Fortum AND CLIMATE CHANGE PAGE 1

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1 Fortum AND CLIMATE CHANGE PAGE 1 Fortum and Climate Change 2009

2 PAGE 2 contents Fortum AND CLIMATE CHANGE Contents Page Page Enabler of a Low-Carbon Society 3 Fortum in Brief 4 Committed to Sustainability 6 Climate Position and Targets Position on climate change Goals and targets 7 Actions Investing in low-carbon energy production and emissions reduction of own energy production plants Energy production structure Nuclear power Hydropower Fuel switching Use of waste-derived fuels Increasing energy efficiency Wind energy Total emission reduction EU emissions trading Use of Kyoto mechanisms Other internal climate actions Reduction of customers emissions Case Stockholm Solutions for sustainable cities Adaptation to climate change 16 Research & Development for a Carbon-Free Future Bioenergy technologies Wave energy Electricity in transportation Carbon capture and storage Climate Benign Products and Services Environmentally labelled electricity Environmentally labelled heat Climate compensated heat products Energy-efficiency service The origin of electricity 20 Carbon Governance Line responsibility Networking Carbon management tools Public affairs Stakeholder dialogue 22 Climate Profile Climate benign energy production GHG emissions accounting Scope 1 emissions Scope 2 emissions Scope 3 emissions Carbon exposure External ratings of Fortum s climate performance Dow Jones Sustainability Indexes Climate Disclosure Leadership Index Storebrand s Best in Class report 26 Appendix 1: New CHP Capacity and Fuel Switch Projects 27 Appendix 2: Additional Low-Carbon Capacity 30 Appendix 3: Abbreviations 31

3 Fortum AND CLIMATE CHANGE CEO s introduction PAGE 3 Enabler of a Low-Carbon Society Climate change is the biggest environmental, economic and social challenge of our era. Mitigating the change requires prompt decisions and actions, as any delay means more difficult and costly measures. Because most global greenhouse gas emissions are generated in the production and use of energy, our industry has the responsibility of assuming an active role in the mitigation efforts. The role of energy companies is to provide the political decision makers with solutions, i.e. the most efficient mitigation measures. In our opinion, global solutions are a necessity and global pricing of carbon, combined with market-based instruments, is the best way forward is an important year regarding the global climate policy post Although the road to the COP15 meeting in Copenhagen has not been easy, we are delighted to see global development going in the right direction: The European Union has set ambitious emission reduction targets and recently confirmed the continuation of its emissions trading scheme after The new US administration has already stated its high climate ambitions and intention to establish new legislation as well as to be actively involved in international climate negotiations. Despite the prevailing economic downturn, climate change mitigation has to continue. At Fortum, we take our own responsibility seriously: Our ultimate goal is to be a carbon dioxide-free energy company. This goal has a direct connection to our core purpose: Our energy improves life for present and future generations. We believe that Fortum s continued success will be based on a benchmark performance and excellence in sustainability. As a forerunner in mitigating climate change, we have already witnessed that sustainability is a success factor for us. Thus, climate change will continue to be a fundamental business driver for Fortum. As a responsible energy company, we want to provide climatebenign solutions based on a versatile energy production portfolio comprising renewable energy, nuclear power, combined heat and power, and low-emitting fossil fuel technologies including carbon capture and storage (CCS). Today, we rank among the least carbon-intensive power producers in Europe. This is a result of a long-term and determined effort to reduce emissions and to build an increasingly CO2-free generation portfolio. In the 2000s alone we have invested seven billion euros in CO2-free power production. The work continues with climate change mitigation at the core of our corporate strategy. We have stepped up research and development with a strong focus on CO2-free technologies. In addition, we are promoting energy efficiency and the use of electricity in the road transport sector as enablers of a low-carbon society. This report, Fortum and Climate Change 2009, lays out our strategy and response to climate change mitigation and summarises the results achieved so far. As the energy industry itself is among the sectors identified as being seriously impacted by climate change, also necessary adaptation measures are described. We have been working on the climate challenge for well over a decade now. I am convinced that we are well positioned and our increasing ability to excel will continue to be a competitive advantage. Espoo, June 1st, 2009 Tapio Kuula President and CEO

4 PAGE 4 fortum in brief Fortum AND CLIMATE CHANGE Fortum in Brief Russia OAO Fortum Norway Russia TGC-1 Heat sales CO 2 emissions TWh Mt Sweden Finland Norway Sweden 2008 Power generation capacity 5,761 MW Heat sales 9.1 TWh CO 2 emissions 0.9 Mt Estonia Latvia Lithuania Russia 2008 Power generation capacity 2,785 MW Heat sales (April Dec 2008) 15.3 TWh CO 2 emissions (April Dec 2008) 9.8 Mt Finland UK Poland Estonia Power generation capacity Heat sales CO 2 emissions ,882 MW 10.8 TWh 5.6 Mt Distribution network Heat sales CO 2 emissions TWh 0.3 Mt UK Poland Lithuania Latvia 2008 Power genera ion capacity 140 MW Heat sales 2.0 TWh CO 2 emissions 0.6 Mt Heat sales CO 2 emissions TWh 0.4 Mt Heat sales CO 2 emissions TWh Mt Heat sales CO 2 emissions TWh 0.02 Mt

