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

2. UPM2 World's leading graphic papers producers 02468101214 Stora Enso UPM International Paper Abitibi-Consolidated Nippon Unipac Norske Skog Oji M-real Bowater Capacity, mill. t/a Source: Jaakko Pöyry, UPM SAPPI

3. UPM3 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

4. UPM4 INTRODUCTION UPM cost structure - Energy costs are about 9% Chemicals and fillers 14% Delivery of own products 12% Logs and pulpwood 14% Recovered paper 3% Personnel expenses 32% Energy 9 %, 765 M Other raw materials 10% Other costs 19% 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 on www.cepi.org

5. UPM5 Use of electricity in 2005 Use of electricity 17 300 TWh own and co-owned resources Use of fuels and heat 34 000 TWh

6. UPM6 A joint non-profit company for electricity generation Jointly owned electricity generation company Shareholder 100% ownership on power plants 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)

7. UPM7 UPM's CO 2 emissions have dropped 25% during last ten years UPM in FinlandUPM globally UPM has reduced its CO2 emissions by 25 % during last ten years by investing in biofuel based energy generation and in energy efficiency. Investments about 500 mio. euros Paper production Target set in Kyoto protocol

8. UPM8 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

9. UPM9 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

10. UPM10 UPM press release March 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

11. UPM11 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

12. UPM12 Using wood in paper production generates more employment than energy use Source: CEPI, 2004

13. UPM13 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

14. UPM14 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