Good morning, everyone. A warm welcome to Fortum's joint webcast and news conference for the investor community and media on our third quarter 2023 results. My name is Ingela Ulfves, and I'm Head of Investor Relations at Fortum. This event is being recorded, and a replay will be provided on our website later today. With me here in the studio are our CEO, Markus Rauramo, and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's third quarter and year-to-date 2023 figures, as well as the group's performance. After the presentations, we will open up for questions. Maybe also good to know that we have reserved one hour for this event today. With this, I now hand over to Markus to start.
Thank you very much, Ingela. A warm welcome to our investor call also from my side. As you know, Q3 is typically the weakest quarter in our sector, and it seems that this trend continued. As you have seen this morning, we have announced the start of an efficiency improvement program, which I will explain. I will, however, start by going through our third quarter events, market fundamentals, and development, then also talk about our strategy execution, and then how this turned into results in the quarter and nine months of 2023. After that, Tiina will walk you through the numbers in more detail. Let me now start by commenting on the third quarter. The third quarter is typically a lower result quarter due to the seasonality of our business. Winter quarters yield higher results compared to the summer quarters.
Our result was impacted by lower spot prices compared to last year, but was resilient, supported by higher hedge prices and higher volumes. Our balance sheet is very strong, as our leverage is low, only at 0.2 times financial net debt to Comparable EBITDA. We have sufficient buffers, with liquid funds of more than EUR 4 billion and ample undrawn credit facilities. We continue our strategy execution and further reshape our organization to better support our renewed business structure. Considering the softening market sentiment, our two-faced strategy serves the current market situation well. I'm also pleased to say that Fortum has submitted the official commitment letter for the Science Based Targets initiative and is committed to setting near and long-term company-wide emission reduction targets in line with SBTi's climate science.
We are now waiting for the completion of the SBTi internal due diligence process and the disclosure of our commitment on their website. Once we get there, the timeframe to finish the validation process is a maximum of two years. In order to improve our profitability, ensure our competitiveness, and adjust to Fortum's current group size, today we also announced that we initiate an efficiency improvement program. This is the picture we showed in March when we launched our new strategy. It describes how we already then saw that the strategy is two-faced. First, manage the uncertainty, and second, electrify and grow. We continue to live in uncertain times at the moment, and we need to act prudently, be disciplined, and plan our actions accordingly. As we see it now, Fortum's operating environment and the general economic sentiment have weakened after the summer, with further escalation of geopolitical tensions.
This means that uncertainty has further increased. There is lower market visibility, and industrial investments are postponed, while inflation and interest rates continue to be high. As we also said, our focus is to ensure our competitiveness and maintain our best-in-class operations while the growth phase comes later on. We constantly optimize our operations and how we operate our Generation fleet. We renewed our dividend policy, and we refined our debt portfolio as we successfully returned to the bond markets this spring. Already in March, we said that we need to transform and develop to fit our new structure. Considering that we were 20,000 people one year ago, with Uniper and Russia still part of the group, today we are approximately 5,000. This means that we need to rebase our operations to match the new reality.
Now, we put even more focus on earnings and cash flow, while at the same time continue the disciplined capital allocation. At this moment, we do not see large investments in the near future. However, we will continue with the ones that are ongoing. We naturally will prepare for future growth in clean energy in the Nordics and aim to build optionality through a sufficient investment pipeline. Let's look in more detail at the efficiency improvement program. The program is both about fixed cost and cash flow, i.e., we will cut cost, but we will also lower our capital expenditure as we see softer and lower industrial demand at the moment. We will gradually reduce our annual fixed cost by EUR 100 million until the end of 2025. This corresponds to approximately 10% of our fixed cost compared to the level in 2022.
This obviously will have a positive effect on our earnings and cumulative cash flows. We cut our guided growth capital expenditure by EUR 500 million for the years 2023-2025. So, we could spend up to EUR 1 billion in growth CapEx during these years, instead of the previously guided up to EUR 1.5 billion. It's good to note that with the ongoing investments, EUR 800 million is already committed. On top of this, it's good to remember that the annual maintenance CapEx is around EUR 300 million. The EBITDA for the last twelve months was EUR 2.2 billion, which means that these actions will have a meaningful effect on results and cash flows.
The efficiency program also includes strategic prioritization and assessment of allocated resources, as well as turnaround actions for underperforming businesses, which mainly relate to development initiatives in our Circular Solutions. To reach the target, it is unfortunately expected that the actions will also include personnel reductions. The planning of the more detailed execution of the program starts now, and we will provide more details later on. With all this, we want to ensure that we are in good shape and have the required preparedness to maneuver in all market scenarios, and can respond to demand when it picks up again. Then over to strategic topics. Our strategy builds on the priorities to provide clean energy and drive decarbonization of industries, which makes the strategy really relevant to enable the energy transition. We continue this determined work.
