USIPA wraps in Miami with a positive outlook to 2017

By Katie Fletcher | November 08, 2016

The U.S. Industrial Pellet Association’s 2016 conference wrapped Nov. 8 in Miami with a generally positive outlook on the future of the industrial pellet market, emphasized by the building anticipation for increasing amounts of demand coming online in the near-term across Europe, as well as expected demand to meet Japanese renewable energy targets. Sustainability of U.S. forests was another of this year’s conference points of emphasis, along with both U.S. and EU policy, funding and legislative activity to support biomass.

John Bingham, director at U.K.-based Hawkins Wright, set the stage for the event by providing a market outlook for wood pellets and assessments on what the future may hold, specifically for the industrial market.

According to Bingham, of the 27 million metric tons of pellets consumed in 2015, 13 million tons were industrial-grade. The U.K., unsurprisingly, was the highest consumer at 6.8 million metric tons followed by Denmark with 1.4 million, then Sweden, Belgium, Japan, South Korea and a handful of others. Global industrial wood pellet demand is coming from a fairly small group of countries, Bingham noted. However, there is near-term demand growth in not only the U.K., but also Belgium, Denmark, Netherlands and emerging opportunities in Ireland, Finland, Norway and France.

Bingham shared some reasons there’s been delay in new demand-side capacity growth, including exchange rates disadvantaging U.S. suppliers, the absence of normal winter conditions, oil prices, bankruptcy of German Pellets, the closure of Ironbridge and Drax maintenance shutdowns, as well as some unhelpful policies and regulations. “All the news is not bad. There is some long-awaited sunlight which we can look forward to,” Bingham said.

He mentioned how pellet manufacturing capacity is mainly aimed at the industrial market (19 million tons per year). Currently, many pellet projects have been halted by an absence of new offtake contracts, but not all, with about 1.3 million tons per year of new capacity under construction in the U.S., Baltic States and Brazil. The lack of new capacity planned to come online will lead to a tightening of demand, Bingham said. “As new projects come forward, they should tighten up this market significantly and develop a requirement to create new supply.”

Overall, global wood pellet production has experienced exponential growth over the last 15 years from 2 million tons back in 2000 to around 27 million tons in 2015. In the last five years, it’s grown by 12 percent, but ground to a halt over the past year. Even so, the market is expected to continue to grow, more than doubling in demand over the next five years.

Bingham, like U.K. MP Nigel Adams earlier in the conference, shared some thoughts on Brexit and how it might impact the industrial wood pellet industry. He said that most will likely remain unchanged and any changes in legislation are likely to be slow and measured. The Great Repeal Bill will appeal the European Communities Act of 1972, but will preserve all EU law in U.K. law, he shared. GHG emission targets are set by the Climate Change Act of 2008. Also, since the Brexit vote, the government has accepted the latest Carbon Budget 2028-2032, requiring a 57 percent reduction in emissions relative to 1990. Bingham provided some possible timing on when the U.K. would finalize its leave. By March 2017, U.K. government is expected to trigger Article 50 of the Treaty of Lisbon, beginning a two-year exit negotiation. There is still lack of clarity on who can trigger the article, however. It’s expected by summer 2019 the U.K. may have finalized its exit.

Bingham also shared an outlook on pellet industries on a country-by-country basis, sharing potential new demand for wood pellets in those respective countries.

In the U.K., the three big projects to offer new demand discussed throughout the conference are Lynemouth, MGT Power and Drax Power. Lynemouth is expected to bring new pellet demand of 1.6 million, and it’s under construction with anticipated completion in 2018. MGT’s CHP plant is now fully financed and is expected to create 1 million metric tons per year in new pellet demand by 2020. Drax’s full conversion of unit 1 (once CfD is given pending state aid approval) will create 2 million metric tons in new demand.

Outside the large U.K. demand coming online in the next few years, Belgium’s 440 MW Langerlo plant is expected to generate 1.6 million metric tons of yearly pellet demand by 2018, and it’s currently obtaining financing. Also, the extension of Engie’s 205 MW Max Green biomass power plant could hold promise, and there is new biomass CHP capacity in Wallonia, with a tender for 200 MW of new capacity.

Bingham mentioned that the Netherlands is a “big opportunity, if the policy can be made to operate.” RWE’s 600 MW plant was awarded SDE + support, expecting to create 1.26 million tons per year of pellet demand by 2018 when it’s expected to startup. Engie’s 800 MW cofiring plant was also awarded SDE+ support, and by 2018, it is expected to create 24,000 metric tons in new demand.  In theory, Bingham stated that 3.5 million metric tons of pellet demand could be available for cofiring supported under the SDE+ scheme, but utilities will only make final investment decisions when the government clarifies its policy of phasing out coal and on the sustainability criteria for biomass.

Denmark-based Dong Energy’s 250 MW Avedore and 350 MW Studstrup CHP plants are completing conversion and are expected to add a combined 95,000 metric tons per year in demand.

Proposed increases in pellet demand from 2015 to 2020 in the U.K., Belgium, Netherlands and Denmark total 7.7 million tons per year. Of this, 60 percent is under construction or fully financed. Other EU countries (mainly Finland and France, plus industrial heat) have potential to add 2.8 million metric tons per year.

