An Industry Looks at 50

The pellet industry has grown each quarter for nearly five years. For this trend to continue, however, the sector must navigate numerous challenges, not least of which is its own success.
By Tim Portz | April 11, 2015

Within 60 days of fall 2014, the two trade associations that represent North American pellet producers active in the export market held their annual events, and both opened with bullish market forecasts for good reason. The wood pellet industry has shown quarterly production increases each quarter since 2011, and according to the Food and Agricultural Organization of the United Nations, 2013 global pellet production surpassed 22 million metric tons. Over half of this volume is traded internationally, with European countries consuming over 80 percent of current production. This strong period of industry growth is powered in part by the European Union’s Renewable Energy Directive, a binding framework engineered to move the region to an energy mix that includes 20 percent renewables by 2020, as well as strong growth in the use of pellets as a residential heat source. Forecasting the industry’s potential emerged as the unofficial theme of the fall conference swing, and while industry experts were split on predicted future volumes, there was a unanimous belief that the industry’s enviable era of growth was likely to continue for the next several years.
Seth Walker, bioenergy economist from forest products information company RISI, shared with attendees of both events a market forecast that shows global pellet production climbing steadily to 50 million tons by 2024. In Miami, at the U.S. Industrial Pellet Association’s Exporting Pellet conference, this prediction was met with skepticism, and, in some instances, was pointedly criticized. Matthew Rivers, director of fuel procurement at Drax, suggested the forecast offered “future expectations without foundation.” The dynamics between Walker’s forecast and Rivers’s reaction to it aptly illustrates the paradox the pellet industry finds itself in. As the industry continues to grow, public attention, scrutiny and misinformation campaigns create a drag on growth and stability that stakeholders in the sector would like to avoid.

While market forecasts in the sector will likely continue to generate passionate debates, producers, associations, project developers, investors and industry vendors are hungry for guidance on where the market is headed. There are currently over 3 million tons of new production capacity under construction, with at least that many tons in earlier stages of development. Whether this era of sustained growth will continue hinges largely on four factors—cementing policy support for the use of biomass to achieve emission reductions goals, establishing a single sustainability criteria applicable to all pellet-buying countries, the emergence and establishment of new, non-European pellet markets, and the continued growth of the global thermal market.

Policy Bedrock
The period of growth the pellet industry currently finds itself in can be traced back to 2007 when the European Commission launched its Renewable Energy Directive, an ambitious plan to grow the region’s share of renewable energy to 20 percent of total energy production by 2020. The plan was central to the commission’s long-term strategy to drive down the carbon intensity of energy production within European member states. Each member nation received a target and was left to develop its own policy mechanisms to achieve the goal. One of the more cost-effective approaches to reduce the carbon intensity of power production was to replace a percentage of the coal burned in power stations with biomass, predominantly with wood pellets.

Policymakers were attracted to this option because it would deliver results at scale more quickly than wind, solar and geothermal deployments. In the United Kingdom, policymakers deployed the Renewables Obligation program, and later, a contracts-for-difference (CfD) mechanism that guaranteed a profit to producers on power they produced in a low-carbon manner. In the Netherlands, a similar program known initially as the MEP and now the SDE-plus were introduced.  These programs, especially those in the U.K., attracted the attention of energy companies and gave rise to the first coal plant conversions that introduced the first real market demand for industrial pellets.
These conversion stories—in particular, the conversion at Drax Power Station—are widely known in the industry, and, almost singlehandedly, have generated millions of dollars in investments in pellet production assets, port and rail infrastructure.

As these power stations conversions have gained momentum and come on line, however, they’ve also fomented significant public scrutiny. Opposition to this approach has been voiced by nongovernmental  environmental organizations warning of widespread deforestation, as well as scientific and policy community members who question the notion that power produced by wood pellets achieves the goals it has set out to.

The science and economics of this strategy continue to draw scrutiny and investigation. In February, the European Commission announced it would investigate the U.K.’s plan to subsidize the conversion of a coal station in Lynemouth, Northumberland, England, to wood pellets, with an aim to ensure that the plan aligns with European Union state aid rules and does not result in the overcompensation of the plant nor distort global pellet prices and demand. On top of this scrutiny, the U.K. has established a program called the Levy Control Framework, which will limit the amount of the money the government can spend on the carbon reduction programs, in order to protect ratepayers against large increases in energy costs.

The pellet industry relies heavily upon policies that make the production of energy from lower-carbon inputs economically attractive. To continue on its march to 50 million tons, support for these subsidies must continue. Without them, a return to the low-cost fossil fuel incumbents is likely inevitable, and continued growth in the industry will  sputter.

The Court Of Public Opinion
Policymakers’ response to constituents, and, ultimately, their support of the industry, is contingent upon the general public’s consensus of whether the investment in renewable energy is both necessary and being done in a sustainable way. At the U.S. Industrial Pellet Association’s Exporting Pellets conference in Miami, Matthew Rivers from Drax said, “The sector depends upon the license to operate.” If the public does not believe in the value proposition of making electricity from wood pellets, it is only matter of time before policymakers no longer support the programs the industry relies upon.

This debate is regular, robust and ongoing. Blogs, exposés, newspaper articles and letters to the editor about the use of wood pellets to produce electric power are published on a daily basis in media outlets across the globe. Most recently, the Washington Post published an editorial that blasted the practice and urged the U.S. EPA to not make the “same mistake” as European power producers. The editorial generated rebuttals from virtually every corner of the forest products and biomass industries.

