FutureMetrics paper explores pellet offtake pricing relationships

FutureMetrics Inc. on Feb. 20 published a white paper that explores offtake pricing relationships between pellet producers and pellet buyers and discusses whether pellet producers can make money in current markets with their legacy offtake agreements.  

The paper, authored by FutureMetrics President William Strauss, explains that many years of near zero inflation resulted in some complacency in how offtake price adjustments were defined in the bilateral contracts between pellet fuel producers and buyers. According to Strauss, it became comment to define an annual fixed adjustment to the sales price of pellets—often in the range of 1.5 percent to 2.5 percent. Such contracts exposed pellet producers to risk if the average cost of production increased faster than the price, he explains.

The white paper focuses on the contract-for-difference (CfD) scheme in the U.K., which supports a 650 megawatt (MW) biomass unit at Drax Power Station and the 420 MW turbine at the Lynemouth station. Together, these units consume nearly 4 million metric tons of wood pellets annually, according to Strauss.

In the paper, Strauss breaks out the general costs associated with wood pellet production, noting fiber accounts for approximately 43.3 percent of costs, followed by logistics at 23.1 percent; maintenance, consumables and fuel costs at 9.4 percent; electricity at 8.6 percent; dryer energy costs at 5.2 percent, labor at 4.9 percent; SG&A at 4 percent; and other costs at 1.5 percent.

FutureMetrics also developed a dashboard that complements the white paper that allows users to model how changes in wood costs, fuels, and other inputs impact production costs. It also allows the user to see the impact of changing foreign exchange rates and other factors.

A full copy of the white paper can be downloaded from the FutureMetrics website.