Text size AA
CEO's review

The unstable economic situation in Europe and globally – and the uncertainty regarding its duration – affected Fortum's business operations in 2012. We aim to ensure the prerequisites for our growth also in a continuing challenging market situation. That is why we continued investments to support long-term targets while also improving the efficiency of our current operations.

Europe needs an internal energy market and effective emissions trading

Europe is facing sizable energy sector investments. Production plants must be refurbished, new plants must be built, and electricity transmission connections between countries must be added. We also need smart grids to meet the growing needs of society and the changing markets.

Energy sector investments are made for decades down the road, and that requires a stable energy policy. An ambitious emissions reduction target would send a very positive signal to the CO2 markets and thus strengthen the long-term operating environment and increase predictability; it also would be an incentive for investments in low-carbon energy production. An alternative to emissions trading would mainly be national carbon taxes, which would further undermine the effectiveness of the internal market and would lead to tax competition between member states.

Strongly fluctuating renewable energy production and its privileged access to the grid has caused even negative market prices for electricity. This undermines the competitiveness of conventional electricity production. In the worst-case scenario, it leads to a situation in which both renewable energy production and the existing, fossil fuel-based capacity are subsidised. For this reason, many countries have adopted or are planning to adopt the so-called capacity payment mechanism to offset the impacts of national renewable energy subsidies. Capacity payments aim to ensure that a supply of electricity would be available also when solar and wind power cannot be produced.

The energy sector's future cannot be built on national solutions nor on public funding and subsidies. Market-driven solutions must be sought out from the EU's internal energy market, and we must advance resolutely towards Europe's energy and climate policy targets. The internal energy market and harmonised renewable energy steering mechanisms would bring significant savings in the EU compared to national measures.

A reasonably good year in a challenging environment

Fortum performed reasonably well in 2012, even though the operating environment was challenging and the demand for electricity didn't pick up. Electricity prices in the Nordic countries were one third lower than in the previous year, partially as a result of the exceptionally high precipitation levels. However, through successful hedging, Fortum was able to achieve a satisfactory price level for electricity.

Earnings in 2012 were satisfactory at 1.59 euros per share. The per-share impact of Sweden's corporate tax rate reduction was 0.22 euros. Our goal is to maintain stability in the comparable net debt/EBITDA ratio also in the current operating environment. Last year, the amount of debt grew slightly higher than the target level, mainly due to our ongoing investment projects.

Because of these financial challenges and uncertainties related to the operating environment, in autumn we launched a two-year efficiency programme. Its goal is to lighten the cost structure, improve competitiveness, and strengthen the operating prerequisites based on our strategy. The programme has been integrated into the business planning and is progressing as expected. We saw the first impacts of the efficiency programme already in the fourth-quarter financial performance.

CO2-free electricity for Nordic markets

The significantly lower electricity price level in the Nordic countries was offset by our record-high hydropower production, over 25 terawatt-hours (TWh). CO2-free hydropower is Fortum's strength, and it accounted for about one third of our production. As the share of renewable energy in the markets grows, there is greater fluctuation in the electricity supply, and thus the importance of flexible, balancing hydropower production grows.

The availability of our nuclear power, meanwhile, was clearly short of expectations in 2012. Nuclear power accounted for nearly one third of our production. In particular, the long maintenance outage of the number one unit of the co-owned Oskarshamn nuclear plant in Sweden was disappointing. The outage caused Fortum an extra burden of about 50 million euros in the form of lost production. In 2013, we will transfer more of Fortum's nuclear power technology know-how for use also at our co-owned power plants.

In terms of availability and safety, Fortum's Loviisa nuclear power plant has traditionally ranked among the world's best. However, availability fell short of the previous year's level, due to the number one unit's extended maintenance outage (performed every eight years) and to three production outages. Continuous improvement of availability and safety are among our goals also this year, and we are investing in the construction of multiple back-up systems for cooling. The continuous improvement of safety is a prerequisite for nuclear power availability.

