The most exciting, and dramatic change to impact wood residue and small diameter roundwood markets in many world regions in the last decade has been the policy driven substitution of wood biomass (biomass chips or wood pellets) for fossil fuels (coal, fuel oil, natural gas) in the generation of both heat and energy. Demand by converted and greenfield power and CHP (combined heat and power) plants pushed global production of wood pellets to over 27 million tons by 2015 per FAO statistics. Production capacity in the United States alone increased from approximately 500,000 tons in 2003 to nearly 11 million tons in 2015 – of which nearly 60% was targeted toward export markets in the European Union and Asia (Spelter and Toth, Forisk).
What has been unique about the development of the pellet industry in the US has been the fact that the majority of US production is exported to subsidized CHP facilities in Europe and Asia, rather than used by a fledgling US biomass CHP industry. The driver, of course has been energy policy in the EU and Asia which has determined that the easiest way to reduce greenhouse gas emissions is to substitute wood fuel for fossil fuel as a base load fuel in power and CHP plants. As is evident to those in the business, the viability of wood fuel as a substitute for fossil fuel as a base load fuel source is very reliant on subsidies paid to the power generators for “green” energy (sometimes in the form of above market “feed-in” rates), which offset the higher costs and loss of efficiency of using wood as a primary fuel source.
It is also important to recognize that wood pellets exported from the US as a primary fuel source for power and CHP plants are derived almost exclusively from cross-subsidized raw materials. Whether or not the raw material is wood product manufacturing residues, harvest residues, or even roundwood pulpwood from thinnings or final harvest logging operations, the wood pellet feedstock has been cross-subsidized by the production of some other higher value product (lumber, wood panels or sawlogs). In today’s global environment of relatively inexpensive energy and increasingly expensive agricultural land, even subsidized delivered pellet prices in Europe or Asia cannot justify the planting of wood crops in the US and the subsequent manufacturing and exporting of wood pellets. As a result, and barring a significant change in pellet prices, the level of subsidies, land prices, or biological production rates, there is a finite limit to the amount of cross-subsidized feedstock material available in the US market to produce export wood pellets.
After a decade of phenomenal growth in wood pellet production and demand, what does the next decade look like? In 2016, proposals for new pellet plants diminished in concert with fewer wood biomass conversion projects in the EU. The economics of producing wood pellets in the United States and transporting them to power facilities in the EU and Asia would seem destined to worsen as wood prices recover from recessionary lows in the US, and shipping costs rebound from the historic lows seen in recent years to more “normal” levels. Although the EU remains committed to the concept of “green, renewable energy”, the uncertainty of Brexit, the result of the US election, and the outlook for economic growth in the EU seems to have dampened enthusiasm for the conversion of additional existing fossil fuel plants, or the construction of greenfield facilities. Preliminary signals from a new Trump administration point to a re-emphasis on fossil fuels in the US; a position that is diametrically opposed to the push for renewable energy in the EU. Layered on this policy contradiction, is an expected near term abundance of relative inexpensive coal, oil and natural gas. Facing these headwinds, wood pellet consumption in the EU would seem unlikely to significantly increase in the near term, with a resultant decline or leveling off of US wood pellet production.
Regardless of near-term market conditions, the question remains if wood biomass can play a major role in energy production going forward. While not nearly as efficient as fossil fuels, wood biomass is one of the few alternative energy sources that can support “base load” energy production that is currently not possible with wind or solar alternatives given today’s energy storage technologies. In the longer term, biomass may play a significant role if the philosophy of centralized power and heat production, and distribution through a large grid, evolves toward local or regional energy production. The concept of community heat and power production may avoid the “procurement dilemma” long faced by pulpmill procurement personnel – that large centralized consumers face the reality that the marginal cost of collection of raw material distant from the consuming mill can cost more than the value of that raw material to the facility.
In the interim, the most effective way to meet renewable energy targets may remain the conversion of coal fired power plants to alternative raw materials. Wood pellets are inefficient and expensive to transport, stock and handle. It may be that so-called “black pellets” will become the interim product of choice for coal fired power plant conversions. In the longer term, wood biomass may only be able to play a significant role in heat and power markets in the future if the centralize production and grid system evolves into a more regional energy production economy.
ForestEdge, LLC is a forest investment and forest product industry consultancy with expertise in global forest product markets, timberland investment strategy, portfolio construction and investment management. The objective of ForestEdge is to bring this experience and perspective to the expanding array of timberland investors who face the challenges of a changing timberland investment environment.