5 Fortum AND CLIMATE CHANGE fortum in brief PAGE 5 Fortum is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Activities cover the generation, distribution and sale of electricity and heat and the operation and maintenance of power plants. Our vision is to be the benchmark power and heat company excelling in sustainability. In 2008, Fortum s sales totalled EUR 5.6 billion and operating profit was EUR 2.0 billion. The company employs approximately 15,500 people. Fortum s shares are quoted on NASDAQ OMX Helsinki. Employees per country Other countries 444 Russia 7,262 Finland 3,045 Sweden 3,436 Poland 767 Estonia 333 Norway 292 Net Assets by segment Other and eliminations 5.3% Russia 14.7% Markets 1.2% Distribution 20.2% Power Generation 35.5% Heat 23.1% Group structure Reporting segments Power Generation Heat Distribution Markets Russia Sales EUR 2,892 million EUR 1,466 million EUR 789 million EUR 1,922 million EUR 489 million Comparable operating profit EUR 1,528 million EUR 250 million EUR 248 million EUR 33 million EUR 92 million Business units Generation Portfolio Management and Trading Service Heat Värme Distribution Markets Russia Generation is responsible for Fortum s Nordic nuclear, hydro, thermal and wind power generation and development in chosen market areas. PMT is responsible for planning the use of Fortum s Nordic generation portfolio and for trading in the physical and financial markets of electricity, fuels and environmental values. PMT is also responsible for related market analysis. Service offers operation and maintenance, productivity and energy efficiency services to power and heat asset owners and commercial energy users. Heat focuses on combined heat and power production (CHP), on district heating and on energy outsourcing services to industries. Värme delivers district heating and cooling, power and gas to industries and private customers in Sweden. Distribution is responsible for Fortum s network asset management and for the distribution and regional transmission of electricity to 1.6 million customers. Markets is responsible for retail sales of electricity to 1.3 million private and business customers as well as to other electricity retailers. Markets buys its electricity through Nord Pool. The business unit is responsible for power and heat generation and sales in Russia. It includes TGC-10 operations, Fortum s TGC-1 share and some other minority shares. Market position # 2 in power generation in the Nordic market # 1 heat provider in the Nordic market # 1 in electricity distribution in the Nordic market # 1 in electricity sales in the Nordic market A leading power company in western Siberia and Urals

6 PAGE 6 Fortum AND CLIMATE CHANGE 2 Committed to Sustainability Fortum s commitment to sustainability is expressed in all elements of the key company management tool, the Fortum Compass. Fortum s Core Purpose Our energy improves life for present and future generations echoes the essence of sustainable business: conducting business in a way that meets the needs of the present, without compromising the ability of future generations to meet their own needs. Fortum s Vision Statement emphasises what the company is after: To be the benchmark power and heat company excelling in sustainability. In accordance with this statement, Fortum revised its Sustainability Policy in It now states that our goal is to make sustainability especially climate-benign business a success factor. Therefore we want to be a forerunner and aim for a benchmark level position in climate change mitigation. Fortum s commitment to sustainability is further elaborated in the Code of Conduct and guiding principles and turned into action by setting development actions on the Sustainability Agenda. Fortum s sustainability agenda consists of three elements: the desired future position for the company, our goals for 2020 and the actions to reach those goals. The desired position defines our strategic ambitions. We want to be an enabler of a low-carbon society and a responsible energy company, offering sustainable energy solutions. To get closer to the desired position, the agenda states intermediate goals for These goals reflect the most important aspects of sustainability for Fortum and serve as input for the business planning. The new agenda was used for the first time in the business planning process for Fortum s sustainability goals for 2020 Desired position Market leader in low-carbon products and energy-efficiency solutions Successful deployment of climate-benign R&D Among the lowest-emitting energy companies Minimal environmental impacts from own activities Benchmark company for equal opportunities Best safety performance in the sector Respected corporate citizen Sustainable energy solutions Enabler of a low-carbon society Our energy improves life for present and future genera - tions The responsible energy company

7 Fortum AND CLIMATE CHANGE PAGE 7 3 Climate Position and Targets 3.1 Position on climate change Fortum believes that climate change mitigation is a major driver of the energy sector. It represents both risks and opportunities to energy companies. Our goal is to turn the threats posed by climate change into business opportunities. We also emphasise the role of market-based climate instruments and the need for broad international participation in global climate efforts. The main aspects of our climate position are: A long-term solution is required, aiming at a global carbon market. A fair balance of climate efforts between all emitters must be achieved. Energy prices shall reflect the cost of greenhouse gas emissions. Emissions trading schemes, such as the European emissions trading system, are the preferred climate instrument. A gradual shift towards global, allinclusive emissions trading with nonfree-of-charge allocation is the preferred route to cost-efficiently reach the needed emission reductions. 3.2 Goals and targets Our ultimate vision is to be a CO2-free power and heat company. In 2007 Fortum set new, stricter targets for carbon dioxide emissions from electricity and heat production. Within the EU, Fortum s targets are: In electricity production: to decrease the specific CO2 emissions to less than 80 g/kwh by 2020 as a five-year average. In heat production: to reduce the specific emissions in each country by at least 10% from 2006 until Outside the EU, Fortum is committed to increasing the energy efficiency of power plants and thus reducing specific emissions. We have also set sustainability targets for the company vehicle fleet and for air travel: As of April 2009, the CO2-emission of Fortum company benefit cars must be under 180 g/km. The emission limit will be reduced to reach 150 g/ km in CO2-emissions from air travel are to be reduced by 10% from the 2007 level during 2009 by extensive use of tele- and videoconferencing.