Let's take a quick look at the ongoing strategic actions that we have announced earlier. We have announced several projects that enhance our best-in-class operations, such as the Loviisa nuclear power plant lifetime extension and upgrades of hydropower plants. Our wind farm in Pjelax is expected to start commercial operation in the second quarter of next year, and we continue the planning of selected solar and wind projects, while at the same time, we work on our last parts of the coal exit. We also work together with industrial customers, serving them in the best possible way. Our nuclear feasibility study includes both technology providers and industrial customers. Another key topic for us is to balance and de-risk our outright Generation portfolio, and in Q3, for example, we announced a PPA together with a Norwegian customer. We see that there is good demand from our customers.
However, there is a gap between the indicative demand and the materialization of long-term power supply agreements. Finally, a few words on the ongoing internal changes to transform and develop. Our internal renew program has two objectives: to build an efficient and fit-for-purpose operating model, and to develop our culture and leadership to support the strategy execution. I also want to say a few words on the market development. In the first half of this year, gas prices decreased. Due to various reasons, renewed concerns about the security of supply first reemerged in June, and then repeated in Q3, and even intensified as several factors came together and revived the gas price and volatility.
However, these price spikes cannot be compared to the levels we saw last year due to the subdued demand and very comfortable European gas storage levels above 90%, even close to 100%, ahead of this winter. During the first part of 2023, the Nordic system price, both spot and futures, declined steeply. In Q3, the Nordic spot prices came under heavy pressure due to high precipitation, which, in combination with the warm weather and strong renewables growth, led to high inflows. In late Q3, reservoir levels in the Nordics were very high. This resulted in spot prices from time to time being close to zero. The power spot price was also negatively affected by the new supply from the commissioning of Olkiluoto 3 and significant growth in installed wind capacity.
Looking at the forwards, the Nordic Q3 2023 product declined by EUR 40, and the Year-24 product, 29 EUR/MWh, during the third quarter. Products for the rest of the year 2023 are currently trading around EUR 50/MWh, and for 2024, around EUR 46/MWh after a recall upwards in October. It is still good to note that although we are talking about clearly lower levels than a year ago, forward prices are still at the higher level compared to the historical prices. Then over to the financial KPIs. What you see here are the comparable headline KPIs for the group's first nine months and the third quarter. I will comment on the cumulative numbers, and Tiina will go through also quarterly numbers later on. On a cumulative basis, our performance improved.
Comparable operating profit increased to EUR 1.186 billion, mainly due to better hedge prices. At the same time, the trend continued in comparable EPS, which was up by 0.14 EUR during the first nine months. While Comparable EBITDA improved by EUR 192 million, operative cash flow improved by EUR 295 million, mainly supported by changes in working capital. As our financial net debt decreased during the quarter, our leverage continued to come down and was at 0.2x at the end of September of this year. I am pleased with the financial performance and our financial position. So with this, I conclude my part in this first section and hand over to you, Tiina.
Thank you very much, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail, and we'll start with the development of the third quarter. With this, let's move to the key financials for our continuing operations. Our comparable EBITDA declined and amounted to EUR 318 million in the third quarter. On a last twelve-month basis, it's total EUR 2.2 billion. The comparable operating profit declined from EUR 354 million to EUR 226 million in the third quarter, while the comparable net profit decreased from EUR 279 million to EUR 204 million. Our quarterly comparable EPS was somewhat lower than last year at EUR 0.23.
The reason for this was that the spot price in our price areas was clearly lower at EUR 33 per MWh, which is as much as EUR 133 per MWh below the level compared to last year. During the third quarter, our funding cost decreased while interest income increased. This is the reason for the modest interest expenses. In taxes, there was some positive impact from restructuring of internal legal entities. Our comparable EPS for the first nine months was 0.93 EUR, and for the last twelve months, 1.34 EUR. Our cash flow was strong, both in the third quarter and for the first nine months, mainly thanks to the good result, especially in the first half year, and the positive change in the working capital.
On dividend payment, in the second quarter, we paid the first half of the EUR 0.06 of the 91-cent dividend for 2022. Now, by end of the third quarter, the ratio for Financial net debt to Comparable EBITDA for the last 12 months decreased to 0.2 times. The second part of the dividend, for EUR 0.45, was paid in October in Q4, so it is not visible in the cash flow figure. Now, over to the segment overview. This shows that the result in the third quarter declined in all the segments. The result of the Generation segment, which reported a Comparable operating profit of EUR 262 million, decreased by EUR 95 million for last year. This is mainly a consequence of clearly lower achieved power prices.
