The Southeast U.S. offers an abundance of wood resources for pellet manufacturers and several have taken up residence there to utilize that supply chain. Some larger facilities are shipping their pellets overseas to better-developed markets in Europe that incentiveize industrial biomass use. While the U.S. pellet export market seems to be evolving and more companies are trying to break into it, one particular European utility has opted to come halfway around the world and operate its own pellet plant, shipping its product to its own European utilities.
Georgia Biomass in Waycross, Ga., is in its precommissioning phase and expects to begin shipping pellets in the second quarter of this year, according to Chief Financial Officer Sam Kang. The mill will produce about 750,000 metric tons of pellets per year for internal use by subsidiaries of German utility RWE, including recently acquired Dutch utility Essent, one of the largest pellet users in the world. With the marriage of Essent and RWE, Georgia Biomass—a subsidiary of RWE Innogy—completes the loop.
Of course the Southeast has ample resources and strict, reliable sustainability codes, but why not just purchase the pellets from U.S. producers already operating there?
Supply, Quality, Price
Many pellet mills, not just in the U.S., are privately funded and may not be well-capitalized, Kang says. Mills with thin margins or those that are kept afloat shipment-by-shipment can’t always provide security of supply, one of three main reasons RWE is constructing its own mill. Pellet mills with credit problems can run out of cash, putting their off-takers at risk of insufficient fuel supply. “[Essent has] had instances when people don’t deliver because the price of sawdust or shipping went up, for instance,” he says. “Little things like that happen and we just don’t want to be open to that.”
The next reason for an internal pellet plant is no surprise: quality. “Quality is very important and is one reason we did invest in our own pellet facility here in the U.S.,” Kang says. “We want to make sure we get the same consistent good quality.” Ash content, fines and calorific value are a few of the important elements, he says. “Yes, Essent has turned away shipments because of quality.” Contracts specify quality parameters for the delivered fuel and the buyer can and most likely will refuse a shipment if it does not meet those specifications. “Based on that, if there was any opportunity to renege on a contract, [the customer] would, and rightfully so,” says John Swaan, chief operating officer for Green Frontiers Energy Group. “If the criteria aren’t met, they have every right to refuse a shipment.”
“We’ve made tens of millions of euros in investments to convert existing coal plants to be able to cofire, so we want to be able to make sure that we will also be receiving those high-quality pellets so we get subsidies to repay our investments,” Kang says.
Quality problems can arise when using poor raw materials or having inadequate cooling in the pelletizing, storage and handling processes, according to Swaan. “You cannot pile up residue, process it, bring it in and expect it’ll be magically altered and refined to something that’s suitable,” he says. “Junk in is still junk out.” Management of the raw material is crucial, he adds, and handling it correctly, in the case of forest residues, means avoiding scraping it through the forest floor and pushing it into piles. “As soon as you contaminate it with dirt, obviously you’re going to have some issues.” While the problem isn’t common in U.S. pellet mills, it has happened in the past and is a lesson today’s manufacturers can learn from others’ mistakes. “What the industry has to learn … in North America is that even though it’s an industrial pellet, it still means that you need quality residues,” Swaan says.
The final major driver in RWE’s decision to develop Georgia Biomass is price risk. “Part of vertical integration is that then you would be insensitive to large price movements,” Kang explains.
But supply, quality and price aside, Georgia represents an ideal location because it has sustainably grown and harvested desirable trees as crops for decades. “We specifically chose Georgia in the Southeast U.S. for the southern pine,” Kang says. The tree is abundant, and has ideal calorific value for RWE’s processes. “More trees are grown than cut down each year,” he says. “We’re looking for long-term production here.”
