200

650

700

1800950

1000615

585

0

300

Source: Nord Pool Spot, EPEX Spot, Polish Power Exchange, Fortum Industrial Intelligence

Interconnection capacity in Nordics and Baltics will double by 2020 EstLink, NordBalt, LitPol and EE-LV key enablers for Baltics

Two 1400 MW NO-UK links as EU Projects of Common Interest: NSN link to England agreed to be built by 2020, NorthConnect to Scotland still requiring Norwegian permission

First direct 1,400 MW NO-DE link

The Baltic Energy Market Integration Plan and the Northern Seas Offshore Grid are included as priorit y electricity corridors in EU’s Infrastructure Guidel ines, approved in April 2013

New internal Nordic grid investments provide for increased available capacity for exports to the Continent and Baltics

350 MW of export capacity from Finland to Russia becoming available in December 2014

EstLink 1 (350 MW) in use since 2007, EstLink 2 (650 MW) since winter 2013/14, resulting in EE & FI power price convergence

11

First direct 1,400 MW NO-DE linkagreed to be built by 2018

EU financial support for a 700 MW DK-NL link, due to be built by 2019

Jutland – DE capacity planned to grow by 720 MW by 2019, with further 500 MW increase by 2022

Hansa PowerBridge by 2025 between Sweden and Germany

LitPol Link (500+500 MW) to connect the Baltic market to Poland by end-2015/20. It will open a new transmission route from the Nordic market to the Continent

EU’s European Energy Programme for Recovery co-financing 700 MW NordBalt (ready 12/2015)

FI power price convergence

Phase-shifting transformers 2015-17 to DE-PL interconnectors enabling more commercial power trade

EU’s Connecting Europe Facility co-financing 3rd EE-LV transmission line , due to be ready by 2020

Source: ENTSO-E ten year network plan, Fortum Industrial Intelligence

Wholesale electricity prices are too low to attract investments:Nearly all new investments in Europe are based on subsidies

12

Disclaimer: Figures above are calculated based on data from recentpublic reports and do not represent Fortum’s view on levelized costs of new capacity

Sources: Sähkön tuotantokustannusvertailu. Vakkilainen Esa, Kivistö Aija, Tarjanne Risto. Lappeenrannan teknillinen yliopisto. 2012.Projected Costs of Generating Electricity: 2010 Edition. International Energy Agency. 2010.IEA World Energy Investment Outlook 2014.Lazard's Levelized Cost of Energy Analysis - Version 8.0. 2014.Nord Pool Spot, EEX, Nasdaq OMX

EU 2030 targets gave clarity and direction to improve overall investment climate

CO2 reduction target to drive energy policy and investments

Target year Greenhousegas emissions

Renewableenergy

Energyefficiency

2020 -20% binding (ref.1990) 20% binding share in final consumption.Shared to members states.

20% indicativefrom BAUETS

-21% (ref.2005)

-1.74%/a

Non-ETS-10%

(ref. 2005)Shared to member

states

2030 (* At least 40% (**

binding (ref. 1990)At least 27% binding share in final consumption.

At least 27% indicativeNot to be shared to

Likely tobe met

13

binding (ref. 1990) share in final consumption.Not to be shared to member states.

Not to be shared tomembers states.

ETS-43%

(ref. 2005)

-2.2%/a

Non-ETS-30%

(ref. 2005)To be shared to member states

(** domestic only, no international offsets

Also targets for electricity interconnections agree d:- a minimum target of 10% of existing interconnections by 2020- an objective of arriving at a 15% target by 2030.

(*Target set by European Council in October 2014

• In addition a Market Stability Reserve (MSR) –system is proposed from 2021 onwards• Carbon markets are today heavily oversupplied and w ill not immediately give a price

signal without an early implementation of MSR from 2017 onwards• MSR as such will lower price volatility and long-term decarbonizatio n costs• In addition European industrial competitiveness and carbon leak age need to be addressed

Content

• Fortum today

• Development of electricity market in the Baltic Sea area

• Key take-aways

14

Electricity market in the Baltic Sea area:Market integration key enabler for power market efficiency and new investments

• Nordic and Baltic countries market integration will enable efficient capacity u se and align power prices in the Nordic-Baltic region

• EstLink, NordBalt, LitPol and EE-LV links and Nordic power exchanges are key enablers of the development

• In Europe as a whole, the poor power demand development and strong growth of subsided power production has pressed wholesale pow er prices to levels, which subsided power production has pressed wholesale pow er prices to levels, which today are not sufficient to attract new commercial investments.

• Market based integration of renewable energy, furth er power market integration and a reasonable CO2 target are enablers for commercial generation investments to meet environmental targets without compromising Europe’s economic competitiveness.

15

Next generation energy companyNext generation energy company

16