The achieved power price decreased by EUR 12.7 to EUR 51.2 per MWh. Also, the optimization margin was much lower compared to one year ago. I will come back to more details on the optimization margin later on. It is still good to note that last year, power prices were at extremely high levels. Despite the decline in price and earnings this year, prices are still elevated compared to the historical levels. The outright volumes increased by 1.4 TWh. However, there is an earnings effect as the Olkiluoto 3 volumes are not as profitable as the rest of the hydro and nuclear fleet. The result of the district heating business was negatively impacted by lower electricity prices and higher fixed cost, which was partly offset by higher heat prices and lower fuel cost.
The comparable operating profit in the Consumer Solutions segment decreased from EUR 17 million to EUR 10 million. This was again an effect of lower electricity sales margin, somewhat offset by higher gas sales. The main reason for the lower electricity sales margin was that customers, especially in Sweden and Norway, have been migrating to spot products which have a lower margin. The comparable operating profit also continued to be negatively impacted by the regulated price cap set for end users in Poland during 2023. And finally, briefly on the other operating segment. The comparable operating profit decreased by EUR 26 million and was negative of EUR 46 million, mainly due to the weaker result in Circular Solutions, especially the recycling and waste business, write-downs of certain IT project and development cost for the new operating model, as well as higher cost in enabling functions.
Now, we move over to a waterfall of the first 9 months. This picture further highlights that the entire result improvements is created by our Generation segment in the first half of the year, as we saw that the third quarter was lower than last year. The comparable operating profit for Generation was EUR 1,289 million, an increase of EUR 343 million from last year's EUR 946 million. The result improvement for the first 9 months resulted from a higher achieved power price and higher hydro volumes. The achieved power price in the Generation segment increased by EUR 12.2 to EUR 65 per MWh, driven by higher hedge prices. Year-to-date, hydro volumes were up, and this is mainly coming from the record high water inflows in the third quarter.
The result of the district heating business was positively impacted by higher electricity and heat prices, and the use of recently commissioned electric heat boiler heat production in Espoo, which partly replaces earlier used fossil fuels. This effect was partly offset by higher fuel and CO2 emission allowance prices. The comparison period in 2022 includes approximately EUR 41 million from the divested Norwegian district heating operation and tax-exempt sales gains from a divested solar plant in India. Consumer solution comparable operating profit increased by EUR 46 million and was EUR 27 million, mainly due to the lower electricity sales margin, the Polish price cap, increased cost, and lower sales of value-added services. There were some positive effects from higher gas sales margins. And finally, on the other operating segment, where the comparable operating profit decreased by EUR 53 million and showed a loss of EUR 130 million.
This comes from higher cost in the circular solution business, and more specifically, the expansion of the battery recycling business. Other contributors to the losses were the write-downs of certain IT project, development cost for the new operating model, and higher cost in enabling functions. The comparison period included structural changes in the circular solution business and one-time positive impact from the changes in pension fund arrangement in Sweden, which affected the group's enabling functions. Now, I will go into some more details in our optimization premium. Lately, there has been a lot of discussion around one of our competitive advantages, namely, the ability to create value through optimization. As you all know, in addition to hedge and spot price effects, the optimization premium is one component in our achieved power price. There are several elements that contribute to the optimization.
The main ones are, however, flexibility and environmental values. These features add value, and lately, the value has actually increased. Let me try to explain this to you. First, it is the flexibility. There are two main components in the value creation from flexibility. The main one is our physical optimization. This means how we allocate our hydropower fleet to peak hours on an hourly, daily, weekly, and seasonal basis. As the market price volatility has increased, the potential for optimization has also increased, which you can see in the picture on the left-hand side and in the middle. The graph of volatility shows the standard deviation. Another margin component is flexibility, is ancillary services.
As overall market volatility increased, while at the same time, predictability of the Generation in the system has declined due to the increase of wind supply, the ancillary service market has become more important, and the share of it has gone up. With our flexible hydro Generation, we can support the energy system and ensure that it is up and running as we offer intraday capacity to the market if and when needed. Second, there are environmental values. The main elements are two products: Guarantees of Origin and El certificates.... Guarantees of Origin are the main value enhancer for the environmental values. These are externally verified certificates for CO₂-free power. They are European-based, and Fortum has registered its Generation fleet in the system of Guarantees of Origin in Finland and in Sweden. Of our units, only Olkiluoto 3 is not yet registered.
As you see in the picture on the bottom right, the price for hydro has clearly increased during the last year. For hydro Generation, the price is approximately 67 EUR per MWh at the moment, compared to nuclear, which is approximately 1 EUR per MWh. El certificates are the system for clean power in Sweden. The market is currently oversupplied, which is the reason why the prices for El certificates are at a low level. Based on this, and with today's information, we estimate that our optimization margin going forward could be between 6-8 EUR per MWh in our achieved power price. Naturally, this will depend on the price levels, overall market conditions, the level of volatility, and other market elements.