8 PAGE 8 Fortum AND CLIMATE CHANGE 4 Actions 4.1 Investing in low-carbon energy production and emissions reduction of own energy production plants The use of low-carbon or carbon-free energy sources and emissions reduction of our own energy production are the most significant part of our climate strategy. Opportunities to reduce emissions are reviewed and the estimates on the marginal abatement costs are updated on a regular basis. These analyses provide information on potential emission reduction volumes and their costs. In chapters examples on our projects in carbon-free or low-carbon energy production are illustrated. More examples are described in appendices 1 and Energy production structure The choice of energy sources used by an energy company is key when managing its mitigation efforts. Fortum has developed its energy production portfolio systematically towards carbon-free production. Thanks to determined investments in CO2-free production capacity and the continuous upgrading of existing installations, the share of climatebenign production has increased significantly during the past ten years. During the 2000s, around 7 billion euros have been invested in carbon-free production, and this has resulted in a more than 90% share of CO2-free electricity in our production within the EU area (92% in 2008). The ongoing, 3-billioneuro investment programme will add another 950 MW of CO2-free generation capacity. The importance of these efforts can be illustrated by the following fact: If Fortum s European power production in 2008 had the specific CO2 emission of the EU average (ca. 400 kg CO2/MWh, ref. Eurelectric Environmental statistics ), the emissions from our power production would have been 10 times higher (21 million tonnes of CO2, instead of the actual 2.1 million tonnes). After the acquisition of the Russian energy company TGC-10 (today OAO Fortum), the share of Fortum s total CO2-free electricity production has decreased to 75%. The energy production in OAO Fortum is based mostly on natural gas. The company has an extensive investment programme to increase its electricity production capacity by 70% by Fortum has prepared an environmental, health and safety (EHS) action plan for OAO Fortum in order to bring the company closer to the sustainability level of Fortum s other operations. The goal is to increase the energy efficiency of the existing power plants and thus reduce specific CO2-emissions. After the investment programme, OAO Fortum s

9 Fortum AND CLIMATE CHANGE actions PAGE 9 total CO2 emissions will increase due to the higher production volumes and larger share of gas condensing power production. However, the increase of specific CO2 emissions will be limited to approximately 5% from the present level, as the current 5% share of coal in the fuel mix will not be raised. Reductions in specific emissions will be achieved later, when existing old power plants are replaced with new, more energy efficient plants. Fortum will study the feasibility of replacing some coal use with biomass or waste-derived fuel. Planning and preparation for a carbon capture and storage (CCS) testing facility in OAO Fortum will be started, as OAO Fortum s geographical proximity to major Russian oil and gas fields makes carbon capture and storage a very attractive future option Nuclear power Fortum is increasing its nuclear power capacity in Finland and Sweden through new investments and through upgrades of existing nuclear power plants. In Finland, Fortum is participating in the country s fifth nuclear power plant unit, Olkiluoto 3, with an approximately 25% share representing some 400 MW of capacity. In February 2009, Fortum submitted to the Finnish Government an application for a decision-in-principle concerning the Loviisa 3 plant to be constructed in the vicinity of the two exist- ing nuclear power plants in Loviisa. The total cost of the new 1,000 1,800 MW nuclear power plant unit is EUR 4 6 billion. Loviisa 3 can be designed to allow for combined heat and power production. The location in the vicinity of the Helsinki metropolitan area offers possibilities for extensive utilisation of district heating. The district heating solution would reduce Finland s annual carbon dioxide emissions by four million tonnes, i.e. 6%. According to plan, the new unit would be operational in Its designed service life is at least 60 years. Capacity increases at the Forsmark and Oskarshamn nuclear power plants in Sweden are planned to be carried out during As a minority owner, Fortum is participating in these upgrades. Fortum s share of the planned capacity additions is estimated at 290 MW. Fortum carried out upgrades to the Loviisa nuclear power plant in Finland during The electricity production capacity was increased by about 100 MW. CASE: Upgrading the Loviisa nuclear power plant in Finland Project description The Loviisa Nuclear Power Plant comprises two units with pressurised water reactors. Efficiency improvements and power upgrading are important tools in increasing the carbon-free capacity at existing nuclear power plants. The project consisted of the modernisation and power upgrading of the plant, resulting in a total increase of about 100 MWe in the plant s electrical output. The project upgraded the thermal power of both reactors by about 9% to 1,500 MW compared with the original level of 1,375 MW. The total generation capacity of the two-unit plant was originally 930 MWe (gross) and 890 MWe (net). After the upgrade, the corresponding figures are 1,020 MWe (gross) and 976 MWe (net). Loviisa nuclear power plant in Finland. The main project was implemented between and some modernisation measures in the turbine plant continued up to The total cost of the upgrades was EUR 33 million. The project aimed to increase plant availability. The goals of the project were to ensure plant safety, to extend its service life and to increase its capacity. The upgrade consisted of, among other measures, a complete safety analyses, change of pressure relief valves, modernisation of turbines, modification of generators and several other small modifications. Project appraisal and method of estimating carbon savings As there are no greenhouse gases, SO 2, NO X nor particulate emissions from nuclear power generation, the project has resulted in significant environmental benefits. Emissions without the project have been calculated using the amount of additional electricity generated by the project and the CO 2 emissions of a new coal-fired condensing power plant or a new gas combined cycle plant, which would have been the alternative production forms for Fortum instead of this project. Example for 2005: Additional electricity generated by the project 1,455 GWh, CO 2 emissions from a coal-fired power plant (efficiency 40%) kt CO 2 /GWh and for a new gas combined cycle plant (efficiency 58%) kt CO 2 /GWh. Emissions without the project = emissions reductions = 1,455*0.851= ca. 1,240 kt CO 2 for coal as reference and ca. 505 kt for gas as reference. A total of million tonnes CO 2 have been avoided through the project during

