Sailing into Japan: Wood Pellet Demand in a Changing Energy Market

By Annette Bossler | January 23, 2020

The earthquake, tsunami and resulting damage to the Fukushima nuclear power plant, triggered by the Great East Japan Earthquake on March 11, 2011, also caused a seismic shift to the Japanese energy market—especially power generation. Before the disaster, the Japanese government attempted a power market reform numerous times, but Japan’s utilities prevailed.

A year after the terrible events, however, Japan’s new feed-in tariffs (FITs) for renewable energy, as well as the first phase of the power market reform, launched renewable energy generation and demand that has made Japan one of the most attractive and promising markets globally. The government’s 2018 strategic energy plan includes a target of 3.7 to 4.6 percent energy from biomass by 2030.

The FIT for biomass power has created a substantial dedicated biomass power project pipeline of 2.8 gigawatts (GW) of capacity (inclusive of  plants with capacities greater than 1 MW) to be commissioned in 2020 and beyond, in addition to 1.5 GW dedicated biomass power capacity already operating. Some of these new plants will further drive demand for wood pellets in Japan, which has seen substantial growth in the past year, and a new supply player: Vietnam.

Until the end of 2018, Canada was the predominant supplier of wood pellets into Japan. In 2019, however, Vietnam is likely to have overtaken Canada as the main supplier. Trade data from the Japanese Ministry of Finance, shows the new landscape (Figure 1).

This picture is unlikely to change even once the full year data becomes available. Whether Vietnam can hold the new leading position will depend on whether the Japanese government will eventually establish stricter sustainability requirements for wood pellets, which may be challenging for some Vietnamese suppliers.

Currently, a government working group is looking at updating the rules related to palm kernel shells (PKS), which are anticipated to be finalized in 2020 and introduced in 2021- ’22. PKS is currently used as biomass fuel in many of the FIT-approved power plants. In 2018, from January to October, Japan imported more than 1.09 million metric tons (MT) of PKS, vs. about 1.26 million MT in the same period in 2019. Stricter sustainability requirements are likely to transfer some of the PKS demand to wood pellets.

As of 2019, the largest consumers of industrial wood pellets are coal-fired power plants that have started cofiring. Based on FutureMetrics research, by the end of 2019, there will be a total of 16 coal plants (total generation capacity 8.3 GW) cofiring with wood pellets in Japan. There is an additional confirmed project pipeline of three plants (total generation capacity of 1.2 GW) that have announced wood pellet cofiring plans. The number of coal plants that are cofiring with biomass is likely to further increase, as 10 additional plants with a total of 11.6 GW capacity filed for FIT certification of their biomass portion in March and September 2017, respectively, but have not yet implemented the fuel change.

Among dedicated biomass power plants, most above 1 MW are using domestic wood chips, woody biomass or PKS as fuel. Only five plants with a total of 171 MW capacity use 100 percent wood pellet fuel. The project pipeline beyond 2019 with 100 percent pellet fuel shows seven new plants with a total capacity of 523 MW. The 17 new plants (total capacity 837 MW) to be commissioned in 2020 and beyond plan to use a fuel mix of wood pellets and PKS. This may change due to the PKS sustainability standards.

Looking at import locations for biomass fuel in Japan, there are 39 ports that have been used for biomass imports such as wood chips, PKS and pellets in 2019. In the period from January to September 2019, there were 17 ports with wood pellet imports of more than 1,000 MT (Figure 2).
At this point in time, Japanese ports do not have wood pellet storage facilities. Some ports will likely invest in such facilities, should the demand for industrial wood pellets further increase, especially if more coal plants decide to cofire with pellets.

FutureMetrics’ demand outlook for biomass in Japan takes into consideration numerous factors, including the overall Japanese government objectives regarding energy supply and cost. Japan is an island nation, and unlike Germany, for example, one of the benchmark countries for the Japanese government, the country cannot import electricity from the Asian mainland. There are no transmission lines between Japan and any other nation. All of Japan’s electricity must be generated domestically.

It is important to remember that Japan is the world’s third largest economy behind the U.S. and China and is heavily dependent on exports. Japan’s neighbors, especially China and South Korea, are strong competitors and Japan’s government will always pursue a policy framework that protects the country’s competitiveness. This includes energy prices as a cost factor—just like other nations, the government must balance objectives such as climate change mitigation and sustainability with continued economic success. Based on this, there will always be a ceiling price for electricity that the government is willing to accept. This can be seen in the downward  trajectory of the FIT prices in recent years and the change to tenders with ceiling prices.

In this context, FutureMetrics has developed several scenarios, one of which we are sharing in detail in this article. This scenario is based on our database of existing and confirmed future biomass power generation, including coal plants that are cofiring. We assume that PKS imports are reduced, starting in 2022, due to the new sustainability requirements imposed by the Japanese government. Since most of the PKS is used in FIT-approved fluidized bed boilers, we expect that these plants will be switching some of their fuel mix over to more domestic biomass and imported wood pellets.
Additional scenarios include an increased number of pulverized coal-fueled, major utility power plants to start cofiring. As of July 2019, not all of Japan’s utility-scale coal plants had applied for FIT certification for a biomass cofiring portion.

This may change, as the other driver for switching to cofiring would be the ability to meet efficiency requirements. In 2016, the Japanese government released efficiency standards for thermal power generation plants. All new major utility coal-fired power plants should aim to have an efficiency of at least 42 percent, with a target of 44.3 percent efficiency by 2030, equivalent to so-called ultra-super-critical plants, or the most advanced technology available for commercial use. Existing plants should aim to have a heat efficiency of at least 41 percent by 2030. Plants that do not meet that threshold are encouraged to gradually ramp down operations. None of these targets are binding at this time, but it can be assumed that most operators plan to comply with these standards.

One way to increase the calculated efficiency rating is to convert part of the fuel from coal to industrial wood pellets. If all the utility- scale pulverized coal plants in Japan were still running in 2030, they would need to consume about 5.8 million MT pellets per year, just to meet the minimum efficiency requirements. Assumptions are that pellets contain about 17.6 GJ, or 4.9 megawatt-hours (MWh) per MT and coal contains about 25.2 GJ (7 MWh) per MT.

Given the Japanese government’s objective for power prices, the continued growth of biomass power generation will depend on whether electricity can be generated at a total cost, including fuel transportation, lower than a certain Japanese yen (JPY) per kilowatt-hour (kWh) price.

We know that the overall price trajectory is going down—the ceiling price for the 2018 biomass power tender was 20.6 JPY per kWh, and for the 2019 tender, we observed a ceiling price of JPY 19.6 per kWh. Likely, the government will further reduce the price per kWh.

Can lower power purchase agreement prices still support future growth for wood pellet demand? A positive answer depends primarily on delivered price of the wood pellet fuel and the capital cost burden that is part of the cost of generation. A number of scenarios using FutureMetrics’ “Ability to Pay” dashboard for wood pellets shows that biomass power generation, especially using pellet fuel, can be profitable long term. It is up to suppliers to manage capacity, costs and especially supply security. The latter will always be key for the island nation of Japan. Therefore, it is up to Japan to develop efficient infrastructure and logistics, especially for pellet import and storage. The investments in liquid natural gas facilities show what is possible if a fuel type has long-term support by industry and government.

A full Japan market overview and all detailed scenarios are available in FutureMetrics’ new report, “Japan Biomass Outlook:  Overview and analysis in the context of a changing power market,” which was released in November.

Author: Annette Bossler
Senior Market Intelligence Expert
FutureMetrics Inc.