The Future of Pellets
Biomass currently provides almost 10 percent of the world’s energy supply. Two-thirds of that 10 percent is used for cooking and heating in developing countries, whereas developed countries measure biomass as a replacement for fossil fuels. According to the International Energy Agency’s August 2014 Renewable Energy Market Report, global renewable generation will rise by 45 percent and is expected to make up nearly 26 percent of electricity generation by 2020. What does this mean to the future of the pellet industry? Today I offer my top three predictions.
• Demand for wood pellets for heat will surpass power in all developed nations. In April 2014, Phase II of the United Kingdom’s Renewable Heat Incentive came into effect. The Domestic RHI provides seven years of cash payments to families who have converted to wood pellet boilers and other renewable heating systems. Although the nondomestic phase of RHI, launched in 2011, reached a milestone in August—over a gigawatt of biomass-fired heating systems supported—the domestic, Phase II adoption was more dramatic. In the first seven weeks, 1,000 installations of renewable energy heating systems were approved. Imagine if 27 European Union members and the rest of the developed nations implement an RHI. In Canada, for example, less than half of the population has access to natural gas. With an RHI-type subsidy, adoption of biomass heating systems could surpass any alternatives. In the U.S., FutureMetrics recently studied 20 northern states and determined that over 4 million households could be regionally and sustainably served by wood pellets. This puts the North American heat market potential at 9.5 million metric tons annually. More than six 500 MW biomass stations would have to be operational to reach that same level. The European Pellet Council predicts 10 million metric tons of demand for the heat market for EU countries, which suggests several countries will meet this prediction. Today, Italy, Denmark, France and Austria have a biomass heat demand that exceeds power. As this increasingly occurs in developed nations around the world, producers should be diversified in terms of pellet type and the geography they serve.
• Consolidation will replace new pellet builds. Despite the growing demand for biomass in multiple sectors, the advance of new capacity in North America will peak in 2014 and decline over the next five years. According to the Biomass Magazine pellet plant maps, an expected 10 million metric tons of new capacity is planned or under construction in North America today. It is unlikely that all 46 projects will proceed, and this will likely begin a steady decline through 2020. Usually, new investment, particularly when project financing is involved, requires long-term offtake for approval. This means the only demand that will be measured and considered will be the power generators in Europe, as Asian gencos have not demonstrated they will sign long-term offtakes. Instead, current capacity will be aggregated, acquired, and consolidated for greater efficiencies. Approximately 150 plants in the U.S. produce less than 100,000 metric tons per year. Today, with the majority of demand in Europe, most North American shipments occur from six or seven major ports. By acquiring, or at minimum aggregating from multiple inland locations, ocean freight efficiencies and volume redundancy can be achieved by producers. Consolidation also offers investors lower risk and lower cost per ton than a new build.
• Trading will become a virtual storage alternative. With over 5 million metric tons of transcontinental trade flows, ports such as Rotterdam are experiencing higher pellet volume each year. To manage this flow, some significant pellet storage investments have been made over the past few years—Savannah, Georgia; Port of Quebec, and Prince Rupert, British Columbia, to name a few. Additionally, several biomass power stations have invested substantially, including Drax in the U.K. and Ontario Power Generation in Atikoken, Canada. Despite the capital expenditure, it is unlikely that major power stations, at full fire, will store more than a few weeks of wood pellet fuel. The onus is on the producers—or the aggregators—to manage production fluctuations with storage. The impact is felt throughout the supply chain, in terms of the cargo size, the selected port, and inland logistics. Over the next several years, trading will become an important intermediary for balancing excess volumes and matching demand to destination. With an average capex cost of $500 to $700 per metric ton to build storage, financing the movement of volume becomes a cost-effective and creative alternative. A trader could move a handymax across the ocean three times for less than the annual cost per metric ton of storage. While virtual storage will not replace domes and other large-scale storage, small producers should look to aggregators with trading capabilities to manage their production fluctuation and reduce costs.
Author: Michele Rebiere
Chief Financial Officer, Viridis Energy