10 PAGE 10 actions Fortum AND CLIMATE CHANGE CASE: Refurbishments of hydropower plants Project description The development of existing hydropower generation is one of the focus areas in our efforts to enhance the renewable and low-carbon energy sources in our production. In this field, an extensive, long-term hydropower refurbishment programme extending to 2015 has been planned. The programme aims to ensure an efficient generation capacity and to continuously improve power plant operations through modern technology that enables increased production efficiency. Since 1990, refurbishments have been implemented at a total of 50 hydropower plants in Finland and Sweden. The projects carried out at these hydro power plants included, e.g., modernisation, the Fortum has an extensive hydropower refurbishment programme. service and maintenance operations of the generator, plus turbine and electricity and automation systems. The refurbishments together have resulted in an increase of 195 MW in the electricity output of the units. The average annual increase of electricity generation is estimated to be about 399 GWh. Total investments have been approximately EUR 270 million. Project appraisal and method of estimating carbon savings As a result of the project, additional electricity is being generated in hydropower plants, and this additional production is assumed to replace coal or gas condensing power. As there are no greenhouse gas emissions from hydropower production, the amount of emissions prevented correspond to the emissions from coal or gas combustion. The project has also resulted in other environmental benefits: the reduction of SO 2, NO X, and particulate emissions. Emissions without the project were calculated using TWh generated by the project and kt CO 2 /GWh of a new coalfired condensing power plant or a new gas combined cycle plant. Example for an average year: Additional electricity generated by the project 399 GWh, CO 2 emissions from a coal-fired power plant (efficiency 40%) kt/gwh and for a new gas combined cycle plant kt CO 2 /GWh. Emissions without the project = 0.851*399 = ca. 340 kt/a for coal as reference and ca. 140 kt/a for gas as reference Hydropower Fortum has a hydropower refurbishing programme extending to 2015, however it will mostly be completed by The plan covers several of Fortum s own or partly-owned plants in Finland and Sweden. The programme s refurbishment investments involve several hydropower plants and will increase capacity, improve dam safety and maintain good plant availability Fuel switching Fuel switching (e.g. from coal to gas, from fossil to renewable fuels) is one of the possibilities to reduce greenhouse gas emissions. Fortum continuously assesses the opportunities for fuel conversion of its existing plants towards more environmentally-benign fuels. We have implemented and are planning a number of such projects. Fortum is aiming for an increase of biomass and waste-derived fuels in district heating and CHP production in the Nordic market. We have several ongoing projects to build biomass-fired combined heat and power plants in the Nordic countries, the Baltics and Poland. Fortum is presently building two biomass and peat-fired CHP plants in Estonia. The Tartu plant is scheduled to start commercial operation in 2009 and the Pärnu plant in A number of new biomass-fired heating plant projects are ongoing in Finland. Fortum is also planning to invest in a new waste-fuelled CHP plant in Stockholm. The new plant can process 240,000 tonnes of waste annually, which is equivalent to the amount of waste produced by all Stockholm households. The planned capacity is approximately 57 MW of heat and 20 MW of electricity, i.e. the demand of a medium-sized Swedish town. Examples of fuel switching projects are included in appendix 1.

11 Fortum AND CLIMATE CHANGE actions PAGE 11 CASE: Joensuu CHP plant in Finland Project description Fortum owns and operates the Joensuu CHP Plant, which supplies district heat for the city of Joensuu and electricity for the Finnish grid. The plant was commissioned in Boiler conversion at Joensuu CHP Plant was implemented in In the project, the earlier pulverised peat milling, drying and firing system was converted into a bubbling fluidised bed boiler (BFB). Boiler conversion enabled more versatile fuel use and especially the additional use of wood. Due to the boiler conversion the share of biomass has increased from 4% (in the beginning of 1990 s) to 30 60%. The use of biomass based fuels has varied between 380 GWh/a and 680 GWh/a in Joensuu CHP Plant in Finland. Project appraisal and method of estimating carbon savings Emissions with the project have been calculated directly from fuel burned. Emissions without the project have been calculated from the quantity of fuel energy used each year and the specific emission factor (t CO 2 -eq/mwh fuel input) in The year 1990 represents the average fuel usage before the project (share of wood 4% of the fuel energy). Example for 2005: Fuel input 1068 GWh, average specific CO 2 -emission factor in 1990 about kt CO 2 -eq/gwh, estimated average specific CH 4 -emission factor in 1990 about 0.2 t CO 2 -eq/gwh and estimated average specific N 2 O-emission factor in 1990 about 1.7 t CO 2 -eq/gwh. Emissions without the project = * 1068 = 388 kt. Emissions with the project = realised emissions in 2005 corresponding 158 kt. Emission reduction = = 230 kt. CASE: Hässelby CHP plant in Stockholm, Sweden Project description The Hässelby CHP plant situated on the shores of Lake Mälaren was the first plant in Stockholm built for combined heat and power production. The plant was commissioned in 1959 and it originally used oil and coal as its main source of fuel. Today the Hässelby plant uses 99% renewable fuel to produce heat for over 50,000 households in the western part of Stockholm and 280 GWh of electricity. During the early 1980s, the plant was converted to 100% coal capacity due to the oil crisis and the increased price of oil. The environmental permit for coal-firing ended in 1992 and the owner, the City of Stockholm, decided to stop coal-firing in Hässelby. It was also decided to apply for a Hässelby CHP Plant in Sweden. permit to fire wood pellets instead of coal. Plans to introduce bio-fuels and still use the main parts of the coal-firing equipment resulted in the construction of trail-firing with wood pellets. Since then, the woodpellet-firing capacity has increased year by year and by the early 2000s the Hässelby plant was almost totally converted to bio-fuel. When the Hässelby plant started woodpellet firing, the supply of wood pellets was limited. The conversion from coal to bio-fuels not only involved the conversion of the plant, it also meant that new woodpellet factories had to be built. Fortum was part-owner of the first big supplier of wood pellets to the plant. Project appraisal and method of estimating carbon savings Emissions with the project have been calculated directly from fuel burned Emissions without the project have been calculated from the same quantity of fuel energy from coal. Example for 2008: Fuel input 4,332 TJ, CO 2 emission factor in coal 91 t/tj, CO 2 emission factor in oil 76 t/tj and use of oil 0.9%. Emissions without the project = 91* 4,332* ( )= 391,000 tonnes. Emissions with the project are almost zero or 76 * 4,332* = 3,000 tonnes, so the emissions reduction is about 388 kt/a.

