Energy and Environment factors impacting the competitiveness

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Energy and Environment factors impacting the
competitiveness case UPM

• Anja Silvennoinen
• Vice President, Energy
• 31.3.2006

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World's leading graphic papers producers
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UPM
UPM's annual electricity consumption is about 18
TWh corresponding with production of 1,5 times of
modern new 1600 MW nuclear power plant Use of
mill site fuels and heat is bout 34 TWh Energy
cost are a significant cost factor
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INTRODUCTION UPM cost structure- Energy costs
are about 9
UPM cost structure (2004)
Not only wood and energy but also labour,
chemicals, other raw materials See also CEPI
Sustainability Report 2005 on www.cepi.org
Total costs 8,500 million(excluding
depreciation)
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Use of electricity in 2005
Use of fuels and heat 34 000 TWh
Use of electricity 17 300 TWh
own and co-owned resources
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A joint non-profit company for electricity
generation
Shareholder
Shareholder
Shareholder
Shareholder
Shareholder
Shareholder
Shareholder
Each shareholder has an individual amount of
shares
Shareholder will get electricity at production
cost and in accordance to their relative share
ownership
Jointly owned electricity generation company
100 ownership on power plants

• Efficient way to shareholders to enter capital
  intensive electricity generation where
• electricity to shareholders is on a production
  cost basis
• shareholders have the share equity on their
  balance sheet (equity accounting method by IFRS)

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UPM's CO2 emissions have dropped 25 during last
ten years
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UPM AND THE NEW BUSINESS ENVIRONMENTRapidly
increasing cost of production inputs
especially energy
Index 2004100
Energy market prices have increased significantly
more than other costs
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ENERGY MARKET DEVELOPMENT IN EUROPE European
electricity markets - Price development
CO2, /tn
Energy, /MWh
CO2
Brent
EEX Western Europe electricity exchange
Nord Pool
Emission Trading
Source Reuters
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UPM press releaseMarch 8, 2006

• UPM to start an extensive programme to restore
  its profitability, Efficiency improvement will
  involve all divisions and functions
• "At the same time, the cost of production inputs
  has dramatically increased and Asian and South
  American competition has entered the market. In
  this kind of business environment sustainable
  profitability improvement requires new kind of
  thinking and more drastic measures than before,"
  says Jussi Pesonen, President and CEO of UPM."
• Regarding UPM's plan to invest in a new paper
  machine producing magazine (SC) papers in
  Continental Europe, the investment decision has
  been postponed to a later date. Energy price and
  availability and other infrastructure issues are
  still open and UPM will prioritize the company
  profitability programme launched today .

Big investment project in Europe postponed partly
due to unpredictability of energy price
development
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Promotion of green electricity has increased
green power's prices
Measures vary country-by-country but all include
guaranteeing high price for green electricity
generation paid by all consumers of energy
pushing up costs of energy use

• Measures increase energy producers' ability to
  pay for wood based fuels this will have an
  impact to fiber and wood availability.
• Promotion of biofuels will accelerate the price
  and availability issues further

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Using wood in paper production generates more
employment than energy use
Source CEPI, 2004
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Analysis
Paper and pulp price is global market price and
industry cannot transfer EU specific cost
increases to end product prices

• The competition on energy markets is not
  functioning
• well functioning market needed faster than
  present idea of completion of liberalisation
• increased competition in production
• more interconnection capacity
• enhance possibilities to independent power
  production (like industry's JVs)
• re-regulation is not a solution
• High uncertainty concerning further development
  of energy policy
• competition on the market
• access to markets and sites for energy production
  units
• policy measures that distort competition
• overlapping measures like EUETS, taxation,
  certificate schemes, feed-in tariffs an other
  subsidies to renewable energy all aim to same
  direction i.e. reducing CO2 emissions and all
  distort the competition on energy markets and
  together accelerate the unfavorable development
• .

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Analysis 2/2
Paper and pulp price is global market price and
industry cannot transfer EU specific cost
increases to end product prices

• Promotion of renewable energy can distort both
  energy and wood raw material market
• Support mechanisms should be designed so that
  they don't distort the wood markets and
  availability of raw material by causing unfair
  competition and price rise
• Support mechanism should not interfere with
  competitive price formation on energy markets
• Climate change policies and measures that are
  implemented only at EU level, mainly increase
  production costs of European industry without
  having a truly global response to greenhouse gas
  reduction
• global approach
• based on BAT type of approach (already in NAPII)