Developing Markets for Wood Pellets & Torrefied Wood, Pt 2

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

In Part I, here, we looked at the Current and Projected Market for wood pellets and torrified wood, plus Biomass Procurement, co-firing, CO2 tax policy, and risk mitigation strategies. Our series today picks up with purchase agreements, sustainability concerns and more on the economics.

WP Purchase Agreements and Other Contracting Issues

One utility representative presenting at the Summit explained in some detail the sustainability standards certifications that his company uses as part of their “Standard” biomass procurement contracts. He also had mentioned the audits that his company is subjected to by Government officials to determine CO2 savings offsets that reduce the amount obtained from sale of the credits issued them for WP they use in lieu of coal. As TW was not discussed, it would be safe to assume that CO2 credits earned on using TW would also be subject to audits and possible offsets. This is a further complication when trying to determine a TW price that is acceptable to all.

Sustainability Certification Issues That Have to be Addressed When Selling WP and TW into the EU

The EU’s sustainability standards certification process is conducted through organizations such the Control Union (“CU”). The CU certification process addresses nine sustainability standards dealing with: green house gas generation; carbon stock sustainability; protecting biodiversity; protecting soil, water and air; and corporate responsibility. Sustainability standards certifications are issued US biomass suppliers by three independent organizations, SFI, ATFS and FSC. Only 23% of the US timberland harvest receives certification. In South Carolina, only 18% receives certification, as timberland owners are small and numerous and certification is costly. But EU wood pellet buyers are required to accept wood pellets from certified sustainable timberland sources. If certification is received, it is for round wood and it is expected that forestry wastes separately harvested and processed may not receive certification. Observation: This may become more of an issue with bio-coal (TW) producers than with white wood pellet producers.

Port Infrastructure Requirements For Shipping WP

Based on those who operate ports that are shipping WP or are planning to do so, they indicate that each port must be evaluated separately with respect to the upgrades needed. These upgrades will depend on: the biomaterial to be handled (green or dried wood chips, WP, TW); the mode of transport to the port (open trucks; containers; hopper cars; barges); the quayside storage to be used (open or covered reclaim stockpiles, open or covered barges); ship loading systems (gantry cranes with bucket loaders, conveyors, mid-stream barge to ship loading systems); as well types of vessels to be used and quantities to be loaded. Further, safety upgrades will most likely be needed to prevent fires and suppress dust.

The Transportation Value Chain

Estimates obtained from presenters at the Summit indicated that the cost of shipping WP from a US east coast pellet plant to one of the ARA ports was averaging $45/t but varied within a “2-Sigma” range from $33/t to $57/t. Obviously no data was presented for TW, but TW is expected to cost less/t than WP as it is denser material

Presentations made at the Summit indicated that WP shipping costs will more than likely increase in the future, not just because of expected increases in the cost of fuel and other ship operating costs, as other factors were cited. For instance, because there is expected to be a shortage of handy sized vessels, in the future, the freight rates are expected to rise even more.

The Economics of Exporting WP and TW To Users in the EU

Table 2 contains a summary of costs and prices for WP and TW when exported from the Southeast US to Northwestern Europe. As shown, when comparing TW to WP:
•    Ocean freight/ton is expected to be significantly lower for TW, due to its density.
•    D&A costs/ton are derived from capital expenditures made and are expected to be higher for a TW plant as they are proving to be more expensive to design, build and commission.
•    Conversely feedstock costs/ton should be lower when producing TW as wood wastes are mixed with pulp wood chips, whereas WP’s required he use of more expensive pulp wood chips.
In the prices shown at the bottom of Table 2:
•    The delivered price per ton for WP is the same as supplied from the economist at the Summit;
•    The TW price was taken from an independent source; and,
•    The “utility required threshold price” of fuel delivered to the power station of $8/GJ. This price was obtained from information supplied by EU utilities in a survey conducted by S&A in March 2012.

These data suggest that TW will be competitive to WP and to thermal coal.

Comparative Costs of WP, TW and Thermal Coal

Answers to The Three Questions

Where are WP and TW Headed?

The U.S. WP trade will continue to grow for at least 5 more years as the supply of wood chips appears adequate to support the biomass requirements of the WP plants that are expected to be operating in the Southeast US.

Further, the CO2 Tax situation in the EU and the ROC program in the UK are not expected to be dismantled any time soon, resulting in providing continued “price support” for WP users in the EU.

However, as TW begins to reach the market, its coal-like qualities will make it more desirable as a thermal coal substitute especially at those coal fired power stations that have not been modified to use WP and those cement plants that are still dependent on lignite and are not planning to use natural gas.

Commercial scale TW plants have yet to be commissioned in the US and only a limited amount of TW is projected to be available in five years.

However, based on the status of TW technology development, it appears that commissioning of 10 TW commercial scale TW plants in the South east US can easily happen in the next 5-years. TW produced from these 10 TW plants could easily reach 650,000 mt in 2017. If this proves to be the case, TW will only capture 11% of the EU WP market in Year 2017 (0.65/5.6).

TW appears to be able to compete with WP on cost and price. In addition, TW is expected to satisfy the EU utility fuel price threshold, which is currently estimated to be $8/GJ. Although plants that use WP may not be the best target market, those facilities that want to continue to use coal and co-fire with biofuel will look to TW, not WP for a variety of reasons.

Are they in a competition?

Not really. The best way to view these two fuels is that they are different enough to be viewed as two separate fuels. TW has an energy density that is higher than WP, making it cheaper to transport. Unlike WP, TW can be transported, ground and co-fired with coal without having to install separate systems. It can be co-fired with coal in greater proportions. TW is more hydrophobic than WP making it easier to handle and store. And with its high volatile content TW is a better “combustion accelerator” than is WP. But WP shares similar benefits with TW, as both are CO2 neutral and produce less ash and nitrogen than coal. But because WP is proven and available and major investments have already been made by utilities at a number of power stations in WP handling and storage facilities and in co-firing infrastructure, these investments are expected to help keep WP in the biofuels marketplace in the EU for many more years.

How will they share the market?

Projections shown in Table 1 suggest that TW has a lot of catching up to do. But catch up is inevitable even though Table 1 forecasts are based upon assumption-laden assessment.

It is still quite possible that commercial scale TW plant commissioning could be delayed, that investment in the TW will become harder to obtain, discouraging further development, and that the CO2 policies in the EU will be dismantled. If the obstacles facing TW developments are overcome and impediments to TW use do not materialize, it is possible that over time, TW will replace WP in the industrial biofuels market. But who knows.

To sum it all up and dispel the confusion, it appears that there is good case to conclude that TW has a market along side WP in the EU, as long as carbon taxes and penalties remain as significant.

For more information about the article and technologies reviewed, contact Tim Sklar here.