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European Biomass Demand Continues to Grow Domestic Markets Face Uncertainty
Legislation and funding uncertainty loom over the domestic market while a boom in the European market soaks up North American supply. What is the future for both markets when it comes to wood pellets and biomass for energy?
By DeAnna Stephens Baker
Date Posted: 7/1/2013
Wood-based energy markets have seen significant growth over the past decade – a trend which is expected to continue, driven by renewable energy policy in the U.S. and abroad. However, unless some significant changes are made in Washington, foreign policies, which are currently larger market drivers than domestic policy, will continue to hold the place of the major cause of demand for U.S. woody biomass.
The North American wood pellet export industry has grown exponentially in a relatively short period of time with the export value increasing from an estimated $40 million in 2004 to almost $400 million in 2012, according to the Wood Resource Quarterly (WRQ). Most of these exports have gone to Europe where aggressive renewable energy policies in many countries are fueling the demand, pushing pellet prices close to, or at, record-high levels in all the major markets in the first quarter of 2013.
European Policies and Demand
Last yeat saw a record volume of 3.2 million tons of pellets exported from North America to Europe, according to the North American Wood Fiber Review. Much of this has been due to the European Union’s 20-20-20 targets of reducing greenhouse gas (GHG) emissions by 20%, increasing consumption of energy from renewable sources to 20%, and improving energy efficiency by 20% by 2020.
“One of the cheapest ways to go about meeting these targets was to take existing coal capacity and either co-fire with wood pellets or convert it to burn wood pellets,” said Seth Walker, an associate bioenergy economist at RISI.
However, the incentive to burn wood pellets has decreased over the past year in Europe due to a glut in carbon credits. This glut was caused by the emissions trading scheme that was set up in Europe prior to the recession. When overall energy usage dropped during the recession, the use of carbon credits did as well, creating an oversupply of credits.
“Within the past year or so, the carbon market absolutely tanked,” said Walker. “So right now the price of carbon is extremely low throughout Europe...and there isn’t a ton of incentive for most power companies to burn wood pellets right now.”
This does not mean that the demand from Europe is dropping off; but it may be shifting to the United Kingdom where analysts expect that the majority of future development will be centered. In July 2012 the UK released new rules for its renewables obligation certificates (ROC) which are issued to power generators for producing renewable energy, with different categories of generation receiving a different number of ROCs per megawatt hours generated. The 2012 rules are favorable to dedicated biomass power generation, awarding two ROCs for dedicated biomass electricity generation with combined heat and power and 1.5 ROCs for dedicated biomass electricity generation, but only 0.5 ROC for co-firing.
Several UK power plants have already been converted from coal to biomass and more are in the process of doing so, including Drax Power Station, the largest coal-fired power station in the country. Drax plans to transform itself into a predominantly biomass-fueled generator, initially converting three of its six generating units to run on biomass. The first unit came online in April and the next unit is scheduled for conversion next year. About 70% of U.S. pellet exports are already going to the UK and with almost all of the biomass used by large-scale power plants being imported due to a limited supply of domestic raw material, demand is expected to rise.
“Each of those facilities is a huge source of demand,” said Walker. “Drax would use about 7.5 billion tons of pellets, which is more than double the entire consumption for one U.S. power plant.”
Demand has already started to ramp up and is expected to increase quickly in the next five years, likely over one million tons annually. Many of the new biomass facilities that have been announced in western Europe will be coming online by 2016, after which demand will probably start leveling out.
“The question is what will be the level of attrition among those projects, given how the carbon trade pans out,” said William Perritt, executive editor of RISI’s Wood Biomass Market Report.
Unlike many European countries, the United States does not have a national renewable energy standard (RES). Congress has considered a RES in the past, but never gotten real traction on one. Many industry analysts expect that the United States will eventually pass a federal RES, but that it will not happen within the next few years due to the current political landscape.
At present, the inclusion of funding for the Biomass Crop Assistance Program (BCAP) in the farm bill is one of the biggest legislative issues that the biomass industry is watching. The farm bill is a bundle of legislation that Congress usually passes every five years to set national agriculture, nutrition, conservation and forestry policy. The last farm bill expired in December and a partial extension of several programs was passed as part of the fiscal cliff deal after the House failed to bring a five-year bill to the floor.
The Senate passed its version of the farm bill in early June, and as of press time the House had scheduled floor debate on its version. However, the two versions have significant funding differences. The Senate’s $955 billion bill calls for over $1 billion in mandatory funding of renewable and clean energy programs over 10 years, including $38 million annually to BCAP for five years as well as $26 million in annual mandatory funding and $30 million in annual discretionary funding for biomass research and development. In contrast, the House version eliminates mandatory funding and reauthorizes programs at reduced discretionary funding levels. It completely eliminates BCAP’s collection, harvest, storage, and transportation (CHST) payments – a move the agriculture committee said was done to prioritize funding for the establishment of dedicated energy crops. Many in the biomass industry prefer the Senate version due to the mandatory BCAP funding. However, other industry groups, such as the American Forest & Paper Association (AF&PA), oppose mandated funding, preferring the discretionary funding of the House bill.
“AF&PA believes that the free market should determine the highest and best use of biomass,” said Donna Harman, president and chief executive officer.
Reconciling these differences could cause a delay in final passage of a farm bill. However, with the temporary program extensions set to expire in September, there is a lot of pressure for Congress to pass a five year farm bill, and it is expected to be completed by the end of summer. The leaders from the Senate agricultural committee may be in a good position when it comes to negotiating a compromise of the two versions, due to the passage of their version with a filibuster proof majority.