Historically, the optimization margin has been 1-3 EUR per megawatt hour, and during 2022, when prices skyrocketed and volatility was huge, we even managed to achieve double-digit EUR in optimization. But now, margin has come down and leveled out. Now, over to the balance sheet. Equity increased by EUR 764 million from the end of 2022, despite the impairments of our Russian operations and dividend payments, which negatively affected equity. On a positive note, also the positive change in hedge reserves and our good result for the first 9 months. The total dividend for 2022 of EUR 817 million, corresponding to 0.91 EUR per share, was paid in two installments in the second and fourth quarter. As you can see, our gross debt has come down, and we repaid some debt.
At the end of Q3, net margin receivables amounted to EUR 559 million, which already is closer to historical, more normal levels compared to extremely high levels we saw last year. We also continue to have sufficient liquid funds, so all in all, we have a straightforward and strong balance sheet. Then a few comments on our net debt and debt portfolio. Maintaining a solid credit rating still continues to be a key objective for us. Today, we have a balanced financial situation and continue to have a good dialogue with our rating agencies. Let's go through the reconciliation of our financial net debt during the quarter. It has further strengthened and shows that our leverage situation is indeed very good. In the opening balance sheet at the beginning of the quarter, we had financial net debt of EUR 745 million.
The operating cash flow was very strong at EUR 429 million. This effect was slightly offset by investment of EUR 172 million, and the change in interest-bearing receivables and other effects was EUR 14 million. So at the end of September, our financial net debt had further declined and was EUR 474 million. Looking at our debt portfolio and the maturity profile, I want to highlight a few things. First, the debt maturity profile is very balanced after our bond issue and repayment of some debt in the spring. All in all, our gross debt is approximately EUR 5.8 billion. Simultaneously, we have a strong liquidity position with liquid funds of EUR 4.6 billion and EUR 4.3 billion of undrawn credit facilities, which provides the capability to repay maturing short-term debt if needed.
With the strong liquidity reserve, we will continue to optimize our cash positions and credit lines to manage any future market volatility and price situation. The overall objective is to constantly ensure an optimal balance between the balance sheet, investment, and dividends. As interest rates have gone up, the interest rate for our debt portfolio has somewhat increased from last year, but decreased lightly from the last year. Going forward, the cost for our EUR 5.8 billion loan portfolio is 4.3%. At the same time, we also get interest income for our liquid funds of EUR 4.6 billion. Interest income was 3.8% in the third quarter.
As a last note, I would also like to highlight that we now are in the process of preparing for our Green Finance Framework, which longer term will enable us to utilize also green bonds and loans for future investment in clean power or similar solutions. With this, over to the outlook section. The outlook section comprises, in essence, three elements: guidance on hedging, CapEx, and tax rates. In addition, we have now also added the cost savings from our efficiency improvement program. The hedges for the Generation segment's outright position for the rest of 2023 was 75% hedged at EUR 50 per MWh. The hedge price for 2024 increased by EUR 1 to EUR 47 per MWh, and the respective hedge ratio increased 15 percentage points to 65% at the end of Q3.
Today, we have also disclosed our hedges for the year 2025. The hedge price for 2025 is EUR 43, and the respective hedge ratio is 30% at the end of Q3. As part of the efficiency improvement program, we also updated our CapEx guidance. CapEx for 2023 is reduced from EUR 700 million to EUR 650 million. We also provide CapEx guidance for 2024, which is expected to be approximately five hundred fifty million euros. CapEx for both 2023 and 2024 includes maintenance CapEx of EUR 300 million, but excludes potential acquisitions. As Markus already explained, at the same time, we also reduced our growth CapEx guidance for 2023 to 2025 from 1.5 billion to 1 billion. We continue to apply the same investment hurdles that we disclosed in March.
There are also some updates for our tax guidance. The group comparable effective income tax rate for 2023, including items affecting comparability, has been lowered to be between 18%-20%. Due to the low power price, we do not expect any windfall tax for the year 2023. For next year, the comparable effective income tax rate, excluding items affecting comparability, is also estimated to be lower, between 18%-20%. With the fixed cost reduction of EUR 100 million, we aim to improve our profitability, cash flow, and our future competitiveness. And then just a reminder of the previously presented optimization margin, which is expected to be in the range of EUR 6-8 per megawatt hour. So with this, I would like to thank you and end the presentation, and then we are happy to answer your questions. Ingela, over to you.
