South Korea long-term pellet offtakes unlikely, experts say

While South Korea’s consumption of industrial wood pellets is growing and expected to continue, the prospect of North American producers securing long-term offtake agreements with utilities in the country in the near-term is grim, according to wood pellet market consultant leader FutureMetrics.

That is, unless there are policy changes that would reduce risk to South Korean utilities.

South Korea’s renewable portfolio standard (RPS) currently requires the 13 largest power companies—installed power capacities of 500-plus MW—to ramp up renewable energy percentages of total power generation from 2012-’24.

As FutureMetrics points out in its new white paper, power companies will be required to annually submit the total RECs both generated or purchased to the New and Renewable Energy Center, and if they do not meet mandates, will face a fine of 150 percent of the average market price of the RECs for that year.

New wind and solar are on the rise, but the low cost of modifying pulverized coal plants to use pellets has rapidly increased demand for wood pellet cofiring. Not only that, but REC prices have soared in recent years, making wood pellets an attractive option when considering the price of producing and selling RECs to the cost of noncompliance or other options.

South Korean policy, however, does not currently protect utilities from the effects of falling REC prices and the impact on bottom lines with new renewable investments, making spot market purchasing the most economical option. FutureMetrics described the situation as “a difficult problem for the S. Korean market. Most pellet producers and project lenders/investors will not commit to the capital expense of a new pellet plant without a long-term offtake agreement to guarantee that most of the plant’s production will be sold at known volumes and prices.”

And with demand growing and soon exceeding Vietnam’s capacity to fulfill the country’s tenders, FutureMetrics points out, “it is difficult to conceive of how pellet production capacity matching the expected S. Korean demand can be deployed without long-term agreements.”

But utilities can’t risk REC prices falling while engaging in long-term agreements, and conversely, producers need confidence that their South Korean counterparty will be able to afford their product over the terms of the offtake agreement.

FutureMetrics suggests there may be future policy changes in the country—without modifications, there is no long-term guarantee to the revenue per megawatt-hour from the S. Korean RPS—and points out that all other nations  with developed pellet cofiring or full-firing power markets have policies that support and de-risk long-term pellet supply agreements.