It goes without saying that not all U.S. pellet manufacturers are guilty of supply and quality issues, and many are successfully shipping pellets to Europe fairly frequently, such as Green Circle BioEnergy Inc. in Florida and Fram Renewable Fuels LLC in Georgia. Some say success in export markets depends on proximity to wood supply and port access. “European buyers are the same as buyers the world over,” says Harold Arnold, president of Fram Renewable Fuels. “They want the product at the lowest possible price. Not every project in every location can be profitable. All have their unique problems and conditions.”
Similarly, the hardships RWE and Essent have endured with suppliers are not attributable only to North America. “It can happen anywhere,” Kang says, adding that the economics, logistics, fiber sustainability and material quality in the U.S. simply represented the best opportunity for RWE and its internal pellet demand at the time it made its investment decision.
But while some European pellet customers might say suppliers and brokers aren’t following through on their quality, volume and price commitments, it’s possible they simply don’t understand the cost of delivering a consistent quality product overseas, says Pete Stewart, president and CEO of Forest2Market, a provider of market trend and industry information for forest products and bioenergy. “On one hand, European utilities say they can’t get consistent deliveries at a good price,” he says. “But on the other hand, they won’t pay the price to get a quality product over there.”
Stewart doesn’t consider RWE to be one of those ill-informed utilities. “They pretty much understand the cost,” he says, adding RWE might not fully nail down exact cost figures until it begins shipping commercial quantities from Georgia. “Right now, their costs to manufacture and deliver a pellet is way in excess of market price, so they’ll certainly be losing on [Georgia Biomass], or they could easily replace the volume in that plant with market-based product, but that doesn’t mean they can replicate the quality of their product in the market, or the timeliness of delivery,” he says. Timeliness and quality are major components of cost, he adds. “I would suggest the price right now doesn’t really take into account consistency or strict adherence to quality measures and that might be the disconnect between the markets and what it really costs to get a decent product to a location in Europe.”
The U.S. is the No. 2 producer of wood pellets in the world, but only exports 20 percent of its product, according to the American Biomass Trade Cooperative (ABTc). In comparison, Canada exports about 80 percent of its product. International investors are indeed reluctant to work with American producers because of shipping hurdles and the inability to secure on-time and undamaged product, according to the cooperative. In accordance with RWE’s reasoning, that security of supply is the primary concern of foreign pellet customers, according to Scott Miller, founder and president of bioenergy marketing and consulting firm The Miller and De Wulf Corp., and marketing consultant for the ABTc. Among other initiatives, the cooperative seeks to serve as a middleman between American biomass product manufacturers and foreign customers, marketing and connecting the two.
“We will definitely be trying to streamline communication across the pond,” Miller says. The possible pricing disconnect is one element of biomass exporting that the cooperative could tackle with its work. “It’s an understandable concern,” he says.
In the thick of it, though, the view might be much different. “That’s just typical business,” Arnold says of the suggested pricing disparity. “I don’t think there’s a disconnect. I think it’s just the long-term situation in business.” The buyer will never propose to pay more than the market price, he adds. “It’s capitalism at its best.”
There is substantial risk involved in the pellet export industry, specifically for startups, which account for a significant portion of manufacturers in the U.S., Kang says. But Georgia Biomass avoids that risk by supplying its own internal demand, although Kang says selling to third parties is an option if excess supply exists after RWE’s demands are met. Even though RWE’s mill means reduced interest in the global pellet market, Kang is still hoping for the success of pellet producers because it builds stability in that market. “I would be very happy to see the success of all the pellet producers because it only helps the whole industry,” he says.
But it is a tough business to be in, Arnold cautions. “Wood pelleting is not a get-rich-quick scheme,” he says. “It is capital intensive and dirty, dusty manufacturing at its best.” He adds that the hype surrounding the wood pellet industry and its export potential has led many project developers to believe pellet manufacturing is a business with guaranteed profits. “Unfortunately it is not,” he says. “The same discipline must be applied to the pellet business as any other. You can make a little money at it, but there’s an awful lot of hard work to do it.”
Author: Lisa Gibson
Associate Editor, Pellet Mill Magazine