Thank you, Tiina, and thank you also, Markus. So we are now ready to take your questions. Please state your name and company before asking the question, and we also ask you to limit yourself to two questions each. We would have approximately half an hour for the Q&A. We will start with questions in English, but if there are questions from the Finnish media, we're happy to take those as well in Finnish at the end. Let's then begin the Q&A session. Moderator, please start.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Harry Wyburd from Exane. Please go ahead.
Hi. Morning, everyone. Thanks for taking my questions. Two of them, please. So firstly, can we just talk a little bit about numbers? So on your cost savings of EUR 100 million, please, could you give us a bit of color on where they're gonna sit in the division? So can we split the 100 as how much is gonna go into Generation, how much into Consumer Solutions, and how much into other, just to help our modeling? And maybe as well, it'd be very useful if you could just give us a guide of what you think normalized operating profit is in Consumer Solutions and other, once the issues that you've had with customers moving on to spot contracts in Consumer Solutions eventually end.
So effectively, what I'm asking is, can you help us model the divisions, going into next year in a more normalized year, including the cost savings? And then secondly, on the reduction in CapEx, I mean, the balance sheet, your balance sheet position just gets better and better. And now you've got lower CapEx as well, which I presume is gonna result in lower net debt in all of our numbers. If you look at many of your peers, they get asked every day about whether they might do something on dividends or share buybacks. It's very topical at the moment in the sector. You're probably one of the best-positioned companies in the sector to be able to do something on dividends or, in particular, share buybacks.
Now that your balance sheet is getting even less levered, would you revisit whether you might do something on maybe a special dividend or a share buyback, and maybe return some of this balance sheet headroom to investors? Thank you.
Okay. Thank you very much, Harry, for the first question. So I can start, and then maybe Tiina can talk more about the where the cost savings would be coming from, which is a number we haven't given, but to scope it a bit. If I start with the Consumer Solutions, so you are correct to spot that there have been one-offs or shifts in consumers changing from one contract type to another. So I would say generally that last year was a more representative year of what Consumer Solutions should be doing. We are not giving a profit forecast for the business, but that's a cleaner result than what we have seen in 2021 and 2023 with more one-offs.
Then with regards to the efficiency program and lower CapEx should lead comparably to stronger cash flows. And you're correct that, if nothing else happens, then balance sheet gets stronger. So the way we look at it is that we optimize between three things: CapEx, dividend, and the balance sheet strength. And we recognize the issue that our leverage is lower than it could be. The recovery of our balance sheet has been fast, we have to say that.
We are discussing this with our board, and then the board makes a proposal to the AGM for the spring meeting in connection with the full year results, so we'll get back to it. We have been preparing for the possibility that there would be substantial customer demand growth, which we have seen, but it has not materialized into projects, actually going forward as quickly as we had thought. So we need to think about this part then going forward. But then on the EUR 100 million, do you want to, Tiina, open up a bit that-
Yes.
What kind of things do we think that where this could be coming from?
Yes. Thank you, Markus. So we have stated the EUR 100 million efficiency program, and important is to note that we have the baseline is the 2022 comparable cost level. So this is the starting point where we aim to get the EUR 100 million savings, and these savings will majorly be implemented by the end of 2025, and the run rate of the new cost level is then on 2026 onwards. If we look at the 2022 in a way cost level, so this is roughly EUR 1 billion, and we could say that all the divisions will work and look at the cost base and where there could be some efficiencies.
Clearly, we are now the smaller company, and we have less activities, so therefore, we also need to adjust our enabling functions, how we operate. In our other segments, we have also the Circular Solutions, where we see that there are activities that we need to improve the operations and the profitability. I think this is the exercise what we have started already during the summer. We are collecting the activities, and while the plans are further developed, we will come back to you.
Okay, that's very helpful. Thank you.
The next question comes from Artem Beletski from SEB. Please go ahead.
Yeah, good morning, and thank you for taking my questions. So, I would like to thank you on first details regarding optimization premium and its structure, and my question is relating to Guarantees of Origin, and we have seen quite significant price increases there. Could you maybe talk about possibilities to lock in current favorable prices there, for example, for upcoming years, to some type of hedging activity? And the second question is, within optimization premium, when it comes to flexibility part, could you maybe elaborate a bit how significant contribution is coming from ancillary services? So I guess it's, for example, income from reserve market and so on. Thank you.
... Okay, thank you. I think Tiina is the expert on all of these topics, but we opened up indeed now after actually a lot of discussion in the last two years about that the optimization premium is higher than it was historically. And now when the market, from our point of view, has maybe more come to a normalized level compared to where we were last year, now we were at the point where we can open this up. So our target is that we can talk about this now in more detail. So we gave quite a lot of detail in this point.
But from my point of view, it is the physical optimization, then the ancillary services and GOOs or El certificates in that order. And then for more detail, maybe Tiina, if you wanna-
Yeah.
