Northern Ambition

The steady build-out of Canada’s industrial wood pellet industry continues, driven by multiple motivations.
By Matt Merritt | January 10, 2020

Canada’s wood pellet industry is reaping the benefits of simultaneous growth in both supply and global demand, with nearly 400,000 metric tons (MT) of new production capacity online in 2019 and another 400,000 expected this year. Combined with the 400,000 MT of capacity added in 2018, Canada’s wood pellet industry has added over one million tons of capacity in just three years, all underpinned by strong demand from important export markets in Europe and Japan. 

“It seems every year there are two or three new plants of a scale anywhere from 100,000 to 300,000 metric tons that are getting built,” says Gordon Murray, executive director of the Wood Pellet Association of Canada. Murray has presided over Canada’s wood pellet trade association as the economies throughout the world continue to include Canadian pellets in their decarbonization efforts.
The past year saw three different facilities complete construction and commissioning activities—Skeena Bioenergy Ltd., a 75,000 metric ton-per-year (MTPY) pellet mill colocated with a sawmill in Terrace, British Columbia; Grand River Pellet, a 100,000 MTPY plant in St. Leonard, New Brunswick, that is nearing full capacity; and the 210,000 MTPY Granule 777 facility in Chapais, Quebec.

One of several plants currently under construction with expectations of commissioning in 2020  is La Granaudière in Saint-Michel-des-Saints, Quebec. Backed by $27.2 million in financial assistance from the Quebec government, La Granaudière broke ground in September, says CEO Yves Crit. Nearly all production of the 200,000 MTPY plant will be shipped to Europe via the Port of Quebec—La Granaudière has a long-term offtake contract with Belgian-French energy multinational Engie—with about 1 percent of production being sold into the local heating market, Crits says. The plant has a timber supply agreement with the Ministry of Forests, Wildlife and Parks for fiber supply.

Startup for the plant is currently on track for September, according to Crits, and it will directly employ roughly 50 people.

The ongoing boom in construction is filling energy needs across the oceans both east and west, Murray says. “There’s a combination of things driving this. A lot of it is the desire to make use of residual products. And then they’re just looking at the opportunities in Europe and being able to fill that.”

In Western Canada, Murray adds, many companies have their eyes on Asia. “Japan is probably the most appealing market just because of the way they do business there.”

Japan stands in stark contrast to South Korea, Asia’s first wood pellet buyer of significance who show little appetite for long-term offtake agreements, instead favoring spot buying strategies and tender agreements that offer North American producers’ little financial certainty to invest in new production capacity. The willingness of Japanese pellet buyers to execute long-term offtake agreements has created a platform of certainty upon which this new production capacity is being built.

Filling Asia’s Sustainable Energy Needs
Asia as a major source of pellet demand is a relatively new phenomenon, Murray says. “For a long time, Europe was where everything was concentrated. And European growth has been quite rapid. It’s only in the last four or five years really that the Asian markets have started to show serious growth.”

Trade data from the U.N. Comtrade database supports Murray’s remarks, demonstrating marked growth over the past four years. In 2014, Canadian producers shipped just 90,000 MT of product to Japan. The numbers have increased steadily since then. In 2015, nearly 150,000 MT were delivered, and in 2016, the number eclipsed 250,000 MT. Export volumes nearly doubled the following year, with 2017 showing nearly 425,000 MT imported into the country from Canada. In 2018, Japan purchased 665,000 MT of wood pellets from producers in the country.

Wood pellet demand in Japan was 1 million MT in 2018. By 2023, it is expected to exceed 5 million MT, thanks in part to 18 new pellet-fired power plants under construction today, according to consultant group Hawkins Wright. While producers and their financial partners are reluctant to bank on South Korean volumes, data from the same U.N. Comtrade set shows that over this same time period, the country remains an important trade partner for WPAC’s members. The year-over-year numbers, however, reveal the intermittency that had kept capacity investment at bay. In 2014, South Korea imported nearly 350,000 MT of Canadian pellets only to see a drop below 100,000 MT in 2015. The number plummeted even further in 2016, with volumes at just 36,000 MT, essentially three or four handy-sized cargo vessels worth. In 2017, volumes surged back to 150,000 MT and dropped to just 40,000 MT in 2018.

