Vast forest resources, a strong wood products industry and maritime access to both Asian and European pellet markets have Canadian producers ideally situated for strong industry growth. As the executive director of the Wood Pellet Association of Canada, Gordon Murray necessarily maintains a high degree of global visibility. His constituents’ pellets find their way into British power stations, Italian bungalows and South Korean test burns. This market momentum has carried Murray into the heart of a global dialogue about the role of wood pellets in a future with a mandate for low-carbon heat and power.
(Editor’s note: A shorter, edited version of this interview appears in the print edition of Q3 Pellet Mill Magazine. The following is the unabridged, lightly edited text of the interview with Gordon Murray.)
How long have you worked as executive director and how did you come to this role?
I started as the executive director in 2009. I was working as a corporate finance advisor and was working on selling a sawmill. I ended up selling this sawmill to a wood pellet company that was a member of the Wood Pellet Association of Canada. [The association] asked me to come in three or four days a month to help them with some organizational things on a consulting basis and then the gentleman who was the executive director at the time, John Swan, resigned in 2009. I took over in a caretaking role and just grew into it after that.
Are there aspects of the Canadian pellet industry that are different from the pellet industry in the U.S.?
There is probably more that unites us than divides us. Both the U.S. and Canadian wood pellets—despite the criticisms and misinformation of environmental NGOs (nongovernmental organizations)—are made very sustainably and great care is taken with the forest practice.
From a production perspective, the new plants in the Southeast U.S. tend to be larger scale than what we’ve seen in western Canada, where our large plants are located. You’ve got plants that are 500,000 or 700,000 tons a year that are using a greater proportion of roundwood, where the industry in Canada is using a higher proportion of mill residuals, although we are increasingly using low grade roundwood.
From a domestic market point of view, you’ve got a much greater population. In the northeast United States, where there is not a very large natural gas distribution network and a lot of the homes have historically relied on heating oil, that population has really enabled the wood pellet industry to make inroads. We haven’t got the same kind of population density.
Pellet export numbers in both Canada and the United States are in a period of robust growth. What are the unique challenges for an industry during a boom?
One thing is that the scale of the customers is so large. You take one customer offline for any reason and you’ve got all of this product sitting around. It can distort the market in a hurry.
Also, the bigger the industry gets, the more it’s on people’s radar, bringing out critics. We are trying to do something that is very clean and sustainable and it is very important that all of the members of the industry act responsibly. Associations like the Wood Pellet Association of Canada, the U.S. Industrial Pellet Association and the European Industry of Pellet Suppliers have worked together in the development of the sustainability certification because we want to present an industry that is very clean and renewable and sustainable. We don’t want to become the target of NGOs that don’t know the facts or don’t care about the facts. I would say that is the downside of growth is raising your profile like that.
The other thing is liquidity. The bigger the industry grows, the more we have to make sure that everyone’s pellets are made to a consistent set of standards, which we’ve got now through the Initiative of Wood Pellet Buyers group of utilities and pellet producing associations. We’ve got to make sure that we’ve got consistent grades and consistent sustainability standards so that the product can be easily traded. We’ve got to come up with the kinds of instruments that other industries have had so successfully over the years. We just haven’t matured to the point where we’ve got commodities trading and futures contracts and the ability to trade and hedge.
Your members in western Canada are ideally located to serve Asian markets like Japan and South Korea, yet demand from those markets lags behind the market potential that you and many industry observers believe is there. Can you share your thoughts and observations on the emerging Asian marketplace?
The Korean market is taking a while to develop. It’s been a little bit frustrating. Initially, it seemed like there were a lot of speculators out trying to make deals with everybody and most of these guys had nothing to back them up. There was a lot of activity that led to nothing and people got quite frustrated. But you know, the renewable portfolio standard system that they have in Korea is supposed to ramp up from 2 percent in 2012 to 10 percent in 2022. As the amount of renewable energy increases, and with wood pellets being a very affordable type of renewable energy, we are starting to see the demand grow.
In 2012, there were test burns at a few utilities and in 2013 we started shipping some significant volume into Korea. It is a difficult market because there is one main power company, Korean Electric Power Company. They own six regional subsidiaries and each one of those is government owned. They have to work under strict tendering rules and they can’t enter into the long-term relationships that we have enjoyed in Europe. As a result, everything has developed on a spot basis in Korea. I don’t think there is any producer in North America that is willing to build a plant based on a spot market and most have long-term contracts with European utilities. The European power utilities are able to trade into the spot market, so we’ve been sending cargoes via the European utilities that end up in Korea. We’re not shipping them direct, because we just can’t get into that spot game, but the larger utilities have the liquidity to operate in that spot market. So that’s the way the Korean market has developed. I don’t think anyone expected that.
