UPM Annual Report 2017

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Businesses

In brief

Strategy

Stakeholders

Governance

Accounts

MARKET AGILITY PROVIDES A COMPETITIVE EDGE

Top-line decline affected profitability Profitability decreased mainly due to lower average sales prices and lower power generation volumes. Power generation in the first half of the year was affected by the weaker hydrological situation and longer maintenance at the Olkiluoto nuclear power plant. Hydrology improved during the latter part of the year, which improved hydro production volume and supported profitability. For the full year, the average Finnish spot price was EUR 33.2/ MWh, 2% higher than in 2016 (EUR 32.5/MWh). Power consumption overall has shown a slight increase in the Nordics. Challenging operating environment The Nordic electricity market remained challenging. Supply of subsidised renewable electricity, wind power in particular, continued to increase and the market price of electricity remained low. The market remained distorted due to factors such as regulation, taxes and support schemes, benefitting some renewable energy generation forms such as wind power while selectively harming others such as hydropower. Hydropower is an efficient way to produce balancing power and operators have invested in growing capacity and improving performance. The high tax burden on CO 2 emission-free hydro power is harming its economic sustainability. New service offering for industrial-scale power consumers In 2017, UPMEnergy launched a new service offering for industrial-scale power consumers to optimise their consumption in a market-agile way. Up to now, power generators have been responsible for the power grid balancing. In the future with more wind and solar power generation, power consumers increasingly need to take on the balancing role. One example of that role is demand response from industrial-scale consumers. Investing in CO 2 emission-free generation UPMEnergy is investing in emission-free power generation capacity with part-owned hydro and nuclear companies and own hydropower assets. The largest ongoing project is taking place at Teollisuuden Voima Oy (TVO), which involves building a new EPR-type (European PressurizedWater Reactor) nuclear power unit, known as OL3 EPR, at Olkiluoto, Finland. Through Pohjolan Voima Oyj (PVO), UPM is entitled to approximately 500MWof its capacity. At Olkiluoto 3 EPR, the installation works and process system tests continued. According to the plant supplier’s reviewed schedule, regular electricity production is scheduled to start inMay 2019. UPMEnergy participated in the expansion of the Länsi-Suomen Voima Oy’s Harjavalta hydropower plant in Finland. A newmachine unit was brought into use in 2016, and refurbishment of the existing two turbines was completed in December 2017. The project improved the efficiency, control and environ mental safety of the plant, while also responding to the increasing demand for flexible capacity. The annual output of the Harjavalta plant on an average hydrological year is expected to increase from the current 390 GWh to 430 GWh. Low-emission power generation mitigates climate change UPMEnergy assets play an important part in providing security of power supply for the society, responding to national economic and social needs. UPMEnergy’s low-emission generation assets are well-positioned to mitigate climate change and support political energy and climate objectives. Hydro power is a form of generation that is efficient in handling grid power stability, a task that is becoming increasingly challenging due to the growing share of wind and solar power generation. The environmental impact of hydropower generation is local and is mitigated through collaboration between plant operators and local authorities. Hydropower plants also play a major role in seasonal flooding management. Market agile energy UPM Energy

UPM Energy is selling its expertise to industrial-scale electricity consumers. The aim of this business model, which is brand new within the industry, is to help customers integrate their industrial processes into the electricity market. UPM Energy has developed its expertise in trading, IT systems and hydropower production models, as well as in developing market analyses. The new service aims to provide electricity consumption capable of responding to changes in the market and operates in the market on behalf of the customer. By moni- toring the price of electricity, understanding the inherent flexibility of their processes and predicting their consumption reasonably accurately, electricity consumers can keep the price risk under control and reap major benefits.

OUR DIRECTION • Create value in electricity generation as well as in physical and financial markets • Ensure competitiveness through cost efficiency and high asset availability • Profitable growth on the Nordic electricity market with CO 2 emission-free generation of power OUR STRENGTHS • Cost competitive, low-emission electricity generation portfolio • Hydropower as flexible generation to create value in volatile markets • Reliable nuclear as baseload generation • Value creation track record in physical and financial electricity markets • Strong knowledge and track record in optimisation of industrial power consumption • Agile and competent organisation MARKET TRENDS • Modest growth outlook for electricity demand in Nordic countries • Grid balancing is more challenging due to increasing share of weather-dependent wind and solar supply • Market integration increased through investments in grid interconnectors • Flexible power generation and active customers reshape industry operating models