When the EU government passed lofty greenhouse gas reduction and renewable energy goals over a decade ago, ensuing market forecasts for future wood pellet consumption were glamorous. Out of the woodwork came an inordinate number of global players looking to seize a slice of opportunity. While some achieved success, others were not able to gain share in a difficult-to-navigate export market, on top of running a business that requires even more than just passion, patience and perseverance to successfully maintain&mdash;or grow. With North America leading the pack of wood pellet exporters by a landslide, production there has grown exponentially over the years. EU consumption has remained a significant catalyst, but is expected to level out in few years, leading suppliers to eye new opportunities in Asia. But while new markets are on the horizon, the EU remains a powerful force for now, and is expected to remain a key driver for at least the next few years, with many large-scale, pellet-consuming projects slated to come online by 2020. Production, Consumption Trends In 2016, nearly 29 million metric tons (MT) of wood were manufactured globally. The EU produced close to half that, at 14 million MT, meeting 65 percent of its domestic demand of 21.7 million MT in 2016. The remaining 35 percent was mostly shipped from North America, with small amounts from other areas, including Russia. While close to the same size as the U.S., in contrast, wood pellet production is spread out across many member states in the EU, and not concentrated in a specific region. EU production trended upward for many years due to growing demand, but following a 4.5 percent growth spurt between 2014 and 2015 (13.5 to 14.1 MT), production levels dipped to 14 MT in 2016, a slight decrease of about 0.4 percent, according to Gilles Gauthier, manager of the European Pellet Council. &ldquo;Adverse weather conditions was the main factor in the stagnation for 2016, with the expansion in underdeveloped markets acting as a mitigating factor,&rdquo; he says. &ldquo;One thing to note is that the industrial market is less weather-dependent, and shows a continuous upward trend over the years.&rdquo; According to the European Biomass Association&rsquo;s annual report, of the 21.7 million MT of wood pellets consumed in the EU in 2016, 61.7 percent was used for heat&mdash;residential (42.6 percent), commercial (11.8 percent) and heat from combined heat and power (CHP). (7.3 percent). Power plants consumed the remaining 38.3 percent.&nbsp; Fiona Matthews, research manager with Hawkins Wright, says that since the drivers of the domestic and commercial sectors are very different, they have grown at much different rates. &ldquo;We expect much slower growth in the residential heating market,&rdquo; she says. &ldquo;The industrial market is characterized by a very small number of individual users, each of whom consume very large volumes. Although industrial pellet demand will rise significantly as a result of two new projects coming online&mdash;Lynemouth and MGT Power&mdash;we do not currently envisage any additional demand growth there.&rdquo; Five new industrial-scale pellet-consuming projects are expected to come online between 2018 and 2020, the largest user being EPH in Lynemouth, United Kingdom. The 420-MW, coal-fired power plant is being converted to use up to 1.6 million MT tons of wood pellets, and is due to come online in early 2018. A handful of projects set to come online in the Netherlands this year will create about 1.5 million MT of new demand, and finally, MGT Power&rsquo;s 299-MWe project in the U.K. will consume about 1.1 MT, beginning in 2020. Unlike most of the pellet-using power projects, MGT was purpose-built, points out Seth Walker, senior economist at FutureMetrics. &ldquo;A lot of these projects are coal plants that are being converted to extend their service life, and using wood pellets was not meant to be a permanent solution,&rdquo; he says. &ldquo;I think demand will probably plateau for the next couple of years.&rdquo; Utilities in various member states are interested in converting to wood pellets, but interest is all it is, at least for now. &ldquo;We still get inquiries from our utility clients all over Europe, some Spanish, Portuguese, German and France coal stations, looking to covert to biomass,&rdquo; says Hannes Lechner, senior principal at P&ouml;yry Management Consulting. &ldquo;These countries have fallen out of favor with coal, and have ambitions to close them fairly quickly. The only option they have for survival is converting to biomass, but they also need the appropriate support system, and this is usually where it falls over. The government isn&rsquo;t too keen on support for large-scale, import-based biomass projects.&rdquo; &nbsp;These potential conversion considerations aside, like Walker, Lechner says that demand is set to level off by 2020, followed by a stable period. And from 2026 onward, demand is expected to contract. &ldquo;It will contract quite significantly, especially during 2027, when support for Drax and Lynemouth comes to an end,&rdquo; Lechner says. &ldquo;This could have quite a significant impact on U.S. suppliers, and potentially, European suppliers form Portugal and the Baltics. Unless, of course, things change.