The Japanese market has been a little bit different in that a couple of our larger producers have been able to sign long-term contracts with both coal power utilities as well as CHP plants. They are not huge volumes, but it is starting. Last year, the volume and price in both Korea and Japan came up some. The latest price indications from the British Columbia Ministry of International Trade say the Koreans are finally starting to be willing to pay market prices.
You identified fiber security and fiber cost as one of your top priorities for 2014. How is this a challenge for producers currently, and what kind of remedies make the most sense?
That’s one area where the U.S. and Canadian industries differ. In the U.S., you have a large proportion of private land so you have an open market for fiber. In Canada, 95 percent of our forests are owned by the government and they are allocated through license and tenure systems. These licenses have been issued over the years to the primary forest users like the sawmill sector or the pulp sector.
We come along as a pellet industry late in the game, so we don’t have any ability to get license access to this Crown timber because it has all been allocated to the sawmills, basically. We end up having to buy the low-grade timber from the sawmills. There are so few forest companies that have vast control over huge regions of the forest that it ends up not being a free market situation. We end up being beholden to the primary forest companies that essentially get to dictate the price and terms of the fiber. If they don’t feel that we are paying enough or that it is inconvenient, they just burn it.
In British Columbia, we tried to make the case to our provincial government to ban slash burning so we could use that fiber to create jobs. For whatever reason, we can’t seem to convince the government of that. So we end up with a primary forest industry that doesn’t want to cede control over lands essentially granted by the government. They are loathe to give us any kind of control over even the low-grade stuff, so it just becomes an ongoing struggle. Then our provincial government, that should be supporting the growth of bioenergy, just sits idly and watches this stuff get burned.
How does the Wood Pellet Association of Canada plan to shape the conversation around sustainability standards as they are developed?
WPAC is by no means alone in this. We work hand in hand with our colleagues at USIPA and the European Industry of Pellet Suppliers. Our three organizations work very closely on sustainability, participating in the development of the Sustainable Biomass Partnership sustainability standards.
The SBP is made up of six pellet-using utilities in the U.K.—Drax, E.ON, Electrabel, RWE, Vattenfall and DONG Energy. They’ve been working on their end to develop sustainability standards, much of it in isolation without consulting us. We have a keen interest in proving that what we are doing is sustainable and we believe whole-heartedly that we need an independent, third-party system for verification. In the last few months, we’ve been meeting with the power utilities to go over the various standards and participating in pilot audits at facilities in Canada, the U.S. and Europe. All of our members have participated in this.
We think that sustainability, along with the greenhouse gas benefits, are the two pillars that our industry is founded on. If our industry is ever found to not be sustainable, we won’t have an industry for very long. We’re aggressively participating in the Sustainable Biomass Partnership’s development of those standards. In addition, we’re members of the Back Biomass campaign that is headquartered in London and focused on promoting biomass sustainability in the U.K. market. We are also a part of Bridging with Biomass that is headquartered in Brussels and targeted at the European Commission, European Parliament and the NGOs in Europe. Essentially, this is all to explain the realities of how we go about managing the forests and to dispel the myths that are perpetuated by NGOs about unsustainable practices.
Coal-to-biomass conversions aren’t limited to the United Kingdom, of course. Do you expect that the coal phase-out in Ontario will begin to be implemented across other Canadian provinces? Are you optimistic that there may be more Atikokan’s in Canada’s future?
The 100 percent coal phase-out is unique to Ontario. Atikokan is a pretty small plant and I think it is only going to run at 15 to 20 percent. I believe it is just a peaking plant. Nevertheless, I think there are going to be a lot of eyes on it in North America. We’re optimistic that other coal companies will be looking to that as a model and even other jurisdictions throughout North America will be looking to see what is actually possible. They’ve been cofiring for 15 years or more in Europe, but it just seems that in North America, we can’t possibly learn anything from what the Europeans do. We have to do everything ourselves here before we can actually believe that it will work. To me, that is going to be the benefit from the Atikokan facility.
In the rest of Canada, the federal government has new coal emissions regulations going into effect in 2015 to reduce allowable emissions to 420 tons of CO2 per megawatt hour from an average of around 1,100 for coal. It’s a huge reduction that will apply to old and new plants.
We have quite an old fleet of coal plants in Canada and we’ve actually done a study with the Canadian Clean Power Coalition. We looked at co-firing about a year ago—at the economics, the sourcing of biomass and what it would take to do the co-firing. I concluded that the coal power industry is very, very conservative and unless our government really pushes them, they won’t make the leap to co-firing. We thought there would be more action by now, given that the regulation was supposed to come into effect in 2015, so I don’t know if it’s just a staring contest between the coal companies and the government or what. The regulatory environment is there for us to make the switch, but the coal power companies haven’t made the leap yet, other than Ontario Power Generation.
