Developing Markets for Wood Pellets & Torrefied Wood, Pt 1

A two-part series in which Digest contributor Tim Sklar looks at where the wood pellet and torrified wood markets are headed.

By Tim Sklar

Many experts familiar with the WP industry he expect demand for wood pellets in Europe to increase from 10 million metric tons per year today to 5 times that by 2020. In recognition of this optimistic outlook, a “Biomass Trade & Transport Summit”. It took place on July 17th and 18^th in Charlotte, NC. This summit was organized to provide the opportunity to bring together those that are already participating in the trade of wood pellets between North American suppliers and European end users, to get a better understanding of this growing market and the profit opportunities that are expected.

The primary objective of this Summit was to convey information about the white wood pellet industry and where it is headed, specifically with respect to the US-EU WP Trade.

This “Summit” consisted of ten panel discussions covering a range of topics of interest to the U.S. wood pellet (“WP”) industry, and the market outlook European market it expects to serve.

Panelists included representatives from the WP industry, from EU utilities and from those involved in logistics and transport of wood pellets from where they are produced in the US to export terminals.

Unfortunately, the market for torrefied wood pellets (“TW”) was only briefly discussed at this Summit, as it focused only in a general way, on the impact TW could have. As a consequence, the objective of this article is on providing a fuller discussion of TW and its place as either a complementary bio-fuel product or as a competitor to the white wood pellet industry.

In the following sections of this article, highlights from each of the Summit’s topics were revisited and a fuller discussion of TW’s expected impact is introduced.

Answers to the following three questions are then provided in an attempt to clear up some of the confusion. These questions are:

1     Where are WP and TW Headed?

2     Are they in a competition?

3     How will they share the market?

The Current and Projected Market for WP

Overall Outlook for the US WP Industry

Information provided at this Summit suggests that:

• WP use will continue to grow especially in the EU;
• WP produced in the US for export to the EU will increase from 1.2 million tons to 5.6 million tons in 5-years time; and,
• US WP manufacturing capacity, especially in the Southeast, will expand to meet this demand.

Highlights from a WP Plant Capacity Survey

Bioenergy International Magazine’s January 2012 survey of worldwide WP manufacturing capacity identified 585 plants operating in 35 countries that have the capacity to produce ~33 million mtpy of wood pellets, with the USA and Canada having a combined capacity of 10.3 million mtpy.

This “Survey” also indicated that:

• The WP plant capacity for NW EU countries have a combined WP plant capacity of 5.89 million mtpy, suggesting a need for 4.5 million mtpy of imported WP.
• Total US WP plant capacity in 2012 is 5.8 million mtpy and if export to the EU are now at 1.2 million mtpy, 4.6 million is being used in the US or exported elsewhere.
• The Southeast US has 13 plants with 2.6 million mtpy of installed WP. This data implies that if most of the 1.2 million mtpy of WP being exported is coming from the US Southeast, then 1.4 million is being shipped elsewhere.

Estimates of North American WP Exports

Data obtained from another recent survey indicates thatin 2011 Canada and the US exported 2 million tons of wood pellets to Europe and the Pacific Rim¹. And by 2017, exports are expected to increase to 10.4 million tons, 5.6 million tons of which is expected to be shipped from the US.

Conclusion Reached

Based on current WP plant installed capacity in the Southeast US it seems reasonable to conclude that the annual demand for WP in the EU will reach 5.6 million tons in 5-years time and could be met from US WP plants in the Southeast. See Table 1 below.

The Current and Projected Market for TW

In the July 9^th and 10^th issues Biofuels Digest Magazine, an article addressing obstacles encountered in biofuels project development, it was observed that with respect to development of commercial scale torrefied wood pellet (“TW”) plants, that this biofuels sector is just in its infancy. Based on whom you talk to, it is suggested that it is reasonable to assume that at least 10 TW plants with an estimated capacity of 65,000 mtpy could be in operating in the Southeast US by 2017. Further, some analysts indicate that once the torrefaction industry matures and more TW plants reach commercial scale, TW capacity should grow quickly and overtake the capacity being projected for the WP industry.  And as discussed in other articles and reports and surveys, major industrial users in the EU that burn coal and are being burdened by CO2 taxes, CO2 emission restrictions and penalties are viewing TW favorably. The major attributes of TW over WP as a replacement for coal is also well established and understood. And in most cases, TW used in test burns is proving to be practical. However, very little TW has yet to be produced on a commercial scale, so the market for WP in the EU still has room to expand over the next several years.