&nbsp; But as the intent of the scheme stands at the moment, demand will contract significantly.&rdquo; In preparation for shifting markets, Canadian suppliers are already contracting and partnering with Japanese companies, as is U.S. supplier Enviva, Lechner points out, though U.S. Southeast producers may face challenges in finding the success in Asia that they did in Europe. &ldquo;If you look at the supply cost curve for wood pellets going into Japan and South Korea, the U.S. isn&rsquo;t well positioned,&rdquo; he says. &ldquo;They are rather expensive compared to the supply coming in from countries like Malaysia, Indonesia and Russia, and that&rsquo;s where we see growth potential going forward. Suppliers at the high end of the cost curve might find it difficult to compete in this emerging Asian market longer-term, and so they will have to do something about it&mdash;perhaps switching to the U.S. West Coast, where biomass is somewhat limited and can be expensive, or establish a platform in Asia Pacific directly, taking their expertise and know-how to where the market is.&rdquo; While industrial pellet growth in Europe slows, Walker says he believes it&rsquo;s likely that a pickup in residential, commercial or small-scale CHP or district heating is in store. &nbsp;&ldquo;[Residential/commercial] Demand and growth has been slow for a few years because of competing fuel prices and warmer winters, so there was really no impetus to switch,&rdquo; Walker says. In the U.K., these markets have been largely driven by financial subsidies provided by the Renewable Heat Incentive, but changes to the rules and support schemes, Matthew says, &ldquo;have caused demand growth to come in fits and starts.&rdquo; The RHI has undergone some controversy regarding implementation flaws and significant overspending, but has been largely successful. &ldquo;The issues really arose in northern Ireland,&rdquo; Lechner says. &ldquo;In England, Wales and Scotland, there were no issues of mismanagement or overspend. It is a very generous incentive scheme, and it has been brought down already, but the government is still quite supportive of RHI,&rdquo; he says. &ldquo;If you want to decarbonize your energy system, for heat generation and cooling, biomass is one of the few viable options. We expect further growth in the biomass heating market in the U.K., maybe not at the attractive levels we have seen, but definitely growth. The ambition would be to supply this growth with domestic resources, and avoid imports and the dependence on international markets as much as possible.&rdquo; Most European countries have defined their energy and carbon reduction goals out to 2020, and what lies beyond then is murky&mdash; at least, for now. &ldquo;What we see is more EU countries looking at the biomass resources they have domestically, how much biomass heat growth it can really support, and how much should be incentivized,&rdquo; Lechner says. &ldquo;As we gather, they aren&rsquo;t looking at incentivizing importing biomass for the domestic market over long distances, because then you&rsquo;re getting into sustainability and footprint discussions, and this is what politicians are quite wary of, at the moment.&rdquo; However, according to Lechner, costwise, the economics of imported wood pellets for domestic heating markets are actually quite favorable in some instances. &ldquo;Mostly because of high raw material costs in a lot of EU countries, and pellet mills are typically smaller-scale, and don&rsquo;t have the efficiencies of the 200,000-ton or half million-ton that you find in North America. Suppliers could compete in the market, but demand would have to increase quite a bit.&rdquo; Right now, continued growth in both the industrial and domestic EU markets&mdash;beyond 2020&mdash;is hinged largely on policy. Policies to Watch 2018 will be a crucial year for the future development of renewable energies after 2020, Gauthier says. &ldquo;In fact, EU policy makers are discussing a very important legislative package that will shape the future legislative framework for renewables, including bioenergy, for the period 2020-&rsquo;30,&rdquo; he says. For bioenergy, there are some important developments that could become opportunities or challenges for the sector, depending on the outcome of negotiations. Gauthier identifies the first as sustainability criteria for solid and gaseous biomass. &ldquo;Until 2020, only biofuels are subject to sustainability criteria,&rdquo; he explains. &ldquo;The currently discussed legislation is foreseeing sustainability requirements for solid biomass, including pellets. The most probable outcome is that only installations above 20 MW will have to comply with these requirements, but the text is still under discussion and other thresholds, like 1 MW, are considered.&rdquo; Another important policy piece is development of a renewable target in the heating and cooling (H&amp;C) sector, and improved energy performance for buildings, according to Gauthier. &ldquo;A new focus on decarbonizing the H&amp;C sector can represent important market opportunities for pellet deployment, especially at residential level,&rdquo; he says. &ldquo;However, this new focus also brings concerns about biomass emissions and air quality linked to an increased use of bioheat, especially in decentralized stoves and boilers.