12 PAGE 12 actions Fortum AND CLIMATE CHANGE CASE: New boiler at Högdalen Project description The Högdalen CHP plant in Stockholm was originally built at the beginning of the 1970s for household waste incineration; in the late 1970s, it was converted to combined heat and power production (CHP) mode. Since then, the capacity of the plant has gradually been expanded. A new CHP boiler at Högdalen was commissioned in 2005, as the waste incineration capacity in the greater Stockholm area was insufficient and Fortum Värme was in need of new heat production capacity for the expanding district heating network. From an environmental perspective, the Högdalen CHP plant contributes to a strong and sustainable energy solution, producing year-round heat and power from household waste. Net methane emissions are also reduced by the nondumping of household waste. Project appraisal and method of estimating carbon savings The energy production of the new CHP boiler has been estimated based on the production The new boiler has increased the district heating capacity, replacing separate heat production (assumed to be oil-based) in households. It has also been assumed that the net electricity increase replaces marginal power production (coal condensing). The increased use of fuel has been estimated at 610 GWh/a. Emissions without the project have been estimated as 288 kt/a. Estimated emissions with the project (increased use of waste fuel) are 77 kt, so the project s net emissions reduction of carbon dioxide into the atmosphere is about 158 kt/a. This corresponds to the emissions of 17,000 oil-heated houses. Högdalen CHP plant in Sweden Use of waste-derived fuels Fortum has developed municipal and industrial waste utilisation in heat and electricity production. In many cases, sludges can also be utilised as fuel. We have long experience in waste-to-energy production. In Finland and Sweden we have several plants where waste is used either in parallel with other fuels or as a main fuel. The Högdalen combined heat and power plant has produced energy from the municipal waste collected from the Stockholm area since Our goal is to ensure that waste-toenergy operations are as environmentally friendly as possible. Site-originated sorting of waste and a high degree of recycling are both supported. Utilising waste as a source of power and heat is a good alternative in the effort to reduce the amount of waste that ends up in landfills Increasing energy efficiency Energy-efficient combined heat and power production (CHP) has a central role in Fortum s production facilities. We improve our energy efficiency by using natural resources responsibly. The efficiency of our CO2-emitting fuel use has increased during the 2000s from a level of 65% up to 80%. We participate in energy conservation through the energy sector s voluntary energy conservation agreement in Finland. Within the framework of the agreement, we have established an energy conservation programme, carried out energy conservation analyses and audits, and made investments in energy efficiency. The most important projects in recent years have been the modernisation of hydropower plants and the Loviisa nuclear power plant (see pages 9 and 10). The aggregate amount of Fortum s energy savings is 3.6 TWh/a in Finland corresponding to about 2% of the fuel energy used. In 2002, Fortum was awarded for conscientious and systematic implementation of the power industry s energy conservation agreement. Since 2000, Fortum has been a participant in the Energy Wisdom Programme, the European electricity industry s voluntary initiative on sustainable development. The programme focuses on projects that improve energy efficiency and decrease greenhouse gas emissions. Fortum s aggregate energy savings reported in the framework of the Energy Wisdom Programme were 7.1 TWh in We are developing solutions to utilise waste energies from industry and to improve the operational efficiency of our power plants. In many cases, our pro-environmental products, for example district heating and district cooling, replace our customers less efficient own energy generation. This leads to improved energy efficiency in society as a whole.

