FutureMetrics paper discusses Japan, South Korea pellet markets

By Erin Voegele | November 05, 2019

A recent white paper published by FutureMetrics LLC discusses wood pellet markets in Japan and South Korea and provides insight into how policies in those countries impact power producers’ ability to pay for pellet fuel under sustainable and equitable long-term off-take agreements.

The new white paper, published Oct. 28 and authored by William Strauss, president of FutureMetrics, references a paper published the company in May 2017 that showed the South Korean REC market is inherently unpredictable and, as a result, the ability to pay by South Korean buyers is also unpredictable. Strauss indicates recent data continues to support the concerns raised in the 2017 paper. South Korean REC prices have collapsed, he wrote, noting excess supply and/or insufficient demand has pushed the market price for a REC to under $52, down from more than $112 in May 2017.

According to Strauss, low REC prices have changed the cash flows for existing co-firing plants. Low REC policies and changes to South Korea’s REC policy that are less supportive of biomass conversions, new facility development and cofiring have also impacted the country’s market for wood pellets, in terms of both volume demanded and the price South Korean buyers are willing to pay.

Strauss said that as South Korea’s renewable portfolio standard (RPS) requirements ramp up to 10 percent in 2023, demand for solid fuel may increase and help rebalance the supply and demand for RECs and firm up REC prices. Uncertainty over REC prices and policy changes will likely prevent most generators in South Korea from engaging in long-term offtake agreements for substantial quantities of pellets, he noted.

In Japan, Strauss said the feed-in-tariff provides a stable foundation for biomass demand. He predicts demand could exceed 4.5 million metric tons per year by 2023-24, or an average of approximately 375,000 metric tons per month, up from current demand of 125,000 metric tons per month.

Stable policy is expected to enable Japanese buyers to enter into 10-plus year off-take agreements for wood pellets, which provides a foundation for the development of pellet plants dedicated to supplying Japanese buyers.

FutureMetrics plans to publish a comprehensive report on the Japanese power markets in November that will include analysis of current and future demand for pellets, potential criteria for meeting sustainability requirements, and overview of ports that are importing pellets, an overview of how power markets are transitioning in Japan, and other factors.

A full copy of the Oct. 28 white paper, titled “Japan and South Korean Industrial Wood Pellet Markets: Insights into their ability to pay for pellets,” can be downloaded from the FutureMetrics website.