-comment further.
Thank you, Markus. So basically, the two elements, the environmental value, so the Guarantee of Origin is the main source of the income. And if we look at the prices, also then the hydro part dominates the value compared to nuclear. We are selling also the environmental values beforehand. That, of course, depends on the demand. Demand, how the customers want to buy them. But clearly, if there are attractive prices, so we are keen to also sell those forward. Then what comes to the flexibility value? So the normal flexibility to optimize our physical operation to the higher prices. So of course, this is the one thing that the volatility has increased.
So there we see and have seen the increase, but more and more also the ancillary services as well. All the Fingrid, the Svenska kraftnät and the TSOs are developing the market, developing the products and the share of the ancillary services, at least in last year and this year, has played also important and even more increasing role.
Okay, it's very clear. Thank you.
The next question comes from Vincent Ayral from J.P. Morgan. Please go ahead.
Yes, good morning. Thank you for taking the question. I would like to come back a bit on the cost saving. We're talking about cost saving of EUR 100 million. You're saying we're looking at a baseline of 2022. Basically, are we here fighting inflation, or are we actually hoping to improve by EUR 100 million? We counter inflation and improve by EUR 100 million. It makes quite a difference in terms of... Otherwise, I don't know if the inflation impact is EUR 100 million and we do cost saving of EUR 100 million, that means we don't, we're basically running to stay still. It would be quite interesting to understand what's the situation on that one.
Then the second question I would have is regarding ancillary services. Fortum is clearly an investment story, which is always related to the highly volatile power prices. Ancillary services are of somehow a contracted nature. What is your strategic view regarding that? Is it something that really, because you can look at using your flexibility to optimize on a daily basis or reserve some of this flexibility for ancillary services. So, what are you looking at doing here? Do you want to increase, in a way, the contracted flexibility and therefore the share of contracted earnings in your mix, or not? And, how do you see the market evolving in that front, and what are you lobbying for? Thank you.
Okay. If I start, thanks, Vincent, for the, for the good questions. So actually, I would say on a very high level, what we're lobbying for is that that Europe, Nordic countries, all of our operating areas would target a clean, robust, reliable energy system. That includes intermittent renewables, that includes base load and hopefully new base load and new flexibility. So the robustness there is what we are mainly lobbying for. Then with regards to the specifics, I would say that, well, we have learned over the years that from our customer's point of view and from the system point of view, we have a rather unique portfolio. It is clean, there is a lot of flexibility.
We can provide these services, and in the short and medium term, we would say that the trend is that there will be more renewables, there will be more volatility. So this indicates good prospects for the flexible capacity. With regards to that, do we have, like, a predefined, locked view of how we would split the capacity between contracting forward the different parts? I would say more that this is a continuous optimization of taking short and mid-term, and even long-term view on how do we optimize the portfolio? To start with, how much do we hedge, how much do we leave unhedged, what are the hydro conditions, and then how much of the capacity is actually available exactly, for example, for frequency services?
You can't sell it if you don't have it. That's a clear point. And maybe still making the point that I think what we see is of high value from the market point of view is that we can provide 24/7, a good amount of 24/7 clean, reliable power. And that is something that typically the very large number of our customers would want for also for their new processes. Then for the question about the inflation. So, what we're saying is that we're targeting EUR 100 million efficiency on a comparable basis, so the inflation will then be what it is.
So we will then clean out the inflationary impact, and of course, we recognize that that may be higher or lower. And for me, actually, the EUR 100 million is more of an outcome of prioritizing our activities, rightsizing our enabling functions, making strategic selections on what we continue and whatnot. So I come back to that we are a very different group than we were a year ago. We were 20,000 people. We had a balance sheet of EUR 200 billion, and we had a different geographic and a different business footprint. So now we will continue to make sure that we have the sharp strategic focus on our new strategy.
And then we will close down activities that are not in line with this strategy, and then rightsize our, like Tiina said earlier, the enabling functions to fit the group we are today. And this also means that on the businesses and functionalities that are important for our customers, we may actually increase resources to actually get even better, stronger, more solid results from these areas. So this is not like a cross-cutting, cheese slicing exercise, by no means. What we have been calling for actually during the summer and the spring from the organization as to... We want to see selection, we want to see prioritization of activities, and then the outcome will be lower cost.
I hope this answers the... or give some color on the question.
Yes, but I'm not 100% clear. I'm not sure I understood. So basically, if I take Fortum now, and I put it from my standpoint as an investor or a sell side, modeling the company. So I got a cost base. Do I effectively reduce this cost base by EUR 100 for my 2026 numbers? Or do I reduce it by EUR 100, and then, if inflation goes up, I need to put some offset in front of it. So is it a net reduction of EUR 100, which is due to a downsizing of some activities or the closure of some activities which are not profitable? Just want to understand if it's a net-
It is the latter. So on a comparable basis, we take out from the 2022 cost base EUR 100 million, but then on top of that, you need to model the inflation, which we don't know what it will be.
