UPM Annual Report 2016

Businesses

In brief

Strategy

Stakeholders

Governance

Accounts

Profitability maintained in difficult market conditions UPM Energy

PREDICTING ENERGY PRICES USING A DIGITAL CRYSTAL BALL

UPM’s energy market analyses support UPM’s energy asset management and anticipate development in electricity prices. Price forecasts are not only used for trading and hedging electricity, but also for decision making in UPM’s other business areas. UPM’s energy market team analyses energy price developments within markets and produces price forecasts that are based on different scenarios. The team uses its own proprietary analysis tools to provide market analyses that aid decision-making related to short-term and long-term price developments. The weather plays a particularly significant role in short-term analyses as wind power and other similar renewable energy sources are highly weather-dependent. In the Nordic markets, electricity prices fluctuate significantly based on weather and hydrological conditions.

• Capital intensive utility business • Regulation • Low-emission energy sources, and water rights • Engaged high performing people CAPITALS

OUR DIRECTION • Create value in electricity generation as well as physical and financial trading • Profitable growth on the Nordic electricity market with CO 2 emission-free generation OUR STRENGTHS • Cost competitive, low-emission electricity generation portfolio • Hydropower as flexible capacity to create value in markets impacted by increasing price volatility caused by renewable energy • Reliable nuclear as base load generation • Value creation track record in physical and financial electricity trading • Lean, agile and competent organisation MARKET TRENDS • Cost of new technologies is declining fast • Balancing of the grid is more challenging due to increasing share of weather-dependent wind and solar supply • Decentralisation of electricity production • Security of supply weakened due to capacity closures • Growth outlook for electricity consumption is modest • Changes in regulation and policies are impacting the willingness of the energy industry to make long term investments • Market integration increased through investments in grid interconnectors • Digitalisation brings new opportunities to the industry

Business performance Profitability remained good due to strong hydropower volumes, low-cost generation and spot-on market operations. Compared to the previous year, profitability was lower due to decline in average sales prices. The low electricity market price in the beginning of the year was impacted by mild temperatures, good hydrological balance and very low commodity prices. Electricity market price increased during the course of the year driven by a deteriorating hydrological balance and increasing coal prices. For the full year, the average Finnish area spot price was EUR 32.5 MWh in 2016, 9% higher than in 2015 (EUR 29.7 MWh). Challenging operating environment continued The Nordic electricity market remained challenging mainly due to increased supply of subsidised renewable electricity. The lowmarket price of electricity combined with the uncertain operating environment does not support new, market-based investments and has also resulted in early decommissioning of condensing capacity. The share of wind and solar power production is growing. This increases price volatility and also the need for flexible balancing power generation. Hydropower is an efficient way to produce this balancing power. Through optimised use of hydropower assets, UPMEnergy is well positioned in challenging markets and able to create value from the increased electricity price volatility. Electricity generation portfolio developed further Through its ownership of Länsi-Suomen Voima Oy, UPMEnergy is participating in the expansion of the Harjavalta hydropower plant. A new machine unit was taken into use in September, and refurbishment of the existing two turbines is proceeding. When completed in 2017, the project will improve the efficiency, control and environmental safety of the plant, while also responding to the increasing demand for flexible capacity. The total power output of the Harjavalta plant will increase from 72 MW to 110MW. The largest ongoing project is taking place at Teollisuuden Voima Oyj (TVO), which involves building a new EPR-type (European Pressurized Water Reactor) nuclear power unit, known as OL3 EPR, at Olkiluoto, Finland. Through Pohjolan Voima Oy (PVO), UPM is entitled to approximately 500MWof its capacity. In 2016, the installation works and process system tests continued. The operating license application of the plant unit was submitted in April. According to the plant supplier’s schedule, regular electricity production is scheduled to start at OL3 EPR late 2018. Well positioned for climate objectives In November, the Finnish Government published its strategy of implement­ ing EU’s 2030 energy and climate policy. As a consequence, it is anticipated that renewable energy, particularly biomass-based, production will increase and replace fossil based production. The government is preparing regulation to abandon coal in energy production. With assets mainly in hydropower and nuclear, UPMEnergy is well positioned to support the Finnish Government´s 2030 energy and climate objectives. UPMEnergy produces low-emission electricity supporting climate change mitigation. Flexible hydropower is able to support the grid stability, which is challenged by increasing share of wind and solar.

NUCLEAR POWER Efficient base load Cost competitive Low emissions HYDROPOWER Renewable Flexible Low cost Low emissions UPM ENERGY VALUE CREATED Electricity sales for day-ahead and intraday markets Financial electricity trading Active ownership role in co-owned companies Centre of excellence for energy services at UPM

Read more: www.upmenergy.com, www.upmbiofore.com

WHOLESALE MARKET

• Households • Small and medium enterprises • Industrial

END USES OUTCOMES

• Top safety

SOCIAL IMPACT

performance

ENVIRONMENTAL IMPACT ECONOMIC IMPACT

• Low-emission electricity

• Flexible power supply • Energy supply security • ROCE

KEY FIGURES Sales, EURm

2016 2015

357 116

415 181

Comparable EBIT, EURm

2,340

Capital employed (average), EURm

2,716

5.0

Comparable ROCE, % Personnel on 31 Dec.

6.7

71

73

CONTENTS

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UPM Annual Report 2016

UPM Annual Report 2016