&rdquo; Finally, conversations are underway place restrictions on power production from biomass CHP, and Gauthier says that if implemented, it could hamper member states from producing power from only biomass, and halt cofiring efforts. &nbsp;Policies and subsidy schemes that continue to drive the residential and commercial EU wood pellet market, besides the U.K. RHI, according to Matthews, include the French Fonds Chaleur heat scheme, the Irish renewable heat support scheme, the Italian Conto Termico, and biomass boiler grants in countries including Austria, Germany, Poland and Holland. In the industrial sector, the U.K. Renewable Obligation and Contracts for Difference policies, the Dutch SDE+, and the Danish heat tax are all important policy drivers, she adds. On challenges beyond policy, things are always changing in the short-term, Matthew says. &ldquo;The supply-demand balance is currently rather tight, especially in the heating market, which has struggled due to low inventories, consolidation in Italy, and sudden cold snaps in some regions. The long-term trends remain in place though, with the biggest issue being the possible impact of rising Asian demand.&rdquo; If the heating sector continues to grow and the industrial projects materialize, Gauthier agrees, then the main challenge may be ensuring sufficient production capacity to avoid any tension on the market. For now, consumption levels in all of Europe are a lot higher than production&mdash;55 percent higher in 2016 , according to Gauthier,&mdash;and therefore, U.S. imports of wood pellets are needed. &ldquo;Competition between U.S. and EU producers remains marginal,&rdquo; he says. &ldquo;However, the main factor for this absence of competition is the type of market U.S. pellets are destined for&mdash;EU products are largely used on the individual and mid-scale markets, and U.S. pellets are shipped mainly to large-scale, industrial users.&rdquo; And driving home Matthew&rsquo;s point that the market changes quickly, Walker points out that several years ago, it was projected that within just a few years, Germany would become net importers of wood pellets, which is not the case today. &ldquo;It shifted in the other direction&mdash;growth stalled in that market, and appliance sales went down,&rdquo; he says. &ldquo;Everything looks different now than it did a few years ago.&rdquo; And finally, the EU commission can change rules at any time, Lechner points out. &ldquo;Things can change very quickly, and very significantly&mdash;there are a lot of ifs and uncertainty,&rdquo; he adds. &ldquo;For example, if Germany should really go for biomass cofiring, very high demand could unfold quickly. Same with Spanish and Portuguese coal power stations. They&rsquo;re busy lobbying their governments, and we&rsquo;ll have to see where it goes. It&rsquo;s a rather uncertain future, but probably more upsides than downsides. Suppliers have to be very wary of this cliff edge in 2026 and &lsquo;27, because it&rsquo;s not that far out any more. They have to really gear up and find a strategy to survive, and not be left with stranded assets.&rdquo; Editor&rsquo;s note: At press time, the U.K. government released its response to consultation of cost control for further biomass conversions under the Renewable Obligation. The response proposes applying a cap at the power station level across ROC units, rather than imposing a cap on ROC support for future biomass unit conversions. In response, Drax announced it would convert a fourth unit to wood pellets, with plans to complete the work in the second half of 2019. Each of Drax&rsquo;s existing converted units consumes approximately 2.3 million metric tons of wood pellets annually. The fourth unit will likely operate with lower availability than the three existing converted units, as Drax intends to run it at periods of higher demand. At the same time, the European Parliament&nbsp; confirmed and improved the revision of the Renewable Energy Directive and the Energy Efficiency Directive,&nbsp; to guarantee sustainability of bioenergy consumed in the EU for the period 2021-&lsquo;30. The European Biomass Association issued remarks of approval, stating that the approach will allow solid biomass to keep playing a key role in the European energy transition while providing coherent and realistic sustainability safeguards, but that the bioenergy sector will have to remain cautious in Parliament trilogue negotiations. Author: Anna Simet Editor, Pellet Mill Magazine asimet@bbiinternational.com 701-738-4961

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Loaded with wood pellets, Panamax-class vessel Popo S arrives at Port of Immingham, the U.K.â€™s largest port by tonnage, from Pinnacle Renewable Energyâ€™s Westview Terminal in Prince Rupert, British Columbia 

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The EU pellet industry may have more growing to do, but just how much, only time and policy will tell.   

A Shifting Market

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