Energy and Environment factors impacting the competitiveness – case UPM Anja Silvennoinen Vice President, Energy 31.3.2006.

Energy and Environment factors impacting the competitiveness – case UPM

Anja Silvennoinen

Vice President, Energy

31.3.2006

UPM 2

World's leading graphic papers producers

0 2 4 6 8 10 12 14

Stora Enso

UPM

International Paper

Abitibi-Consolidated

Nippon Unipac

Norske Skog

Oji

M-real

Bowater

Capacity, mill. t/a

Source: Jaakko Pöyry, UPM

SAPPI

UPM 3

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

UPM 4

INTRODUCTION

UPM cost structure- Energy costs are about 9%

Chemicals and fillers14%

Delivery of own products 12%

Logs and pulpwood 14%

Recovered paper 3%

Personnel expenses

32%

Energy 9 %, 765 M€ Other raw materials 10%

Other costs19%

Total costs € 8,500 million(excluding depreciation)

UPM cost structure (2004)

Not only wood and energy but also labour, chemicals, other raw materials

See also CEPI Sustainability Report 2005 onwww.cepi.org

UPM 5

Use of electricity in 2005

Hydro Power 16%

Mill site CHP 23%

Nuclear power 23%

Condensing power 5%

Purchased electricity from market 33 %

Use of electricity 17 300 TWh

own and co-ownedresources

Biofuels 51% Natural gas 26%

Heat recovery 6% Purchased heat 2%

Peat 3% Oil 3%

Coal 9%

Use of fuels and heat 34 000 TWh

UPM 6

A joint non-profit company for electricity generation

Jointly owned electricity generation company

Shareholder

100% ownership on power plants

Shareholder ShareholderShareholderShareholder Shareholder Shareholder

Each shareholder has an individual amount of sharesShareholder will get electricity at production cost and in accordance to their relative share ownership

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)

UPM 7

UPM's CO2 emissions have dropped 25% during last ten years

UPM in Finland UPM globally

UPM has reduced its CO2 emissions by 25 % during last ten years by investing in biofuel based energy generation and in energy efficiency.

Investmentsabout 500 mio. euros

Paper production Paper productionTarget set in Kyoto protocol

UPM 8

70

90

110

130

150

170

190

210

Q1/04 Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05 Q4/05

Electricity(EEX)

Coating materials

Chemical Pulp

Electricity(Nordpool)

UPM AND THE NEW BUSINESS ENVIRONMENT

Rapidly increasing cost of production inputs – especially energy

Index 2004=100

Energy market prices have increased significantly more than other costs

UPM 9

ENERGY MARKET DEVELOPMENT IN EUROPE

European electricity markets - Price development

Brent

Nord Pool

EEX = Western Europe electricity exchange

CO2

Source: Reuters Emission Trading

CO2, €/tn Energy, €/MWh

UPM 10

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

UPM 11

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

0,0

20,0

40,0

60,0

80,0

100,0

120,0

Finlan

d

Germ

any,

>20

MW

Estonia

Sweden

Germ

any,

5-20

MW

Franc

e

Austri

aUK

Feed-in tariff

Green certificate

Market price

EUR/MWhe

UPM 12

Using wood in paper production generates more employment than energy use

Source: CEPI, 2004

UPM 13

Analysis

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

.

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

UPM 14

Analysis 2/2

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)

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