South Korea already has 3.4 million MT of demand, with three new pellet-fired power plants on the way. According to Hawkins Wright, the Asian market is expected to overtake Europe sometime in the mid-2020s. While the raw demand numbers are eye-popping, the up-and-down nature of the South Korean market fails to generate the kind of excitement or corresponding investment of the more modest, but more predictable growth of Japanese volumes.

New Capacity, More Fiber
Another large-scale plant currently under construction is Northern Pellet LP in High Level, Alberta. Pinnacle Renewable Energy is building Northern Pellet LP in Alberta in a joint venture with Tolko. That plant, with a capacity of 200,000 MTPY, is expected to start commissioning sometime in the third or fourth quarter of 2020.

Robert McCurdy, CEO of Pinnacle, says demand growth in Asia was the primary driver for its decision to build. “Globally, the pellet market has been growing 18 to 20 percent per year, but if you look at the Japanese market, it’s growing faster than that,” he says. “So you have both global demand and you’ve got very fast-growing demand in Japan.”

Murray says South Korea mixes pellets with coal in many of its plants, while Japan is more focused on dedicated biomass-powered facilities. That means the quality standards are much higher, something Canadian producers are able to accommodate in a way that Canada’s competitors in Asia may struggle with. It also means the Japanese need the kind of certainty of supply that long-term contracts can deliver. “They like to sign on to long-term agreements because their project financing requires demonstration that they have long-term supply,” Murray says. These long-term contracts provide risk mitigation both ways. For financiers of new power stations or cofiring operations in Japan, long-term contracts assure guaranteed volumes at prices with fixed-pricing agreements while simultaneously guaranteeing a long-term market to recoup the investment of building new capacity to serve those markets.” 

Pinnacle has offtake agreements in place, McCurdy adds, but rather than tie them to one plant, those agreements are fulfilled by the larger pool of pellet facilities.

As for competition, Canada currently has unique access to Japan, thanks to logistics. “The Americans haven’t really competed in Japan because there isn’t any West Coast export out of the United States,” Murray said. “All the exports come out of the south or the Southeast.”

Another part of the dynamic in Canada has been a rise in the available feedstock for pellets, primarily sawmill residuals. The paper industry has long been a customer for that material, Murray says, but paper is facing challenges today. That is freeing up more feedstock for the pellet industry. “The pulp and paper industry is buying less residuals, and so many of the Quebec sawmill companies are looking to get into the pellet industry to have a market for their residuals,” Murray says.

McCurdy says finding a market for sawmill residuals is what led Pinnacle’s partner, Tolko, to pellets. “On the feedstock side, the sawdust and shavings at that Tolko mill used to be just burned to atmosphere.”

Now, government regulations do not allow that. “That led to the opportunity to have a good, reliable feedstock to make pellets,” he adds.

A Bright Future
During the next two years, utilities in the European Union and U.K. expect to increase industrial wood pellet consumption by about 5 million MTPY. Beyond that, demand is expected to plateau in Europe with the expiration of renewable energy support. That could limit new investment aimed at Europe.
However, Asian demand is increasing and will more than make up for a slowing market in Europe. By Hawkins Wright projections, Asia, the EU and U.K. will combine for 13.2 million tons of new pellet demand by 2023.

All of these efforts are aimed at cleaner, renewable energy, and reducing carbon emissions, but utilities, energy producers and governments aren’t the only stakeholders involved. More and more, the public is taking an increased interest in energy and emissions. “More and more people are becoming aware of the consequences of pollution,” McCurdy says. “Pellets fill more than just our energy needs. They help meet our environmental goals as well.”

As for whether this trend of rapid demand for energy pellets will continue in the long-term, McCurdy says, “The short answer is yes. I believe [growth] will continue. There’s still a lot of coal being burned to generate electricity in the world, and I see more and more people wanting to reduce greenhouse gases. I see the demand continuing.”

That idea is evident in Japan, Murray says. Japan’s commitment to environmental stewardship helps make them an attractive business partner for Canadian companies. “They have a keen sense of corporate social responsibility, wanting to make sure that what they’re using is sustainably produced and high quality,” he says.

Continued growth depends on continued support for biomass as a renewable energy solution to our world’s problems, Murray concludes. “That support comes in the form of favorable policies worldwide and general public awareness about the benefits of biomass power,” he says. “We’ve got to be ever-vigilant to tell a good story and back it up with performance.”

Author: Matt Merritt
Freelance Writer
[email protected]