Fortum's strategy is based on three areas of focus:
- Leverage the strong Nordic core
- Create solid earnings growth in Russia
- Build a platform for future growth
Investment, integration and project risks
Fortum's growth strategy includes expansion of operations. As a result of ongoing
integrations or any future acquisitions, there is a risk to existing operations, including:
- additional demands placed on senior management, who are also responsible for managing existing operations;
- increased overall operating complexity and requirements for personnel and other resources in other cultures;
- the need to attract and retain sufficient numbers of qualified management and other personnel.
Within the projects that are part of the Russian investment programme, as with all large projects, there is a risk of delays, for example in establishing new capacity and grid connections. The project risks are closely monitored by the management and risks are followed up in monthly management reporting.
Political and regulatory risks
The political and regulatory environment has a clear impact on energy businesses. This applies both to existing and potential new businesses and market areas. Fortum is thus exposed to regulatory risks in various countries.
Nordic/EU Policy harmonisation, infrastructure development and integration of the Nordic electricity market towards continental Europe depend to large extent on the actions of authorities. The current trend of national policies could even endanger market-driven development of the energy sector and the uncertainty with regard to future policy targets and framework is currently considerable. Fortum favours market-driven development, which would mean e.g. more interconnections and competition in addition to policy
harmonisation, by maintaining an active dialogue with all stakeholders.
Currently the biggest potential risks within the policy framework relate to the electricity market model, targets with regard to future climate change mitigation and renewable energy and taxation. In particular, the interlinkages of these issues create uncertainty, as they are overlapping and undermine the effects of each other. The EU is currently discussing capacity remuneration mechanisms that would change the market model. The specific details of targets for CO2 emissions and renewables for 2030 are also under discussion. At the end of 2013 in Finland, a Government Bill for a windfall tax on some non-emitting and old power plants was approved. Furthermore, the nuclear safety directive is under revision, and a discussion on broadening nuclear liability in the EU is starting.
All these would pose risks, but also opportunities, for energy companies. To manage these risks and proactively participate in the development of the political and regulatory framework, Fortum maintains an active dialogue with the bodies involved in the development of laws and regulations at national and EU-levels.
Russia is exposed to political, economic and social uncertainties and risks resulting from changes in policies, legislation, economic and social upheaval and other similar factors, as other similar countries.
Fortum owns and operates heat and power generation assets in Russia under the operations of OAO Fortum. The wholesale power market deregulation in Russia has proceeded well and to a large extent according to original plans. The main policy-
related risks in Russia are linked to the development of the whole energy sector, part of which, namely wholesale electricity, is liberated while other parts, like gas, heat, and retail electricity, are not. Currently, there is the risk that the Government will freeze tariffs of certain regulated products including gas, which creates a risk for Fortum's efficient operations. Cross-subsidies, which are supposed to be eliminated but still exist, compromise the competitiveness of energy-efficient combined heat and power (CHP) production. Artificially low energy prices do not benefit anyone in the long run, as they promote inefficiency by limiting investments in efficiency.
Political risk concerning taxes
The current economic situation in Fortum's key operating territories has created an unstable tax environment leading to new or increased taxes and new interpretations of existing
tax laws. This in turn has led to unexpected challenges for Fortum in the way the Group is organised and how its operations are taxed. The certainty and visibility around taxes has decreased. Where there is uncertainty, Fortum seeks to maintain its position in line with its tax policy.
Legal and compliance risks
Fortum's operations are subject to rules and regulations set forth by the relevant authorities, exchanges, and other regulatory bodies in all markets in which it operates.
Inadequacies in the legal systems and law enforcement mechanisms in Russia and certain other emerging markets expose Fortum to a risk of loss resulting from criminal or abusive practices by competitors, suppliers, or contracting parties. Fortum's ability to operate in Russia may also be adversely affected by difficulties in protecting and enforcing
its rights in disputes with its contractual partners or other parties concerning, for example, regulatory influence on business and unfair market conditions, and also by future changes to local laws and regulations.
Fortum maintains strict internal market conduct rules and has procedures in place to prevent, for example, the use of confidential information before it is published. Segregation of duties and internal controls are enforced to minimise the possibilities of unauthorised activities.
Compliance with competition legislation is an important area for Fortum. Fortum has also enhanced its compliance risk management by establishing a process to systematically and separately identify and mitigate compliance risks linked to the operational risk framework. This process aims to capture also potential bribery risks. Fortum has also rolled-out the Code of Conduct, including the bribery risk assessment process, to enhance the compliance to business ethics.