Critics of the industry suggest that continued support of the policies that drive this industry will result in widespread deforestation. Industry proponents counter that the biggest threat to forest is not more market opportunities for its fiber, but fewer. “I think the big thing that we need to be doing is educating policymakers and others within the overall forest products industry that when you compare the sustainable wood fiber usage in our industry to the available fiber within the broader forest products sector it is absolutely, positively a drop in the bucket,” says Seth Ginther, executive director of the U.S. Industrial Pellet Association. “We need to find a better a way to better articulate that, and I think that is as critical to this industry’s long-term success as anything else.”

Proving Sustainability
To satisfy the skeptical fraction of their constituencies, the governments most aggressively supporting biomass-derived energy are introducing sustainability requirements that energy producers and their feedstock suppliers must comply with in order to receive subsidies. While the intentions of these measures are clear, the means of arriving at clear rules is not. Moreover, standards are currently being developed within multiple markets and may be different from one another, introducing bottlenecks and inefficiencies into the marketplace. Finally, at the center of many sustainability programs is some level of certification, which can introduce an administrative expense to landowners and pellet producers, making the economics of pellet production even more challenging.

This marketplace reality is most recently playing out in the Netherlands, as the Dutch try to find consensus between the pellet-buying power producers and the environmental NGOs. The NGOs are pushing hard for requiring all pellets bought by Dutch power companies come from certified forests. The power companies, with guidance from the pellet industry, argue that the requisite volume of certified feedstocks simply isn’t available and is not likely to be within the policy’s timeframe.

“I think it is certainly a little bit of a setback for the harmonization of standards, but I wouldn’t say this is the end of harmonization,” Walker says. “They are obviously going to be setting a new high-water mark.”
Harmonization is a concept the pellet industry has been forwarding as necessary to the establishment of an efficient pellet marketplace. Simply put, the industry supports sustainability requirements as long as there is one global standard they must adhere to. Having to satisfy a different sustainability standard for each market they intend to sell into would overwhelm producers, they argue. “I think that harmonization of sustainability criteria is key,” Ginther says. “We think that the Sustainable Biomass Partnership is a linchpin in all of that.”

The Sustainable Biomass Partnership was established by the pellet-buying power companies in Europe as a proactive effort to simplify and unify a fractured set of sustainability criteria that were emerging across the region. “To a certain extent, the average pellet producer need not concern themselves with the ins and outs of each one of the (European) member states’ regulations and criteria, because if the Sustainable Biomass Partnership does its job, their certification will literally be a one-stop shop,” Walker says.

For the Sustainable Biomass Partnership’s plan to work, a sustainability framework must be built. Not only one that is workable for pellet producers, but also robust enough to satisfy each and every government introducing sustainability criteria within their policy support schemes, eliminating the need for unique, country-specific criteria. With a blend of optimism and pragmatism, Ginther says, “If you fast forward three or five years from now, I think we will be on a harmonized certification program.”

Toward Marketplace Diversity
While the pellet industry has grown impressively for nearly five solid years, it is hardly a global commodity. In fact, 80 percent of the wood pellet market can be attributed to European buyers; 15 percent to North American buyers. Industry analysts believe that those markets will see continued growth, but any forecast of a 50 million-ton-per-year pellet industry includes a prediction of the establishment and steady growth of an Asian pellet market. In fact, Walker’s oft-cited market forecast of a 50 million-ton market by 2024 shows Asian demand growing to nearly 8 million tons per year, with nearly all of that volume going to power production.

Asian governments, including policymakers in South Korea and Japan, are also working to increase the share of renewables in their energy mix and are eyeing biomass cogeneration as well. Because of its impressive potential, the Asian marketplace has been the subject of speculation and interest for years without any real activity. In 2014, pellet sales in Asia finally began to occur in volumes that suggest this new market may finally be coming to fruition.  While no producer currently holds a long-term contract from an Asian buyer, spot market activity is picking up. In the second quarter of 2014, South Korean generators bought nearly 400,000 tons of pellets, largely from Canadian producers in British Columbia. For now, South Korean generators see pellet cofiring as the most cost-effective means of achieving their renewable portfolio targets.

Can producers count on this developing market? This remains to be seen. So far, Asian buyers are reluctant to sign long-term contracts, thus making it difficult for developers of North American pellet assets to convince investors of the economic viability of new projects. “I think the key for the Asian market over a time horizon is getting the generation companies to a place where they are comfortable undertaking long-term contracts,” Ginther says.

The Forgotten Market
Lost in all of the excitement and debate about the use of pellets to produce electric power is the market that gave rise to the production of wood pellets in the first place—the heat market.  While the use of pellets to produce electric power is the fastest-growing segment of the overall market, for now, more pellets are used in Europe to create heat than electricity, and the vast majority of pellets sold in North America are purchased to produce heat.

It can be argued that the continued deployment and growth of the heating market is vital to the industry, because it carries far less risk than the power markets. In many European countries, wood pellets are the lowest-cost provider of space heat. As the industry continues along its path to 50 million tons, a strong focus on continued growth of these markets in Europe and North America can be expected.

The pellet sector is in its heyday and is the envy of the broader bioenergy space for good reason. Quarter-over-quarter production growth for nearly five consecutive years is a condition every industry would like to find itself in, bioenergy or otherwise. Still, as the industry grows and momentum builds, so does opposition and scrutiny. This is a pattern the bioenergy space has seen before in the biofuels category, and will only be amplified as greater percentages of market share are won from the incumbent. Defending its position within the energy market will require the industry to continue to closely align itself with its feedstock constituents, aggressively counter misinformation and bad science, and build broad support among policymakers around the world looking for a proven means to a lower-carbon energy future.

Author: Tim Portz
Executive Editor, Biomass Magazine