In recent presentations, you’ve identified the home heating market as a significant opportunity for Canadian pellet producers. What about the home heating market most excites you and your membership?
It’s funny how it falls under a lot of people’s radar, but if you look at Europe right now, the home heating market at 10 million tons exceeds the power market at 9 million tons. But it’s made up of thousands of small customers each buying 4 or 5 tons a year, instead of a single power utility that might buy a million tons a year. There is the opportunity for diversity.
The thing about Canada, although we have huge natural gas resources, our gas distribution only covers about 45 percent of Canadian homes. The alternatives like heating oil or electricity or propane are all double the cost of wood pellets. We haven’t done a good enough job as an industry to educate the consumers about the new modern types of wood pellet appliances there are. If we have to build a whole market on carrying bags and feeding wood stoves, I don’t think we are ever going to become mainstream. But look at Europe and the modern types of boiler systems they have. They only have to fill a bunker up once a year, there is almost no maintenance, and people can operate their boilers with smart phones. The whole thing is as convenient and automated as gas. That’s the kind of education that we need to do.
When you look at in the northeast U.S., Maine Energy Systems is one company I like to point out that has been a real pioneer there. They’ve brought in the European OkoFen boilers and created a huge bulk delivery industry in the Northeast. That’s what we’ve got to get to in Canada. We’ve started to some extent in Quebec with ResoMass that’s got the Quebec distributorship for the OkoFen boilers, but we’ve just got to educate the homeowners, commercial businesses and institutions about the benefits, the convenience and the low cost of wood pellets. We’ve got such a cold country, we could sell millions and millions of tons if we do our homework properly.
Home heating markets overseas continue to look very strong in places like the United Kingdom and Italy. Are you optimistic about the recently launched domestic Renewable Heat Incentive in the United Kingdom?
I guess I would have to say I’m cautiously optimistic because the commercial RHI has been in place for some time now and it’s been a bit slow. I know the U.K.-based producers have been excited waiting for the domestic RHI. It’s only been a couple of weeks now, and it’s hard to see anything significant take place yet. I guess my optimism would be that all those U.K. producers that have been exporting into other markets like Italy will keep their product at home now. That will exacerbate the demand in the other heat markets around Europe, creating a vacuum effect that will enable us to sell more product. I think there is a pretty robust domestic wood pellet market in the U.K. that I believe is probably capable of being self-sufficient and the imports from North America will probably continue to go into the power sector. The net effect will be to reduce the volume from U.K. producers in other European heat markets and that will just create more opportunities for others.
In the Southeast United States, ports are investing significant capital to develop infrastructure that will allow them to effectively store and load pellets for trans-Atlantic shipment. What is the status of pellet infrastructure at Canadian ports?
It’s probably not to the scale of the ports in the US. We’ve got deep water ports in Canada, so we don’t have to get into any of the dredging you might see in U.S. ports. We’ve added a new terminal in Prince Rupert that was built by Pinnacle Renewable Energy. They had their grand opening in May. They have been shipping out of there for a few months now and that will reach both Europe and Asia. So we’ve got two pretty solid West Coast facilities now.
In eastern Canada, it’s the opposite of what you would expect, in that our exports to Europe predominantly move through our western ports. We have excellent facilities in Halifax and Belledune where we are shipping pellets from now. In the case of Halifax, it is a converted grain terminal and in Belledune, New Brunswick, it was purpose-built flat storage. Both have more capacity than is being utilized right now.
In Quebec City, Quebec Stevedoring has installed two big storage domes. Rentech is on track with the two pellet plants they are building in Ontario. I expect to see product being shipped out of Quebec City in the third quarter of 2014. I think the capacity at Quebec City is around 1 million tons per year and I know that they will be looking to bring in other producers in Quebec and Ontario to fill out that volume. In addition to that, we’ve got a number of container ports that are shipping bagged pellets, particularly to Italy. Containers are shipping out of Montreal and Vancouver as well.
What is meant by the Canadianization of ISO pellet quality standards?
Even though it is an international standard, to make sure it is a national standard and accepted by all of the provinces, we have to go through the bureaucratic process of ratifying it. We’re not trying to change it or invent something new at all. We, along with everyone else accept ISO. Every country, U.S. included, has its own standards association. We have to run it through a mirror process in Canada and pick through the standards and make sure we are happy with it and then it becomes the CSA ISO (Canadian Standards Association – ISO). In Europe it’s called CEN ISO, so they’ve done the same thing.