UPM Annual Report 2018

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UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

UPM ENERGY

MARKET-AGILE ENERGY

OUR DIRECTION • Profitable growth in low-emission electricity generation in the Nordic market • Attractive solutions to support decarbonisation of the energy system • Exploring opportunities of the new wave of electrification in society

OUR STRENGTHS • Competitive, low-emission electricity generation asset portfolio • Strong track record in physical and financial electricity markets • World-class competence in optimisation of industrial power consumption • Agile and competent organisation

FUTURE ENERGY MARKETS

New climate policies and technological developments are driving growth in clean energy sources. Thanks to a carbon neutral energy portfolio UPM will remain a strong player in future energy markets. According to the Bloomberg New Energy Outlook 2018, global electricity demand is estimated to increase by 57% by 2050. The electrification of the transport system, the growth of the IT and digital industries plus the rising number of middle-class consumers are boosting the demand for electricity. The increasing need for electricity can be covered by clean energy production. Bloomberg estimates that by 2050, wind and solar technology will provide for almost 50% of total electricity globally with hydro, nuclear and other renewables taking total zero-carbon electricity up to 71%. In the future, smart grids will manage load balancing and consumption. Technological developments and the decreasing costs of batteries to competitive level will support the growth of clean energy sources by making it possible to charge and store electricity in batteries and take that energy into use when neither solar nor wind power is available.

Competitive service concept for new earnings models As the share of intermittent energy sources – for example, solar and wind – grows in the energy system, the volatility of the system also increases. This in turn requires increased balancing capabilities in order to ensure the stability in the system. Balancing can be achieved via supply-side or demand-side measures. UPMEnergy’s new optimisation services have been further developed to offer large industrial electricity users an opportunity to actively participate in energy markets through demand- side flexibility. In addition to traditional cost-saving scenarios, UPM’s service concepts provide customers with more proactive tools for creating value in the energy markets. UPMEnergy is experimenting with new earnings models that leverage its long-term experience of supporting industrial- scale energy consumption and optimisation. Investing in CO 2 emission-free generation UPMEnergy is investing in CO 2 emission-free power generation through its own hydropower assets and co-owned hydro and nuclear power companies. The main, ongoing project is underway at Teollisuuden Voima (TVO), where its Olkiluoto 3 EPR-type nuclear power unit is on the home stretch and is scheduled to commence regular electricity production in January 2020. UPM’s share of the new unit’s capacity is approximately 500MW, through holding in Pohjolan Voima. UPMEnergy has taken over Pohjolan Voima’s hydro planning, regulation and power plant dispatching operations and also taken the decision to refurbish the Kuusankoski hydropower plant during 2019–2022.

Value from transformation of the energy markets The electricity markets are undergoing a transformation, from largely centralised generation towards a more decentralised model with an increasing amount of intermittent renewable generation. This transformation is driven by efforts to mitigate climate change which, alongside other measures, calls for the decarbonisation of the energy system. UPMEnergy is well aligned to support these developments. Our hydro and nuclear generation assets are free of CO 2 emissions and account for 93% of our electricity generation. Hydropower is a valuable balancing asset for an increasingly volatile market, whereas nuclear can provide a stable base load for the system. An end to the heavy subsidisation of renewable energy is normalising electricity prices and competition. Together with a strengthened CO 2 emission trading scheme, this offers an attractive business position for UPMEnergy and its competitive future-proof generation assets. In addition, the Nordic electricity market is increasingly connected to the continental European market, in particular Germany, providing UPMEnergy with new business opportunities as the number of interconnections increases and markets become more integrated.