The Future of Pellets

Biomass currently provides almost 10 percent of the world’s energy
supply. Two-thirds of that 10 percent is used for cooking and heating in
developing countries, whereas developed countries measure biomass as a
replacement for fossil fuels. According to the International Energy
Agency’s August 2014 Renewable Energy Market Report, global renewable
generation will rise by 45 percent and is expected to make up nearly 26
percent of electricity generation by 2020. What does this mean to the
future of the pellet industry? Today I offer my top three predictions.

• Demand for wood pellets for heat will surpass power in all
developed nations. In April 2014, Phase II of the United Kingdom’s
Renewable Heat Incentive came into effect. The Domestic RHI provides
seven years of cash payments to families who have converted to wood
pellet boilers and other renewable heating systems. Although the
nondomestic phase of RHI, launched in 2011, reached a milestone in
August—over a gigawatt of biomass-fired heating systems supported—the
domestic, Phase II adoption was more dramatic. In the first seven weeks,
1,000 installations of renewable energy heating systems were approved.
Imagine if 27 European Union members and the rest of the developed
nations implement an RHI. In Canada, for example, less than half of the
population has access to natural gas. With an RHI-type subsidy, adoption
of biomass heating systems could surpass any alternatives. In the U.S.,
FutureMetrics recently studied 20 northern states and determined that
over 4 million households could be regionally and sustainably served by
wood pellets. This puts the North American heat market potential at 9.5
million metric tons annually. More than six 500 MW biomass stations
would have to be operational to reach that same level. The European
Pellet Council predicts 10 million metric tons of demand for the heat
market for EU countries, which suggests several countries will meet this
prediction. Today, Italy, Denmark, France and Austria have a biomass
heat demand that exceeds power. As this increasingly occurs in developed
nations around the world, producers should be diversified in terms of
pellet type and the geography they serve.

• Consolidation will replace new pellet builds. Despite the
growing demand for biomass in multiple sectors, the advance of new
capacity in North America will peak in 2014 and decline over the next
five years. According to the Biomass Magazine pellet plant maps, an
expected 10 million metric tons of new capacity is planned or under
construction in North America today. It is unlikely that all 46 projects
will proceed, and this will likely begin a steady decline through
2020.  Usually, new investment, particularly when project financing is
involved, requires long-term offtake for approval. This means the only
demand that will be measured and considered will be the power generators
in Europe, as Asian gencos have not demonstrated they will sign
long-term offtakes. Instead, current capacity will be aggregated,
acquired, and consolidated for greater efficiencies. Approximately 150
plants in the U.S. produce less than 100,000 metric tons per year.
Today, with the majority of demand in Europe, most North American
shipments occur from six or seven major ports. By acquiring, or at
minimum aggregating from multiple inland locations, ocean freight
efficiencies and volume redundancy can be achieved by producers. 
Consolidation also offers investors lower risk and lower cost per ton
than a new build.

• Trading will become a virtual storage alternative. With over 5
million metric tons of transcontinental trade flows, ports such as
Rotterdam are experiencing higher pellet volume each year. To manage
this flow, some significant pellet storage investments have been made
over the past few years—Savannah, Georgia; Port of Quebec, and Prince
Rupert, British Columbia, to name a few. Additionally, several biomass
power stations have invested substantially, including Drax in the U.K.
and Ontario Power Generation in Atikoken, Canada.  Despite the capital
expenditure, it is unlikely that major power stations, at full fire,
will store more than a few weeks of wood pellet fuel. The onus is on the
producers—or the aggregators—to manage production fluctuations with
storage. The impact is felt throughout the supply chain, in terms of the
cargo size, the selected port, and inland logistics.  Over the next
several years, trading will become an important intermediary for
balancing excess volumes and matching demand to destination. With an
average capex cost of $500 to $700 per metric ton to build storage,
financing the movement of volume becomes a cost-effective and creative
alternative. A trader could move a handymax across the ocean three times
for less than the annual cost per metric ton of storage. While virtual
storage will not replace domes and other large-scale storage, small
producers should look to aggregators with trading capabilities to manage
their production fluctuation and reduce costs.