Table 1 below combines WP and TW forecasts. WP forecasts were taken from two independent sources. TW forecasts were developed assuming 8 plants in operation in Year 2015, 20 by 2017 and 60 by 2020. It shows a crossover to TW occurring in 2020 where TW output first exceeds WP output

 Table 1- Projected EU Wood Pellet Demand & US TW

Obstacles To Be Overcome IF TW Capacity Is to Develop

 Assuming that TW production is able to scale up over the next five years and the prices to be charged for TW are competitive to prices being paid for thermal coal and WP, it is conceivable that TW production could match WP production by 2020. But the TW industry will have to overcome many obstacles. Here is a short list.

• Obtaining commitments for capital investment required and guarantors for debt financing.
• Solving remaining technical problems in scaling up and in producing a consistent TW product.
• Perfecting a commercial scale processthat is economic enough to price TW that can compete against WP and thermal coal plus carbon.
• Obtaining sources of contingency financing that is often needed to ramp up of TW plants.
• Obtaining “Affinity Investors” from the most likely users of TW namely, owners of coal fired power stations and cement plants.

To date, utilities that had been asked to invest in a TW plant we are developing are reluctant to do so. They are also reluctant to commit to off-take agreements without seeing a commercial scale plant that can produce TW that is interchangeable with thermal coal they now use. And their reluctance is contributing third party institutional investors reluctant to invest, without having affinity investors as partners. We suspect that this reluctance is widespread.

Perspectives from European Utilities as Importers of WP

On Biomass Procurement

Utilities are sophisticated fuels buyers of biomass, especially when it comes to WF and TW to be used as boiler fuel. Likewise cement plant operators are similarly demanding, particularly with respect to TW’s properties and consistency of quality, as they are able to co-fire TW in higher proportions with other fuels. They are expected to require their WP and TW suppliers to enter into complex and detailed “Standardized” biomass procurement contracts, containing detailed biomass specifications to be met, detailed test procedures to be followed, and explicit sustainability certification requirements to be met.

On Co-Firing WP and TW

Several utility representatives attending the Summit had expressed the belief that co-firing of wood pellets with coal is uneconomic. In other words, they claim that the use 100% WP combined with sale of high value CO2 certificates is needed to offset cost of CO2 certificates purchased if coal is to be incinerated. However, no data was provided to support this claim. They all expressed a preference for obtaining WP from local sources, as the transportation costs for importing WP from the US makes WP much more expensive to use. However, one of the utility representatives at the Summit revealed that they co-fire using 35% WP in one of their plants, achieving a 1 million tpy reduction in CO2 while when burning WP and gasifying forest residue. This suggests that 100% WP incineration may not always be needed.

On CO2 Tax Policy

One of the utilities that operate a coal-fired power station in Belgium indicated that the Flemish government is debating possible proposed reductions in CO2 credits. He expressed the concern that if this happens, it will undercut economic incentives for using WP. There was a general consensus among attendees representing the EU utilities, that the uncertainty of CO2 tax policy in various EU jurisdictions is making it hard for them to plan for the increased use of biofuels in the future. Clearly, this continued uncertainty will adversely impact the market for TW as well, even though TW was not discussed.

Risk Mitigation Strategies

One utility reported that they take a comprehensive approach to risk mitigation when undertaking WP programs, including risks associated with commodity prices, exchange rates fluctuations, power plant operations, and new technologies.

Capturing Users of WP as TW Buyers

From the perspective of the TW supplier there are several issues to address when attempting to sell TW to users that now co-fire with WP or have converted to 100% WP or are gasifying woody biomass. The TW supplier should assume that these WP users have made substantial investments in infrastructure in order to use WP. Questions that need answers include the following:

• If TW is being considered when it is proven and available, will any of the cost of the added infrastructure need to be recovered before TW will even be considered?
• If not, will any of these plants want to use TW in lieu of WP?
• Will they consider using TW in lieu of thermal coal they now use, or will they at least consider using TW along with WP and coal?
• Are potential TW users limited to those that currently use no biomass?

No answers to these questions have yet to be obtained as TW is yet to be offered in commercial quantities. And it is also expected that answers received from each potential TW user may be different.

In Monday’s Digest, part II of the series. For more information about the article and technologies reviewed, contact Tim Sklar here.