13 Fortum AND CLIMATE CHANGE actions PAGE Wind energy Fortum s aim is to increase wind power production substantially by Fortum is currently carrying out a number of feasibility studies on wind power in Finland, Sweden and other countries where Fortum is present. The studies include both on-shore and off-shore wind farms. Fortum and Metsähallitus (The Finnish National Forest Enterprise) have made a reservation agreement on two state-owned sea areas in the Bay of Bothnia for large-scale wind power generation. According to a preliminary survey, a megawatt and a megawatt offshore wind farm can be built in those areas. According to initial estimates, the wind farms could probably begin to generate electricity in Fortum is investigating the possibility of building five wind power stations on the island of Bergö in the municipality of Maalahti in Finland. The total capacity of the wind power stations will be megawatts. The wind power plants would start producing electricity approximately in Total emission reduction This chapter sums up the emissions reductions gained through various activities related to fuel switching and Emissions reduction since 1990, most projects realised during the past 10 years kt CO 2/a Fuel switches, CO 2 reduction on site or at customer's site Finland 1,060 Sweden 1,030 Hydro upgrading, CO 2 reduction via grid Finland 50 Sweden 290 Nuclear upgrading, CO 2 reduction via grid Finland 1,200 Other grid-connected CO 2 savings Replacement of distributed heating * ) 1,250 * ) includes only the case of Stockholm; see sub-chapter the upgrading of plant efficiency and/ or capacity since 1990, mostly over the past 10 years. The figures for both of Fortum s main focus countries, Finland and Sweden, are shown separately, because the national calculation rules for the evaluation of emissions reductions are slightly different. Appendices 1 and 2 describe the gallery of projects that have been included. It should be noted that although these projects do not represent 100% of all emissions reduction measures, they cover the major part. On a summary level, the CO2 emissions reductions gained by the projects have been in the range of million tonnes of CO2/a depending on whether we exclude or include the replacement of distributed heating in the Stockholm region. It should be noted that the figures in the table related to the case of Stockholm cannot be summed up directly because of double-counting risks. The Mt CO2/a figure should be compared to the recent emissions levels of Fortum, i.e Mt CO2/a. Without the projects, the emissions would have been Mt CO2/a. The costs associated with the fuel switch and upgrading projects are in the range of EUR 500 million. 4.2 EU emissions trading Emissions trading (ET) started in the European Union in the beginning of The purpose of this marked-based mechanism is to help the EU achieve its emission reduction targets under the Kyoto Protocol with least cost and to provide companies with incentives to invest in climate-friendly technology. Companies participating in the system are allocated a certain quantity of emissions allowances. If a company emits more CO2, it must buy more allowances. If a company emits less CO2, it can sell the extra allowances. The ongoing second period of the European ET system (ETS) extends from 2008 until The EU has recently approved the directive setting up a revised emissions trading system for the period The new legislation aims to harmonize the ETS for this period. We welcome the new directive and think that the auctioning of emission allowances is the right solution for the long term. The majority (about 95%) of Fortum s emissions from electricity and heat production in Europe are included in the European Emissions Trading System. Fortum has some 140 installations belonging to the ET scheme in seven member states. Each business unit in Fortum is responsible for the practical implementation of emissions trading according

14 PAGE 14 actions Fortum AND CLIMATE CHANGE to their trading strategies and risk policies. However, the trading operations have been centralised to the Portfolio Management and Trading (PMT) business unit, which takes care of market information and transactions for and as defined by the business units. Fortum is participating in different market places (e.g. Nord Pool and ECX). Fortum manages its exposure to CO2 allowance prices through the use of CO2 forwards and electricity derivatives and by ensuring that the price of allowances is taken into account during production planning. The allocation to our installations belonging to the ETS during was 8.1 million allowances per year. Fortum s allocation for the Kyoto period is a tight 5.9 million tonnes of CO2 per annum. 4.3 Use of Kyoto mechanisms Fortum has been actively developing competence and management with respect to the Kyoto mechanisms (Joint Implementation, Clean Development Mechanism), so that these mechanisms (JI/CDM) are an important tool in our climate strategy. These mechanisms make it possible to improve the cost-efficiency of reducing emissions because, in addition to domestic action, they also allow investments in developing countries and countries in transition to a market economy. Fortum is a member in the World Bank s Prototype Carbon Fund (PCF) and a member of the Testing Ground Facility (TGF), a carbon fund operating in the Baltic Sea region. The total amount of Kyoto credits for Fortum through these fund investments is estimated to be million tonnes CO2 cumulatively. PCF is a mutual fund of 17 companies and 6 governments. It has capital of USD million. Fortum has invested USD 10.7 million in the Fund. The PCF invests in Joint Implementation projects in Eastern Europe and in Clean Development Mechanism projects in developing countries. The emissions reduction credits created in these projects are redistributed to the participants of the PCF proportionally to the participants investments. The PCF project portfolio was closed in 2007 and the projects are now in the implementation phase. The first certified emission reductions (CER) were transferred from PCF to Fortum in January In addition to these two fund investments, we continuously look at new possibilities in Kyoto mechanisms. In 2008, Fortum signed contracts with the Russian TGC-1 and OAO Fortum on Joint Implementation projects. According to the agreements, Fortum will invest in energy-efficient production in these companies and in turn receive approximately 6.5 million tonnes of emission reduction units (ERU) from Russia during the Kyoto period. The projects still need the approval of both Russian and Finnish authorities. Fortum can use the Kyoto credits to cover part of its own emission allowances in ETS. The maximum amount of Kyoto credits Fortum is allowed to use for compliance purposes in the EU ETS is about 3 Mt during Other internal climate actions In order to increase the climate awareness among Fortum s own personnel and enable them to contribute to climate change mitigation in their work, Fortum has started a number of internal climate actions. Fortum launched new climate targets for company car procurement and air travel already in In 2009, Fortum decided on new stricter targets for its car fleet. The CO2 emission limit for Fortum s company benefit cars is 180 g/km from April 1, The aim is to further reduce the limit to 150 g/ km in Each company car driver is obliged to participate in Ecodriving training and the car manufacturers of the makes available to Fortum must have a long-term commitment to sustainability. Our target is to reduce CO2-emissions from air travel by 10% from 2007 to Instead of air travel, teleconferencing and videoconferencing is being promoted. Fortum has also started to offset the carbon dioxide emissions resulting from its personnel s air travel. As the first step, Fortum has purchased Gold Standard verified emission reductions corresponding to the emissions caused by flights taken during This fee was channelled to two wind energy projects in China. In the future, we will use the certified emission reductions from the Prototype Carbon Fund of the World Bank for the offsetting of emissions. In Fortum s offices light bulbs have been replaced by energy saving lamps and only CO2-free electricity is purchased for the offices in Finland. Fortum is cooperating with WWF to introduce Green Office concept to the office premises. 4.5 Reduction of customers emissions Case Stockholm In many cases, our energy production reduces the emissions of our customers. This effect can be demonstrated by analysing the global emissions, i.e. by extending the system boundary of emissions accounting. This kind of analysis takes into consideration not only For-