Bingham mentioned how the corfiring investment decision is easier now than it was a year ago. In South Korea, nine power stations cofired biomass in 2015, and this number as well as the cofiring rate is likely to increase over time. South Korea is expected to create 1.3 million metric tons of new pellet demand with KOSEP’s 125 MW conversion project coming online next year, in addition to cofiring on new build projects. “Biomass cofiring is an attractive way of meeting utilities’ RPS obligations at the lowest cost,” he said. There are also several gencos known to be looking at new-build biomass.

Japan’s Sumitomo/Summit Energy new build 50 MW project, Osaka Gas cofiring at its 110 MW plant, as well as others cofiring are expected to result in some 1.53 million metric tons in new pellet demand by 2020. Momentum is building though, as they increased imports 93 percent year-onyear in January through August 2016. Potential demand was ramped up to as much as 15 million metric tons in demand under one potential scenario discussed by Bill Strauss of FutureMetrics, who moderated a panel focused on the market later in the conference.

Japan’s pellet market in 2015 was 23,000 metric tons, but momentum is building with imports increasing 93 percent year-on-year in January through August 2016. Bingham shared that its feed-in tariff (FIT) program is very generous in its support, in theory, but its design has “constrained swift investment decisions.” Government is currently proposing reforms which should remove obstacles. Black pellets are also a popular solution to minimize conversion costs and storage constraints with cofiring, Bingham offered.

Brodie Govan, a biomass broker with Voyage Power, sat on the panel discussing growth opportunities within the Japanese market. He said, “The good thing about Japan is that unlike the Korean market it’s replicating Europe in terms of sustainability and in terms of specification, so it’s a lot more straightforward for North American producers to do business with them.”

He discussed since the Japanese are looking at 10- to 15-year offtake contracts, it’s been challenging to establish long-term, bankable contracts with Southeast Asia suppliers. “Questions about sustainability still do exist in Vietnam, there are no large-scale producers and there’s a lot of aggregation that goes on,” Govan said. “Japanese are very stringent on sustainability—they like good, quality pellets and want a long-term contract. Vietnam is not something, I think, North America needs to worry about. Vietnam will play a role in the spot market, but in terms of long-term markets, North America will be the key supplier for 10- to 15-year contracts.”

Canada is already supplying volume to Japan, and Vietnamese volumes are rising, but the competition between Korea and Japan is driving the price up, so Korea could serve as an opportunity for the U.S. in the future, in addition to Japan.

Govan believes the Japanese power market will require both Canadian and American volumes to meet its demand. “I think we’re just getting started,” he said. “I think in the next few years, while more Southeast Asia supply will play a role, there is definitely going to be a major role for North America. I don’t think it’s going to be long until big Canadian producers are sold out of their volume and the market dynamics could change very quickly and we’ll need more production and supply.”  

Beyond Asia and Europe, Canada and the U.S. have developments in the works that could support the emergence of market demand. In Canada, there are new commitments to address Canada’s higher per capita GHG emissions with a federal plan to establish a floor price for carbon starting at C$10 per ton of CO2 in 2018 and rising to C$50 per ton of carbon dioxide in 2022. Provinces also have two options to either join a cap-and-trade scheme or implement a carbon tax. At the same time, coal power plants are being phased out and this creates potential opportunities for biomass.

In the U.S., the Clean Power Plan’s aim is to reduce GHG emissions from the U.S. power sector by 32 percent from 2005 levels by 2030 would hold promise if passed. Coal-fired generators would most likely be affected, and some may delay or avoid closure by cofiring or converting to biomass.

Webb Moore, partner at Hirschler Fleischer, closed the conference speaking on the Clean Power Plan and its potential timeline. As many know, EPA’s publishing of the CPP triggered a number of lawsuits, which were brought to the Court of Appeals for the D.C. Circuit earlier this year. The court initially denied the motion for stay that would have prevented the U.S. EPA from implementing the CPP until legal challenges are resolved. However, later in February, the U.S. Supreme Court reversed the D.C. Circuit’s decision and granted the motion to stay. According to Moore, he finds this decision as a signal from the Supreme Court that they determined the plaintiff’s challenge would likely succeed, essentially ruling the illegality of the CPP.

In May, the case went back to the Court of Appeals and a September hearing was scheduled en-banc, or in front of the full, 11-judge panel. “The level of interest about this case is just remarkable,” Moore shared.

Moore expects a decision will be made around February or March of 2017 after the election has been sorted out. On election day, before the results were known, Moore stated that Donald Trump has said he opposes the CPP and will repeal it, and Hilary Clinton has said she’ll support the CPP. “The election today is huge for the life of the Clean Power Plan,” he said.

As for the 11 panel judges, Moore predicted there would be at least six judges voting in favor of the legislation, with 10 judges participating. He believes the CPP will survive this round on a vote of six to four or seven to three. Moore said the eight Supreme Court justices will be split four to four, and if so, whatever the Court of Appeals decides will stand. However, he did add he believes a ninth justice will be appointed by the time it reaches the court.