Okay. So I take 22, I remove 100, and after then we always have the inflation now.
Yep.
Okay, thank you.
The next question comes from Anna Webb, from UBS. Please go ahead.
Hi, thank you very much for taking my questions, two from me. Firstly, on the optimization premium, can you clarify what the time horizon is, on that EUR 6-8 per megawatt hour? How far into the future we should expect that to remain? And also, could you give a bit of detail around what the optimization premium was over recent years, maybe 2021, 2022, 2023, just to put the new guidance into a little bit more context. And then secondly, there are a few comments in the release, about weak conditions in the power markets, and being ready for when demand comes back. Should we infer from that, that there is not much demand for corporate PPAs now?
So should we consider the recent hydro PPA you signed a bit of an outlier, or how do you see the market there? Thank you very much.
Yeah, I can, I can take the, the market and if Tiina, Tiina then continues on the optimization premium. So, we, we continue to see incoming inquiries for, for long-term power supply, and we are in a great position to, to answer that. So we want to be ready when the, when the projects go ahead, that, that either from our existing portfolio or then, if there's a business case for it, and, and there's profitability, we can also then answer the customer needs, potentially with, with new supply, if it is contracted. So yes, there is demand for, for PPAs, but it's not materializing actually to sign contracts because customers are not going ahead, with their new projects. And this is, this is the big part of, of the pipeline we see.
Then I would say that for the existing demand that we see at the moment, what we see is this whole uncertainty. So companies are now carefully considering what of their input costs do they want to lock in? Because commodity prices, inflation, interest rates, supply chains are all in a fairly turbulent stage. So for the long term demand we continue to be optimistic. Could be even stronger, looking at the pipeline, but that requires for the economy then to turn, which of course, eventually will happen when interest rates recede and visibility improves. And Tiina for the optimization-
Yes.
-premium.
Happy to take that. So the optimization margin is pretty much correlated to overall of the price level and then the volatility. And if we look at the graph in our presentation, we can see that the price level and the volatility, they have been fairly stable until 2020 until that point of time. And that was a time when we saying that the optimization margin is around 1-3 EUR per MWh. Then the last year, 2022, we see these extremely high prices and extremely high volatility as well. So there, our margin was even a double-digit number. Now the volatility has come down, prices come down.
Still, the level is fairly high, and this EUR 6-8 per MWh correspond this kind of the volatility level and the price level.
Okay, thank you very much.
The next question comes from Deepa V from Bernstein. Please go ahead.
Thank you. I think my two questions are also going to center around power prices. So firstly, thank you, thanks a lot for chart 13 and explaining the optimization premium. Obviously, the hydro is a big part of it, but can I crudely just assume that this is the number for the entire portfolio, so the entire 45 TWh? And, you know, going from 1-3 EUR, so let's take a midpoint of 1.5. Your new optimization midpoint is 7, so there's like a 5.5 EUR per MW delta. Would it be crudely okay to kind of crudely multiply with your 45 TWh, saying that this could be an uplift of around EUR 250 million on EBITDA? So please correct me if my crude calculations are wrong.
And secondly, in terms of longer term Nordic power prices, so excluding the optimization premium, it's a very complex market for anyone to model, but could you explain a bit more about what your longer term assumptions are? Or if not, at least the logic of how you try and maybe derive Nordic prices with reference to continental prices or any other basis, just so people can get a handle around what longer term assumptions to use, because as you're aware, that's clearly a very big driver of the valuation of your company. Thank you.
Okay, thank you. So, with regards to your first question, yes, this applies to the whole portfolio, so it is 6-8 EUR per times the 45 TWh. That's correct. And of course, that has already been materializing, and as Tiina said, last year, it was even higher than that. But now when things have stabilized, we thought that this is a good time actually to give the components where this is coming from. And it's a very good question to ask because it is an important point that when we report the hedge prices and then wherever the materializing spot prices are, then for the remaining unhedged part, on top of that, you then get the optimization premium.
So this is a good point to note that of course we cannot—we don't know what it exactly will be before we get to delivery on the optimization. So hedge prices are one thing, and then achieved power price is another one. But your assumption is correct from that point of view. Then for the long term, Nordic picture, like I said before, we continue to see very, very strong demand for clean energy in the Nordics. Some forecasters are saying that it could double by 2050 if electrification goes ahead even more, and even in the short term, take 2030, a very, very substantial growth.
