White paper discusses state of pellet market, Japanese potential

By Katie Fletcher | June 13, 2016

FutureMetrics LLC released a white paper this month written by William Strauss, discussing the current state of the industrial wood pellet markets and potential opportunities for its growth in Japan. It was once predicted the industrial wood pellet industry would grow to an excess of 20 million metric tons per year by 2016. According to Strauss, “those forecasts did not anticipate the changes in the policy environment that underpins the use of wood pellets in place of coal in large power stations.”

He added that U.K. policy changes have eliminated many wood pellet projects, and that the conversion of the Lynmouth power station and possibly the MGT Teeside station, will probably be the last big increases in pellet demand for U.K. power plants. Further, delays and uncertainty in Dutch markets have postponed the 3.4 million metric tons per year in expected new demand. Even so, the purchase of the Langerlo power station in Belgium by Graanul Invest is a positive step forward for expected growth in the Belgium industrial pellet market, with consumption at that plant expected around 1.8 million metric tons per year when it begins consuming wood pellets in 2018.

Also, if the MGT project and the Dutch marketplace move forward, total industrial wood pellet demand in the EU and U.K. could rise to about 21.5 million metric tons per year by 2023. This all depends on if the projects are indeed implemented, Strauss reiterated.

Currently, the industry is in a state of excess supply, meaning some projects have been financed and built without most of their production capacity matched with an offtake agreement, or, in some cases, the power plants that were to undergo wood pellet conversions that those projects were expected to supply fuel to have either been abandoned or have been put on hold due to policy uncertainty.

Another reason for oversupply included in the paper is a few years of exceptionally warms winters closing production in the European heating markets. Strauss wrote, “there are too many pellets chasing too few buyers,” and as a result, spot market prices for industrial wood pellets have hit historical lows (in U.S. dollars).   

When looking at North America, the paper estimates that excess supply (assuming industrial plants run at 80 percent of nameplate capacity) is about 2.5 million metric tons. Nameplate capacity assuming that 80-oercent production rate will be about 12.7 million metric tons per year if all projects under construction are producing by the end of the year. Actual 2016 exports from the U.S. and Canada are forecast around 10.2 million metric tons. Oversupply is compounded by increased production in eastern Europe and decreased demand for heating pellets in Europe. “Exchange rate challenges with the U.S. dollar and short shipping distances have favored eastern European pellets in the industrial spot markets and EU heating markets,” the paper stated.

With Lynemouth and Langerlo expected to come online in 2018, oversupply will be taken up by new demand and North American production capacity is expected to increase after 2018, assuming that a proportion of new U.K. and EU demand will be met by North American wood pellets, correcting the current state of oversupply in North American markets. However, if the Dutch markets do not grow as expected, the excess supply may linger longer.

Besides providing an update on the current state of industrial pellet markets, the paper provided analysis behind growth opportunities in Japan. Strauss said several policies are driving current and future growth, and under one plausible scenario, Japan could be demanding well in excess of 15 million metric tons per year of wood pellets by the mid 2020’s. Feed in Tariff (FiT) incentives offered to independent power producers (IPPs) are currently having an impact on the demand for wood pellets. Wood pellets and other biomass under the current FiT is 24 Yen per kilowatt hour (kWh) (about 23 cents per kWh or $225 per MWh). This rate is set and guaranteed for 20 years.

Besides the FiT, two other fundamental policy goals Strauss identified in the paper are Japan’s carbon emission targets and the government’s desired energy mix by 2030. Currently, there are voluntary targets requiring power companies to reduce CO2 per kWh by 35 percent from 2013 levels by 2030. The 2,000 MW Shinchi coal power station is cofiring wood pellets at 3 percent, about 160,000 metric tons of pellets per year, which does not require modifications to the fuel delivery systems and burners. Other pulverized coal power stations are also cofiring or having discussions about pellet fuel. These add up to around 18,700 MWs, according to the paper.

According to the Japanese government’s analysis, expected demand for energy by 2030 is 1,065 billion kWh. The government’s “best energy mix” shows renewables will account for 23 percent of the total power generated in Japan, as illustrated in the paper. Of that 245 gigawatt hours (GWh), 45.8 GWh or about 4.3 percent is projected to come from biomass. Strauss wrote in the paper that assuming an 85 percent capacity factor for biomass generation, this amounts to about 6,150 MW of biomass generation capacity, some from wood pellets.

Strauss spent some time in the paper discussing possible markets. Countries with favorable shipping logistics and the foundations for sustainable sourcing and durable contracts are the western U.S. and Canada, New Zealand, Australia and Chile. The paper states that Southeast Asian producers such as Vietnam, Thailand, Myanmar, Malaysia and Indonesia would need to improve accountability for sustainability and for the legality of logging.

Strauss concluded that although the future growth of the European and U.K. industrial wood pellet demand is expected to flatten over the next several years, there is high probability for Japan, the U.S. (dependent on the Clean Power Plan) and other nations to use more wood pellets.

FutureMetrics has published several other white papers on the potential for the Clean Power Plan to enable industrial wood pellet demand growth in the U.S. and it plans to release an upcoming white paper on the potential in Alberta, Canada.

FutureMetrics dashboard for estimating the increased cost of generation and the carbon emission reductions from substituting wood pellets for coal in pulverized coal power plants was updated to include a full range of pellet blending ratios from 0 percent to 100 percent. Different fuel costs, heat rates, capacity factors, types of coal, fuel energy values and more can be changed as well.  

The interactive dashboard and white paper can be downloaded from FutureMetrics website here.