Fortum also has a 25-per cent stake in Teollisuuden Voima Oyj's (TVO) third nuclear power unit under construction. The Olkiluoto 3 project has proven to be challenging and has been pushed even further from its original timetable.

Demand for our special expertise in nuclear power

In 2012, Fortum made a significant sales agreement on the delivery of the Fortum-developed Nures ion exchange material to Fukushima, Japan. Using the material makes it possible to decrease the amount of radioactive liquids to a fraction of its former volume. Fortum's 2012 Innovation Award was given for the development of the Nures material. The innovation is a good demonstration of our special expertise, which creates value for the surrounding community and drives energy-sector development forward.

Combined heat and power (CHP) production brings resource efficiency

In addition to hydro and nuclear power, Fortum is one of the world's biggest heat producers. In combined heat and power production, close to 90 per cent of the fuel's energy is utilised. We use a diverse range of energy sources flexibly in our CHP production, and we aim to increase the use of renewable fuels. The use of biomass and municipal and industrial waste at our European plants replaces other fuels and reduces greenhouse gas emissions.

The cornerstone of the world's first industrial scale bio-oil plant was laid in early November at the Fortum plant being built in Joensuu, Finland. The plant to be integrated with the Joensuu CHP plant will be comissioned in autumn this year. The integrated CHP/bio-oil plant will use biomass to produce electricity and district heat as well as 50,000 tonnes of bio-oil annually that is suitable for heat production.

We produce energy at CHP plants and heating plants in seven countries. In Stockholm, Fortum also has close to 20 years of experience in district cooling solutions for modern urban living. In Russia, Fortum operates in the developed industrial areas in the Urals and western Siberia where we are the leading supplier of district heat in the region.

After the reform of the electricity wholesale market, the modernisation of the heat sector has also become a focus in Russia. The aim is to increase the investment interest in that country's heat sector.

Weather-proof electricity distribution to customers

We continued improving the weather-proofing of our electricity distribution network in 2012, after the 2011 year-end storms that demonstrated the vulnerability of electricity distribution in Finland.

We have improved our preparedness for power outage situations in electricity and heat distribution by deploying text message-based outage notifications for customers, by improving procedures in exceptional situations, and by training personnel. The enhanced preparedness was put to the test during a storm last autumn; our customers experienced minimal disruptions as a result of the storm. In 2012, the reliability of Fortum's electricity distribution increased to 99.98 per cent from the previous year's 99.90 per cent.

More customers and higher satisfaction

Last year, our customers gave Fortum a more favourable rating in the survey measuring the satisfaction of electricity sales and distribution customers in Finland, Sweden and Norway. In Sweden and Norway, we achieved our all-time best result. In Finland, customer satisfaction decreased slightly as a result of the storms in late 2011. The long-term customer satisfaction trend has developed favourably in all three of these countries of operation.

The number of Fortum electricity customers increased in 2012. We now have more customers in Finland than ever before. I believe that new products, like solar panels and energy efficiency services, contributed significantly to our success. We will continue developing solutions that enable our customers to also sell electricity and heat back to Fortum as well as other new products that enable our customers to actively influence their energy consumption if so desired.

Sustainability targets renewed

Sustainability is an integral part of Fortum's strategy. Our goal is to advance in all sub-areas of sustainability. We are also committed to compliance with the principles of UN Global Compact initiative.

The good hydrological year enabled us to achieve our climate targets in 2012, and the share of CO2-free electricity production grew from the previous year. In terms of energy efficiency, we fell slightly short of our target. We will continue our efforts to improve plant availability, energy efficiency and fuel quality, among other things. In Russia, where we have focused our operations in oil and natural gas production areas, our emissions have increased with the growth in the volume of operations.

The renewed sustainability targets came into force at the beginning of 2013. We emphasise Fortum's role in society and measure not only environmental targets, but also the company's reputation, customer satisfaction, and the security of power and heat supply.

