Join the change

There are four growth areas in our strategy and they have a clear priority order. Growth engine number one and our first priority is to drive productivity and industry transformation. Growth engine number two and our second priority is solutions for sustainable cities. Growth engines three and four –  growing in solar and wind and building new energy ventures – are targeting to secure our long-term competitiveness in the future energy system.

The timing of our growth efforts and the redeployment of cash will take place in two phases, and a significant part of the redeployment is expected to take place during 2017. Our objective is to maximise our cash flow, while targeting a net debt to EBITDA ratio of 2.5. We believe that the European power generation industry will consolidate and we want to have a significant role in driving the change. Broadening the scope of our City Solutions business will also offer growth opportunities.

The cash flow generated as a result of phase one will be used for 1) securing a competitive dividend; and 2) investments into phase two.

Phase two comprises growth engines three and four as described above. We have already started investments in solar and wind, in the Nordics, Russia and India. They are lower in priority when it comes to capital allocation, but we have a clear target to accumulate a gigawatt-scale portfolio in the coming years.

The final priority is New Ventures, in which we will allocate approximately EUR 100–200 million into new innovations and start-ups with disruptive potential. Here, too, we have already acted by investing in companies like Info24, Chempolis and Exeger, which are small investments, but have good potential for the future and are a good fit with Fortum’s business.

We updated our vision and mission during the autumn of 2016. Our updated vision – ‘For a cleaner world’ – goes beyond just clean energy production, it expresses our commitment to fuel and resource efficiency and how we enable our stakeholders, customers and society to make sustainable choices. It’s not only about energy production, it’s also the wider added value potential of fuels like biomass and waste. Our new strategy clearly pronounces our commitment and the continuous alignment of our actions with the principles of the UN Global Compact and Caring for Climate initiatives.

In our mission we state that “we engage our customers and society to drive the change towards a cleaner world.” In saying so, we invite all our stakeholders – society, our employees, our shareholders and our partners – to join us in the change. Our role is to accelerate the change by reshaping the energy system, improving resource efficiency and providing smart solutions for the future. And naturally we believe that we can do this in a way that delivers excellent shareholder value.

The global megatrends affecting our industry are quite well-known and impact many other businesses as well: climate change, urbanisation, digitalisation and active customers. Climate change and the need for decarbonisation and resource efficiency is the one changing our industry in a profound way.

The Paris Agreement sets a target to limit global warming below 2°C above pre-industrial levels while pursuing efforts to limit the increase to 1.5°C. The International Energy Agency has estimated that in order to fulfil the targets of the Paris Agreement, approximately USD 16,500 billion will have to be invested in the world’s energy system. We strongly believe that the only way forward will be market mechanisms that remunerate private investments.

The progress in renewable energy technology is very encouraging. The investment cost of new renewables is declining rapidly and is causing fundamental changes in the energy system.

In addition, recycling and the circular economy create opportunities for companies like Fortum. The amount of waste the world is producing is roughly expected to double between 2015 and 2025.

A third very big shift will be the role of active customers and, in particular, the role of the retail electricity business model. Digitalisation enables new scalable services to consumers, and the growth of decentralised generation means that many consumers will become "prosumers" with their own production as well as consumption. Consumers will also play an important role in balancing the increasingly intermittent energy system.

2016 was a challenging year in many respects. The beginning of the year was characterised by increased commodity market volatility; especially coal and oil prices were very low. Nordic water reservoirs were clearly above the long-term average, creating pressure on electricity prices, and the British EU exit vote also created uncertainty.

From the second quarter onward, the power market started showing positive signs, mainly driven by the improving commodity market prices. Commodity prices increased throughout the year and are now clearly higher than at the end of 2015. At the beginning of 2016 Nordic water reservoirs were 15 TWh above the long-term average, and by the end of 2016 they had dropped 23 TWh to 8 TWh below the long-term average. In 2016, our hydro production was almost 20% lower than the year before.

Our comparable operating profit for continuing operations was EUR 644 million, down 20% from 2015. The decline was mainly due to significantly lower hydro-power production and the lower achieved power price.

Operationally, the year met our expectations, as availability in our plants was good and ongoing projects progressed as planned. We completed our extensive investment programme in Russia in spring 2016, and the new capacity has been the key driver for the earnings growth in the Russia division.

Also positive was the Swedish political agreement on energy policy in June and the government’s budget proposal in September. The budget proposal included the timetable for lowering the real-estate tax on hydro assets and for phasing out the nuclear capacity tax over the coming years.

FINANCIALS

The number one priority for Fortum going forward is to ensure a controlled transition towards a low-carbon energy system. Accordingly, our CO₂-free production should increase.

To the extent we have fossil production, our goal and strategy is, of course, to make it as efficient as possible. Our specific CO₂ emissions from power generation, measured as grams of CO₂ per kilowatt hour produced (gCO₂/kWh), puts us among the lowest emitters of all utilities in Europe. In 2016, 96% of our power generation in the European Union was CO₂-free. Including the Russian power generation, which is mainly gas-based, and our Indian solar power, 62% is still CO₂-free, and our specific CO₂ emissions of 173 gCO₂/kWh puts us in the category of one of the cleanest utilities in Europe.

We at Fortum have decided to take an active role in mitigating climate change also by creating solutions for sustainable cities, by developing new products and services to help our customers mitigate their carbon footprint, and by building new energy ventures that we believe will play an important role in the future sustainable energy system.

We do this because it is the right thing to do for society, for our customers and for our shareholders. By being at the forefront of creating the new sustainable energy system, I am confident we will create value, stronger earnings per share, and a good platform for producing stable, sustainable and over time increasing dividends.

“2/3 of global emissions are from the production and use of energy”
_{Source: World Energy Outlook Special Report on Energy and Climate Change, IEA, June 2015}

With the adoption of the Paris Agreement in December 2015, mitigation of climate change rose to the top of the agenda all over the world. The commitment to mitigate climate change in order to limit global warming is now so widely spread that it affects every industry. The effects can be seen everywhere, e.g. the increase in low- or zero-emission housing, better fuel efficiency, the increase in the number of electric vehicles, the rapid growth in solar and wind power production, fuel switches to more environmentally friendly fuels, increased resource efficiency and waste recycling.

The whole energy industry is very heavily affected by this megatrend. This can be seen in the transition to low-carbon and renewable generation, which increases the share of intermittent power production and the need for demand response and flexible generation capacity. The increased need for resource efficiency paves the way for circular economy solutions.