15 Fortum AND CLIMATE CHANGE actions PAGE 15 tum s own emissions, but also the net impact of the use of our product instead of an alternative energy source. Combined production of heating/ cooling and electricity (CHP) and increased use of district heating instead of individual heating in the Swedish capital area of Stockholm are good examples of climate change mitigation. Breakthrough of district heating in Stockholm started in the early 1960s and the current district heating delivery is almost 8 TWh. District cooling operations began around 1995 and the current annual cooling delivery totals 390 GWh. In the calculation of the global emissions, the following factors have been taken into account: Fortum s emissions on-site in our production plants in Stockholm. Part of Fortum s production is based on fossil fuels that result in carbon dioxide emissions. These emissions are calculated based on the amounts of fuels used and the specific emissions of each fuel. Fortum is also a producer and user of electricity. Most of the electricity is used for heat pumps (total capacity 495 MW). The impact of Fortum s electricity production and consumption, as this electricity is delivered to or taken from the Nordic grid, has to be considered. Depending on the situation, we either replace or utilise the electricity production of coal condensing that is in the marginal in the Nordic power system. The specific emissions of coal condensing power used in this analysis is 837 kg CO2/MWh. The emissions of the district heating consumers (compared to their own heating alternatives). As district heating (and nowadays also cooling) is connected to a consumer, his/her local emissions caused by distributed heating systems (oil, heat pumps, electricity, town gas) are avoided. The emissions of district cooling consumers (compared to electricitydriven cooling production). Fortum s global CO2 emission balance shows a significant emissions reduction in the system since At the moment, the global annual CO2 saving is estimated at 1.25 million tonnes of CO Solutions for sustainable cities Today half of the world s population live in cities. Development of sustainable energy solutions for cities is urgent, especially to mitigate climate change. Several cities have ambitions to create such showcases. In Stockholm, development of the residential area Hammarby Sjöstad was started in the mid 1990s based on an ambitious environmental programme in which the main goal was to reduce environmental impact by 50% compared to conventional areas. The Hammarby model was created through close cooperation between all infrastructure actors in the area. As an energy company, Fortum was one of the major actors in developing the Hammarby model. The main idea behind the Hammarby model is to recycle and close the loops of all outputs like waste, waste water etc from buildings. Household waste and waste water are utilised to produce biogas, electricity, heat and cooling. The area also demonstrates other opportunities, like solar heating, photovoltaics CO2 emissions in Fortum Värme and fuel cells. Hammarby Sjöstad is well known also outside Sweden, and every year about 15,000 visitors come to the area from different countries. The district heating solution in Stockholm, the Hammarby Sjöstad model and many other environmental actions in Stockholm contributed to Stockholm becoming the Green Capital of the EU The next step in Stockholm is to continue developing sustainable city solutions with high environmental ambitions for three areas in the city. Two of them are mainly new residential and commercial areas, while one is refurbishment of an existing residential area The alternative fuel mix of the customer in : 84% oil boilers, 11% electric boilers, 3% heat pumps, 2% town gas boilers The alternative fuel mix of the customer in : 60% oil boilers, 2% electric boilers, 12% heat pumps, 25% town gas boilers kton 2,500 2,000 1,500 1, ,000 1,500 2,000 2, net emissions using global system boundaries increased/decreased emissions caused by electricity purchase/delivery from/to the Nordic grid own on-site emissions from Fortum s energy production cumulative reduced emissions at consumer site after the connection to district heating

