The Griffin

Changes in the energy markets reflected in all aspects of society

ENERGY CHALLENGES

text: Tuovi Similä
photos: Herman, UPM, Fingrid Oyj

Energy, especially electricity, features in the headlines almost daily. The energy economy is undergoing upheaval; the decisions being made now are far-reaching and will affect the lives of future generations as well.

The energy sector is affected by many things: the recession, the expected post-recession growth in energy consumption, and global targets to curb climate change. The key issues in mitigating climate change consist of policy instruments to increase renewable energy and decisions to construct additional nuclear power plants − in other words, endeavours to boost zero emission energy production.

Reliability of electricity supply is also a key issue for all of us who want to keep the lights on and the mills turning. In addition, the electricity market is opening up in the EU and its neighbouring countries, a fact which is creating more competition.

Electricity takes an increasingly large share of energy

The economic downturn will reduce global electricity consumption this year by as much as 3.5%, estimates the International Energy Agency (IEA). In Finland, the figure is about 10% compared to last year. UPM’s Energy Vice President, Anja Silvennoinen, deems the fall to be temporary. “Electricity consumption will resume its upward trend once the economic situation eases.”

The share of electricity in total energy consumption has risen steadily, and it is not to be expected that the demand for electricity will decline in the future. Energy efficiency has increased in production processes, electrical equipment and in other household appliances. These are proliferating more and more though. Electricity consumption is also being increased by many new solutions aimed at reducing carbon dioxide emissions. These new consumers include electric cars as well as air and ground heat pumps, which are replacing oil heating.

Although the forest industry has closed down production lines, new and more refined products will be manufactured in their place. These, too, need electricity. The forest cluster aims to double the value of new products and services in Finland by 2030. An example of new innovations in the forest industry is UPM’s planned biorefinery, which requires as much electricity as a paper machine.

Free electricity market, but more regulation

Opening up to wider unrestricted competition has ushered in a new era in Europe’s electricity markets. Electricity has become a commodity moving freely within the EU and its neighbouring countries too. Electricity markets are no longer defined by state boundaries, nor is it feasible to talk solely about national solutions. The generation of electricity close to where it will be consumed does increase supply reliability and for this reason it is important to enable domestic investment in electricity generation.

The EU is committed to reducing carbon dioxide emissions by at least 20% and to increasing the share of renewable energy to 20% of total energy use by 2020. To promote this development, the EU has implemented and planned a variety of policy instruments.

“The policy instruments to support renewable energy are numerous and partially overlapping: emissions trading, promotion of renewable energy through, among other things, feed-in tariffs and changes in tax focus,” Silvennoinen points out.

UPM − and the forest industry in general − is concerned that a feed-in tariff similar to that for wind power might be imposed on wood-based electricity production. This would lead to a situation where processable wood ends up being burned as fuel. “The world needs paper and wood products, and it is economically most sensible to manufacture products with a higher value added first and, alongside these, biomass-based energy from fractions which are unsuitable for processing,” Silvennoinen says.

In her view, emissions trading alone is a sufficient policy instrument and, as such, already boosts the profitability of renewable energy. “Wood-based electricity feed-in tariffs will not advance progress towards a sustainable bio-economy any more than towards a sustainable energy economy.”

Energy taxation and emissions trading are also partially overlapping instruments. “The forest industry, which exports its products to global markets, produces 70% of Finland’s renewable energy. The industry should not be further burdened with increasing energy taxes or funding of wind power feed-in tariffs,” Silvennoinen says.

UPM aims to expand in emission-free electricity markets

UPM’s electricity generating capacity is 2,539 MW. “It is a good base on which it is feasible to grow new business,” Silvennoinen says. UPM will bring additional supply and new competition to the Nordic electricity market.

More than 65% of UPM’s electricity in Finland is emission-free hydro and nuclear power, and the remainder, too, is mostly biomass-based back-pressure power from the mills. The production palette is therefore rising to the challenges at hand extremely well.

UPM has contributed to mitigating climate change in an exemplary manner. The company has been a pioneer in renewable energy generation and has invested more than EUR 1 billion in it over the last decade. Since 1990, UPM has built at its mills in Europe 12 modern wood-fuel based power plants, of which nine are in Finland. A new one is currently under construction. Although UPM is Finland’s biggest energy user, it produces only just over 1% of the country’s carbon dioxide emissions.

There is a great deal of demand for emission-free electricity, and it is in this emission-free electricity market that UPM wants to grow. “There are many opportunities for growth: investments, joint ventures and acquisitions,” Silvennoinen says. The first increase is due in 2012 when the third reactor at the Olkiluoto nuclear power plant is completed. The Olkiluoto power plant is owned by Teollisuuden Voima Oy, in which UPM has an interest through its holdings in Pohjolan Voima.

UPM also wants to participate in building a fourth reactor at Olkiluoto, for which Teollisuuden Voima has already filed an application to the Finnish Government. “A decision-in-principle enabling a fourth plant unit at Olkiluoto would increase confidence that Finland will continue to be an attractive investment and growth environment both for the industry and the domestic energy sector,” Silvennoinen says.

In addition to nuclear power projects, UPM is actively investigating other opportunities to build and be involved in producing emission-free energy. “Besides biomass power plants, UPM has experience of both wind and hydro power production,” Silvennoinen says.