UPM annual report 2015

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UPM Annual Report 2015 UPM Annual Report 2015 23 24
contents
OUR DIRECTION
• Create value in electricity generation
and physical and financial trading
• Profitable growth on the Nordic CO2
emission-free electricity market
OUR STRENGTHs
• Cost competitive, low-emission electricity
generation portfolio
• Versatile asset base – nuclear power
as base load capacity, hydropower as
flexible capacity and condensing power
as reliable peak load capacity
• Strong competencies and value creation
track record in physical and financial
electricity trading
• Proven capabilities in energy management
services to both generating and consuming
customers
KEY FIGURES
2015 2014
Sales, EURm 415 464
Operating profit excl. special items, EURm 181 202
Capital employed (average), EURm 2,716 2,903
ROCE excl. special items, % 6.7 7.0
Personnel on 31 Dec. 73 80
UPM ENERGY value created
CAPITALS
Capital intensive utility
business
Low-emission energy
sources, including
water rights
Fuels
Engaged high
performing people
Organisational experience
Energy trading platform
Regulation
OUTCOMES
Low-emission electricity
Work safety
Energy supply security
Flexible power supply
Risk mitigation
ROCE
DISTRIBUTION TRANSMISSION
IN BRIEF STRATEGY BUSINESSES GOVERNANCE STAKEHOLDERS ACCOUNTS
PHYSICAL POWER MARKET
o o Physical value creation
o o Mainly Nord Pool Spot market
for day-ahead and intraday trading
o o Members (buyers and sellers)
agree on contracts for the
delivery of power
VERSATILE GENERATION
(from own hydropower plants and
shareholdings in energy companies)
HYDROPOWER
o o Flexible
o o Cost competitive
o o Low emissions
o o Renewable
CONDENSING
POWER
o o Reliable peak
load
NUCLEAR
o o Efficient base load
o o Cost competitive
o o Low emissions
FINANCIAL MARKETS
Derivative power contracts traded on Nasdaq Commodities
o o Value protection and creation
Energy management services to both generating and consuming customers
HOUSEHOLD
CONSUMPTION
SMALL AND MEDIUM
SIZED ENTERPRIsES
INDUSTRIAL ELECTRICITY
CONSUMPTION
300
240
180
120
60
0
2015 2014 2013
*) excl. special items
Operating profit*)
EUR million
Business performance
Operating profit decreased due to clearly lower average electricity prices. Significantly
higher hydropower generation volumes reduced production costs, and thanks to good
water availability and increased price volatility, profit opportunities improved from
optimal use of the adjustable hydropower capacity. Return on capital employed met
long-term financial targets.
Business development
The year 2015 was characterised by a challenging market environment. Electricity
prices decreased and the competitive market situation remained distorted. Mild
temperatures caused decrease in demand and electricity prices also decreased thanks
to exceptionally good hydrology.
The competitive market situation was impacted by non-market driven issues such
as regulation, taxes and support schemes, benefitting renewable energy generation.
Meanwhile other generation forms, including emission-free hydropower and cost
competitive nuclear generation, suffered fromweak profitability and generally rising
taxes and environmental regulation.
Current low electricity prices and the distorted competitive market situation
prevent market-based modernisation or new investments in low-emission generation
technologies. The full potential of all sustainable alternatives may not be fully utilised.
The challenging market conditions are laying the groundwork for industry restruc-
turing, e.g. by mothballing coal condensing and decommissioning nuclear power
capacity before the originally projected life span. Market situations may also call for
structural changes in the industry and UPMEnergy, as a large producer, can be an
active participant.
The share of weather-dependent (wind and solar) power production is growing.
This increases price volatility and also the need for flexible balancing power genera-
tion to compensate for the variations in the production and consumption of electric-
ity. Hydropower is an efficient way to produce this balancing power and it is needed to
mitigate climate change.
With its competencies and optimal use of its hydropower assets, UPMEnergy is
well positioned to generate good profitability and create additional value from the
increased electricity price volatility in the market.
In 2015, UPMEnergy proceeded with its hydropower production asset upgrades.
Through its ownership of Länsi-Suomen Voima Oy, UPMEnergy is participating in
the expansion of the Harjavalta hydropower plant. The project covers a newmachine
unit and refurbishment of the existing two turbines. 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 plant will increase from 72 MW to 110MW.
The largest ongoing project is at Teollisuuden Voima Oyj (TVO), which involves
building a third nuclear power reactor, OL3, at Olkiluoto, Finland. The new unit will
have an annual nuclear power generation capacity of approximately 1,600MW.
Through Pohjolan Voima Oy (PVO), UPM is entitled to approximately 500MWof capacity.
According to the plant supplier’s schedule, regular electricity production is scheduled
to start at OL3 towards the end of the year 2018.
In June 2013, UPM announced that it is participating in the share issue from Pohjolan
Voima Oy to finance the Olkiluoto 3 nuclear power plant project. UPM’s share of the issue
is EUR 119 million, of which EUR 31 million was paid in Q4 2015, EUR 31 million in Q4
2014 and EUR 31 million in Q2 2013. The remaining part of the share issue will be imple-
mented in the coming years based on the financing needs of the project.
In June 2015, Teollisuuden Voima Oyj decided not to apply for a building permit for
the Olkiluoto 4 nuclear power plant unit, resulting in a charge of EUR 19 million related
to UPM’s participation in the tendering and planning phase of the project.
Markets and drivers
• Electricity consumption in the Nordic countries is expected to remain stable. Demand
is driven by household consumption, the commercial sector and industrial activity, and
it is heavily dependent on temperatures.
• In 2015, electricity consumption in the Nordic countries decreased slightly, primarily
due to weather that was warmer than usual.
• New capacity investments in the Nordic countries are driven by economics and influ-
enced by regulatory policies and support schemes Therefore, capacity is mainly growing
in subsidised renewables.
• Due to current market conditions, existing generation capacity is decommissioned
before the originally projected life span, e.g. it has been announced that Swedish
nuclear capacity will be decommissioned earlier than expected.
• Hydrological balance and wind in the Nordic countries impacts electricity supply and,
therefore, electricity prices and price spreads between different price areas.
• In the Nordic countries there are several different price areas; UPMEnergy’s assets are
located in the Finnish price area only. Power markets across Europe are becoming
more integrated due to new transmission lines.
Mitigating market challenges
HYDROPOWER IS SUPERIOR
BALANCING POWER
As the use of renewable energy based on the
forces of nature increases, also the need for
balancing power grows to maintain the stable
operation of the power grid. If there is no
wind or sunlight, the electricity generated by
windfarms and solar power plants has to be
replaced by other energy sources. Balancing
power is also needed for evening out the
fluctuations in energy consumption.
Hydropower is an excellent solution for
producing balancing power. The electricity
production of a hydropower plant can be
adjusted very quickly by controlling water flow
and the operation of the turbines. Unlike wind
and sunlight, water can also be stored for
future needs. By using reservoirs, electricity
can be generated when it is needed. Autumn
rainfall can for instance be used to generate
electricity during the cold winter months.
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UPM Energy