16 PAGE 16 Fortum AND CLIMATE CHANGE from the 1970s. The environmental goals focus on becoming fossil free by 2030 or earlier. Energy and transports are especially important as are adaptation to future climate change and societal engagement and behaviour. For Fortum these projects are of strategic importance to develop the energy system, our products and offerings for a sustainable city in close cooperation with other actors. Stimulating and demonstrating innovations for the future will also be part of the project. Examples of areas where Fortum will be involved is energy supply for low and passive energy houses, district heating to replace electricity in several applications, individual metering, billing and customer communication, microproduction, smart grids and infrastructure for electrical vehicles. Cooperation between all actors is important to achieve smart energy use and optimise both energy and production capacity. Fortum is planning to be engaged both in the construction and operational phases of the area. 4.6 Adaptation to climate change Energy and other basic infrastructures are among the sectors identified as being strongly impacted by climate change. Many of our businesses (hydro power production, power distribution, thermal power production) are vulnerable to the physical risks of climate change. Therefore assessment and management of the impact of changing climate conditions are needed. Changes in precipitation (flooding and drought) have an impact on the volumes of hydropower. An increase in temperature will result in higher cooling water temperature for condensing power plants and will require additional cooling water pumping capacity. Many of our thermal power plants are situated on the seaside and exposed to a rise in the sea level. Storms, gales and heavy snowfalls impose requirements on maintenance of power distribution etc. These may result in losses of production and increased maintenance costs. Extreme weather conditions are becoming more frequent, especially in coastal areas where many of Fortum s distribution networks are located. With a mild climate, the storm resistance of forests becomes weaker. Therefore, systematic maintenance and renewal and development of networks are necessary in order to secure reliability of supply. Physical risks also include a need for increased statutory compensation fees in cases of long power failures and the increased need for investments in transmission grid reliability in order to avoid compensation fees. In the long term, climate change may have an effect on biomass growth, which could result in new conditions both for the maintenance of gridlines in forested areas and for the production of bioenergy. We have been participating in studies that have identified and analysed, in more general terms, the potential implications of climate change to energy production and distribution. In Nordic conditions, these include better availability and a changing annual production pattern of hydropower as well as a decreased need for heating energy. As many of our power plants are situated on the coastal area, a rise in the sea level may present a risk to the operation of the plants; there is a need to gradually reconsider the dimensioning of the location (from sea level) of plants and planning for flood protection and cooling water pumping. There is also a need to consider more frequent and stronger storms in the distribution operations. The distribution business is closely monitoring climate statistics and development so that it can take this parameter into consideration in network planning. The Corporate Risk Policy of Fortum governs the risk management process within Fortum. Each business unit is responsible for identifying and assessing operational risks, such as the effects of extreme temperatures, floods and storms, to name a few. The risk management process is continually being developed, and efforts are ongoing to improve the process of systematically identifying and assessing these risks. Physical risks related to e.g. changes in hydro power production, disturbances in power distribution and changes in thermal production are a key part of Fortum s risk management and hedging policies. For example, Fortum s hedging of its future electricity generation volumes takes into account the volume risks related to the uncertainty of hydro generation and the swings in thermal volumes with forecast power price scenarios. Physical risks related to Fortum s distribution networks are mitigated through e.g. Fortum s ongoing investment programme in network reliability.

17 Fortum AND CLIMATE CHANGE PAGE 17 5 Research & Development for a Carbon-Free Future Technologies curbing climate change are a strong focus in Fortum s research & development (R&D) activities. In line with our long-term goal of being a carbon dioxide-free energy company, we want to participate in developing the emissions-free energy system of the future. Fortum s R&D programmes focus on new bioenergy technologies, solar and wave energy, carbon capture and storage, and sustainable energy systems, such as electric vehicles. We want to develop and apply new technologies in all these areas to support the development towards a carbon dioxide-free energy system. 5.1 Bioenergy technologies Fortum is studying technologies to replace fossil fuels with biomass fuels. As part of this research, we have launched lignin combustion tests at the Värtan power plant in Stockholm, Sweden. Wood-derived lignin is a byproduct of the paper industry and it has a thermal value equivalent to coal. In the tests, lignin is mixed with coal paste. The results in terms of fuel handling and the combustion process have been very positive. Similar tests have also been conducted with other types of biomass. 5.2 Wave energy Wave energy s global potential is big: It is estimated that wave power could accommodate as much as 10% of the world s electricity demand in the future. Wave power technologies tap into the energy of bottom and surface waves at sea. At the moment, Fortum is participating in two wave power projects. In collaboration with Finnish AW-Energy, Fortum is researching technology that utilises bottom waves in Peniche, Portugal. Surface wave technology is being studied off the coast of Lysekil in Sweden in collaboration with Uppsala University. 5.3 Electricity in transportation An electrical motor is more than three times more energy efficient than a combustion engine. Thus replacing conventional cars with electrical vehicles can significantly reduce CO2 emissions from road traffic. Fortum wants to ensure a smooth transition to electrical road transport and to accelerate the penetration of plug-in hybrid and electric vehicles as car manufacturers introduce them on the mass market in the next few years. A pilot project with the cities of Stockholm, Sweden and Espoo, Finland was launched in 2008 in order to test both different types of plug-in vehicles and

18 PAGE 18 Research & Development for a Carbon-Free Future Fortum AND CLIMATE CHANGE charging solutions. During 2009, tens of charging poles with several different features will be tested with four types of plug-in vehicles. 5.4 Carbon capture and storage Carbon capture and storage (CCS) is a process in which carbon dioxide created in energy production from fossil fuels is captured, liquefied or converted into crystals, transported for storage, and permanently sequestered underground. CCS is estimated to become the single most important way to reduce carbon dioxide emissions in electricity production. Fortum is participating in numerous development projects involving all phases of the CCS process: capture, transportation and storage. In Sweden, carbon capture has been tested successfully at the Värtan power plant in collaboration with Sargas; over 95% of the carbon dioxide emissions were captured. In Finland, the plan is to commission a full-scale CCS facility at the Meri-Pori power plant as an EU demonstration project. In Norway, Fortum is developing carbon capture technology in collaboration with Aker Kvaerner. Based on the April 2009 agreement between Fortum Corporation and PGE Belchatow Power Plant S.A., a subsidiary of Poland s biggest energy company PGE, the companies will start cooperation in carbon capture technologies and storage solutions (CCS). Both Fortum and PGE have their own development projects under way that aim for the CCS demonstration programme of the European Commission. Fortum tests plug-in vehicles and charging solutions. CCS demonstration plant in Värtan, Sweden.