UPM Annual Report 2016

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UPM Annual Report 2016 UPM Annual Report 2016 28 29
In brief Strategy Stakeholders Governance Accounts Businesses
CONTENTS
OUR DIRECTION
• Create value in electricity generation as well as
physical and financial trading
• Profitable growth on the Nordic electricity market
with CO2 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
Profitability maintained in difficult
market conditions
UPM Energy
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.
• Capital intensive utility business
• Regulation
• Low-emission energy sources,
and water rights
• Engaged high performing people CAPITALS
• Top safety
performance
• Low-emission electricity
• Flexible power supply
• Energy supply security
• ROCE
WHOLESALE MARKET
• Households
• Small and medium enterprises
• Industrial
END USES
OUTCOMES
SOCIAL
IMPACT
ENVIRONMENTAL
IMPACT
ECONOMIC
IMPACT
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.
Read more:
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
KEY FIGURES 2016 2015
Sales, EURm 357 415
Comparable EBIT, EURm 116 181
Capital employed (average), EURm 2,340 2,716
Comparable ROCE, % 5.0 6.7
Personnel on 31 Dec. 71 73