Occupational safety must be improved every day

In terms of occupational safety development, I am both pleased and disappointed. The safety of our own personnel improved further, and the accident frequency decreased to an all-time low. Contractor safety development, meanwhile, didn't progress in the right direction: a fatal accident occurred in Russia and several serious accidents also happened during the year. I extend my sincere condolences to the family and co-workers of the victim.

To prevent serious accidents and also to reduce the number of less serious accidents, we will continue our determined efforts to improve occupational safety. The attitude of continuous improvement must be part of the daily routines of every Fortum employee and contractor.

The ISO 14001 environmental certification and OHSAS 18001 certification for occupational health and safety received by our subsidiary OAO Fortum's operations reflect a favourable trend.

Employee engagement is an integral part of strategy implementation

In 2012, we measured employee satisfaction by conducting the Fortum Sound survey. The results indicate a clearly stronger level of employee engagement compared to the previous survey three years ago. According to the survey, our strengths include teamwork, the possibility to influence the content of one's own work, and fair treatment of personnel. The survey was conducted in all of our countries of operation.

The Code of Conduct guiding the ethical activities of all Fortum employees was updated last year. By the end of February 2013, 99 per cent of the personnel had completed training related to the Code of Conduct.

A strong commitment to growth

Fortum's purpose is to create energy that improves life for present and future generations. Alongside emissions-free hydro and nuclear power and combined heat and power production, we are developing the use of biofuels and exploring solar, wind and wave energy opportunities. These are all part of the future energy system, which in the long-term will transition to solutions that are based on solar energy.

In 2013, we will commission the Järvenpää biopower plant in Finland, the Jelgava biopower plant in Latvia, and new, waste-fired power plants in Brista, Sweden, and Klaipeda, Lithuania. All four plants are energy-efficient, combined heat and power plants that reduce CO2 emissions and increase the use of local fuels. In the latter part of 2012, we made an investment decision to build a biofuelled CHP plant in Stockholm. The plant will be commissioned in 2016.

Our goal is to complete the extensive Russian investment programme by the end of 2014. In addition to the three plants already completed, next we will commission three 400+ megawatt (MW) power plants in Nyagan within the original overall timetable; that will be followed by two almost 250-MW power plants in Chelyabinsk.

The Russian electricity market reform has been realised as promised by the country's government, and the overall market outlook there is more positive than in Europe.

We are pursuing growth in our current markets as well as in the integrating European and rapidly growing Asian markets. In France, we are continuing preparations for the upcoming hydropower concessions tender process. Succeeding in the tender process would give us an opportunity to grow the CO2-free hydropower capacity. In India, we are exploring opportunities for CHP production for industry as well as solar power production.

We are assessing the future alternatives of the electricity distribution business

We initiated a project in the beginning of this year to assess the future alternatives of the electricity distribution business. Divestment is also among the alternatives being assessed.

Electricity distribution is a regulated business that yields a stable return. However, the distribution business would hold better value potential in a different kind of business structure, which would enable a bigger share of liabilities. The assessment is also impacted by the legislature's long-term goal to separate electricity distribution from electricity production and sales into a clearly detached, independent infrastructure business.

The results of the assessment will be available by the end of this year. We decided to communicate the issue already in the early phase of the assessment so that we can openly assess all alternatives and discuss them both internally and externally and to have a dialogue about the needs and views of the surrounding society.

Assessing the electricity distribution business alternatives does not affect our customers. We will also continue building a weather-proof grid, as planned. We are developing new products for electricity sales customers, and we intend to take the development of electricity market products forward as an industry frontrunner.

A strong platform for advancement

We will continue implementing our strategy in 2013. As a result of investment decisions made in recent years, we will commission a significant amount of new capacity this year. We are developing future energy production forms, like solar and wave energy, in addition to emissions-free hydropower and nuclear power, and CHP production. Also our efficiency programme is advancing and improves Fortum's preparedness to respond to opportunities afforded by the changing energy markets.

I want to thank Fortum employees in all of our countries of operation for the past year and for the effort put forth to achieve common goals. A thank you also goes to our shareholders for their investments – we will continue the work to grow shareholder value also this year.