The Japanese biomass market maintained its momentum in 2019 with new power projects starting up and projects in the pipeline progressing. From 2023 onward, however, a significant uptick in demand is expected, calling for a focus on the biomass supply&rsquo;s origin. In Japan, palm kernel shells (PKS) are a major feedstock in the growing market, and their availability will become increasingly important. A lot of the Japanese projects, both under development and operating, have circulating fluidized bed (CFB) boilers, which allow for flexibility in the biomass fuels they can use. The abundant supply and relatively low cost of PKS in Southeast Asia, a waste product of the palm oil industry, has made it an attractive fuel to those power plants. The introduction of government support in 2012 has driven up demand, with Japanese PKS imports nearly tripling since 2015, to 1.3 million metric tons (MT) in 2018. Imports appear to have exceeded 1.4 million MT in 2019, although official data is yet to be released. Looking ahead, greater demand is expected. Hawkins Wright research shows that almost 60 percent of planned, dedicated biomass power plants in Japan over 20 MW intend to use some PKS. Even more projects intend to use an unspecified form of woody biomass, which could potentially include PKS. However, we foresee little expansion of PKS use in South Korea. The sole company currently using PKS is GS Energy, at its Dangjin Unit 1 power plant. Furthermore, changes made last year to the country&rsquo;s renewable portfolio standard scheme mean that PKS now earns less financial support than other biomass fuels, making it less economical. Korea imports around 360,000 MT per year of PKS, a level that has been fairly steady year-on-year since cofiring at the Dangjin coal-fired unit began in 2015. For most Japanese plants planning to use PKS, it is only a minority fuel source, with most relying on wood pellets for 50 to 85 percent of their biomass supply. Many have chosen to lock in long-term pellet contracts for the majority of their fuel portfolio because of the need to partner with reliable, bankable suppliers. In particular, this is the case for projects raising funds through project financing, as they must demonstrate security of fuel supply to potential investors. These projects are expected to purchase their remaining biomass volumes on the spot market, whether in the form of PKS, wood pellets or wood chips. In recent years, Hawkins Wright has seen increasing evidence of the commoditization of PKS. The involvement of Japanese trading houses is helping&nbsp; provide secure, bankable counterparties for PKS trades, allowing more projects to sign long-term offtake contracts for the fuel. Japanese buyers are seeking to diversify their supply sources. In addition to more upstream investment in new pellet mills in emerging markets such as southeast Asia and eastern Russia, we are hearing of more interest in long-term PKS contracts. The availability of PKS could be a determining factor behind wood pellet consumption in the region. Reduced PKS availability or higher prices would likely increase demand for wood pellets. On the flip side, increased PKS supply could decrease spot pellet demand. A wide price differential between the two fuels may also drive Japanese power projects to sell their higher-priced pellet volumes and replace them with cheaper PKS. The supply of PKS and its availability for export are determined by a range of regional issues, including weather conditions, palm oil demand, local use and logistics. Until now, PKS supply has greatly surpassed exports, but uncertainty surrounds how much could be available for export if demand rises to expected levels. Another important factor concerning availability of PKS is the regulatory sustainability requirements. Only a small portion of PKS is certified to be sustainable, so the introduction of stringent requirements by the Japanese government would severely limit supply. We estimate, based on data from the Roundtable on Sustainable Palm Oil, that around one-fifth of the PKS produced in Malaysia and Indonesia between July 2018 and June 2019 was from RSPO-certified palm oil plantations. Japan&rsquo;s Ministry for Energy, Trade and Industry&rsquo;s biomass sustainability working group has recently proposed changes to the way agricultural byproducts are treated under the country&rsquo;s feed-in tariff. It proposes that byproducts must be certified from the point in the supply chain where they are generated. This means that PKS must be certified from when it is separated from the fresh fruit bunch at the palm oil-processing mill. From this point onward in the supply chain, certified PKS must be kept separate from noncertified fuel&mdash;mass balance reporting is not permitted. METI has evaluated the compliance of third-party certifications, including Indonesian Sustainable Palm Oil Certification, International Sustainability and Carbon Certification and Malaysian Sustainable Palm Oil, against its criteria. It concluded that, in addition to the currently accepted RSPO certification, RSB, or Roundtable on Sustainable Biomaterials, certification should also be accepted. Biomass power plants using agricultural byproducts will have three years from the end of fiscal year 2018-&rsquo;19 before the new sustainability rules are enforced&mdash;i.e., until March 2022. The Japanese biomass market&mdash;particularly its relative fuel flexibility compared to the wood pellet-dominated European market&mdash;will create an interesting trading environment as demand grows in the coming years. Those players who keep well-informed of developments in all fuel types will be best placed to capitalize on this opportunity. For a more detailed analysis of the PKS market, including demand forecasts, estimates of PKS resources, cost drivers and price forecasts, contact Hawkins Wright. Author: Rachael Levinson Biomass Research Manager, Hawkins Wright rachael@hawkinswright.com www.hawkinswright.com

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The Japanese biomass market—particularly its relative fuel flexibility compared to the wood pellet-dominated European market—will create an interesting trading environment as demand grows in the coming years.

The Growing Importance of PKS in the Japanese Biomass Market

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