And then, what are the components that then impact the power price in the Nordics? We see now that when there is uncertainty, there is not new supply coming either. If it's not contracted and new supply is not in the money, it will not come. So as I have assumed, at least, the market will regulate itself over time. Unprofitable projects will not, like unprofitable supply, will not be built. So one determining factor for the Nordic power prices will be, and is the cost of new supply. That will absolutely set a certain level on the market. Then also, if you look globally, Europe is a fairly well interconnected energy market.
It's quite a unique setup in global comparison, and Nordics are connected also to mainland Europe and U.K. So the transmission capacities they do impact the Nordic prices. More is built around 1 gigawatt of transmission capacity per year. And then, through that, the continental European prices have an impact, and they continue to be driven for quite some time still by the coal or gas condensing prices. And if you look at, for example, German or, well, German forwards, they are at a completely different level than the Nordic prices. So they continue to have an impact when the markets are connected, depending on the day. And we have seen in the Nordics now that prices, the volatility is quite huge.
So spot prices can vary between zero or even mildly negative, then easily jumps up to 200 EUR per megawatt hour, when it's a not windy day. So it is quite sensitive, and that's where the value of our flexibility is coming from. And we are now benefiting from a trend that we saw already some time ago.
All right. And any rules of thumb?
What I look at myself is the cost of new supply. So that eventually for the-
Would that be onshore, onshore wind? So I guess onshore wind PPA prices now-
Uh
have gone up everywhere, but historically, we used to be in the mid-forties.
Yeah, at-
Now, probably in the mid-60s.
At the moment, the new supply is onshore wind, and increasingly it will be onshore solar as well. And there we see inflation, interest rates, cost of supplies, and overall, the supply chain difficulties with the geopolitical tensions. So yes, we saw costs coming down quite rapidly in recent years, and now there's clearly a turn. I cannot even say today exactly where the LCOE of new supply would be, because we haven't been making tenders actually recently. Our most recent one is the Pjelax case, which was very, very cost competitive. So since that, costs have gone up clearly.
All right. Thank you so much.
Thank you.
The next question comes from James Brand, from Deutsche Bank. Please go ahead.
Hi, thanks for the results, and the disclosures. I echo, it's pretty interesting. So firstly, on the cost cutting, can I just, can I just double-check? I think this was your message earlier, but just double-check that the normalization in profitability in the supply business is not included in the EUR 100 million. And then secondly, are there any implementation costs in delivering these cost savings? And if so, could you quantify them? And then secondly, I just want to ask on the optimization premium, whether you're wanting to share what your assumption is for the price for the Guarantees of Origin. Are you assuming that that kind of normalizes, or you think that will stay at this elevated level you're seeing at the moment, around EUR 7 for the foreseeable future? Thank you very much.
I'll let Tiina answer on the, on the GOO prices. On the cost cutting, yeah, the normalization of the Consumer Solutions business, that is not included. And of course, we don't know if it will normalize, but on a normalized basis, I would say 2022 is more representative. But no, so like, one of business conditions that we are not including here. And one of costs, there may be that we don't know yet because we don't have actually all the detailed plans in place. And this is very much also now actually the EUR 100 million, partly we have activities and plans behind it, and things are even ongoing.
Partly this is now a clear input into our planning, our long-term forecast planning for the coming years, which is now ongoing. So this sets also guidelines and borderlines for these activities. And of course, we'll find a balance between implementation cost and the benefits, and also potential personal impact. So all this we are then balancing in a good way. And GOOs-
Yes
... do you wanna comment on that?
GOOs, so basically, it is also the market of supply and demand, and while the green transition is going forward, so of course, one would hope that the demand is continuing to increase, but that, of course, will depend how the market will develop. One example is the Swedish el certificates, where we have oversupply and the price is lower. So this is something what we follow and monitor, but I guess we don't disclose our own forecast.
One thing that comes to my mind, which is actually something-
Agreed
... that we are discussing with our customers is that the regulatory demands, for example, on electricity or hydrogen derivatives, are increasing all the time. So the requirements on matching actually of the supply become tighter and tighter. And from that point of view, we are in a great position because we do have a possibility to give, even on an hourly matching basis, Guarantees of Origin, and this is quite a rare commodity. So also here, going forward, probably there will be differentiation between what actually you can from respective portfolios what you can sell. And I would say we on a Nordic level have quite a unique asset with our nuclear and hydro on this front.
Agree.
Great. Thank you very much.
Unfortunately, we are now out of time, so we are already on overtime now, and I'm really sorry to say that there still are some questions in queue. We would be happy to answer those from IR to provide you more details, and of course, we are at any time at your availability to discuss further. But at this point, I would like to thank everyone for your participation here today, and on behalf of Fortum, we all wish you a very nice rest of the day. Thank you.
Thank you. Have a good day.