Members of the biomass industry are also continuing to lobby for the biomass sector to receive tax parity with other types of renewable energy. In 2009, under the American Recovery and Reinvestment Act, wood-fired biomass power plants were given only half the production tax credit that other renewable energy sources received and for only five years - half the time period that the other sources were given. According to the Biomass Thermal Energy Council (BTEC), there are currently about 80 different energy-related tax provisions in federal law.
“Unfortunately, none of these incentives extends to high efficiency biomass thermal energy, despite the fact that biomass thermal energy fulfills all the same public policy objectives as other renewable energy sources, and despite the fact that the Internal Revenue Code recognizes other thermal technologies such as solar and geothermal,” said Joseph Seymor, executive director of BTEC in a letter to the Energy Tax Reform Working Group. “The end result is an unlevel energy landscape that promotes certain technologies over others, both limiting consumers’ energy choices and their ability to utilize local fuels from landowners and farmers.”
Not only does this disparity in tax incentives put biomass at a competitive disadvantage compared to other types of renewable energy, but it can also discourage development in an industry that already has tight profit margins. The effort has received some attention recently from both President Obama’s budget proposal and a piece of Senate legislation.
In his proposed 2014 fiscal year budget, President Obama included a permanent extension of the production tax credit for renewable energy sources. The credit is currently scheduled to expire at the end of the year. If a permanent extension is passed, it could go a long way toward helping new biomass facilities secure needed investments for construction by providing the stability and continuity that would help attract private investment.
The Biomass Thermal Utilization Act of 2013 would amend the federal tax code to incentivize biomass energy, as it already does for several other forms of renewable energy. Currently, a number of renewable energy technologies qualify for investment tax credits for capital costs incurred in residential and commercial installations. This legislation seeks to achieve equal treatment between those renewable systems and thermal biomass systems. One provision of the bill would include high-efficiency biomass heating technology in the 30% residential renewable energy investment tax credit. The second provision is a tiered tax credit for 15% or 30% of the installed cost of biomass-fueled heating systems for commercial or industrial applications. Because biomass thermal technologies have comparatively high up front capital costs, these investment credits can help overcome the investment hurdle and help build the market.
A close eye is also being kept on the Environmental Protection Agency’s (EPA) progress on the decision of whether or not to require GHG permits for biomass-fired sources under the Clean Air Act’s Prevention of Significant Discharge (PSD) Tailoring rule. Currently, EPA has no standards for the regulation of GHG emissions from biomass-to-electricity facilities. However, that could change when EPA makes the decision that it deferred in 2011 for up to three years to provide time to study the science and policy of regulating biomass emissions and determine whether a Clean Air Act permit is required. A decision is expected soon and the outcome of the decision could have a significant impact on the biomass industry.
“The prudent course for EPA to take, and one with real potential for climate change mitigation, is to pursue amendments to the Tailoring Rule that incorporate the carbon benefits of forest bioenergy in the broadest and simplest terms,” said Dave Tenney, president and chief executive officer of the National Alliance of Forest Owners (NAFO).
Wood-based energy has had a difficult time being accepted as a renewable energy option in the United States largely due to the aggressive campaigns that have been mounted against it by many environmental and competing industry groups.
“There’s a dilemma in people’s minds about using wood-based energy,” said Dr. Burton English, professor of agricultural economics at the University of Tennessee. “The demand for energy is so large that we could do this wrong and hurt the environment and people are afraid of that. So we’ve been spending a great deal of effort to make sure that the systems we plan for are indeed sustainable. And that’s the key: bioenergy is bearing a cross that other fuels don’t have on them.”
That burden is made worse by policies and regulations that create uncertainty for the entire biomass supply chain. And until that uncertainty is dealt with, it will continue to inhibit the growth of domestic demand.
“We’ve seen what happens in the last three or four years when uncertainty is there,” said English. “We have uncertainty in policy; we have uncertainty in fuel prices; we have uncertainty in the whole area of energy and we need some policies that reduce that uncertainty.”
Wood Pellet Logistics Expand
The rising and expected demand from Europe for wood pellets is driving developments in infrastructure and logistics – especially in the Southeast United States where a number of new pellet plants and port facilities are currently in various building and planning stages.
“Investment in pellet mills and port infrastructure is in the tens to hundreds of millions of dollars,” said Pete Madden, vice president of renewable energy and supply chain at Plum Creek.
According to Madden, states are actively trying to attract that investment capital with a variety of incentives for companies that locate their mills in their states, along with investments in the port infrastructure.
“There currently are only a handful of U.S. ports that are capable of handling wood pellets,” said Madden. “These ports require pellet storage and handling facilities that are capable of keeping the pellets dry with fire protection and dust abatement systems. This infrastructure will take time to develop along with the added complexity of keeping the ports properly dredged (if necessary).”
Some of the most recently announced pellet-related port projects include:
• the Port of Wilmington’s agreement with Enviva for a $35 million wood-pellet storage and shipping facility;
• a potential agreement between International WoodFuels and the Port of Morehead City for a project costing up to $15 million to build pellet storage domes and update an existing rail unloading station;
• the $28 million to $30 million facility ($10 million is being funded by the state of Mississippi) being built at the Port of Pascagoula that will include a system, storage silos and a ship loader for receiving and shipping wood pellets;
• a plan by Drax Biomass plans to build a port-side storage and loading facility, capable of accommodating delivery of pellets by rail and truck, at the Port of Greater Baton Rouge, with the capacity to store approximately 80,000 metric tons of biomass pellets.
The planned biomass production facilities in the region are even more numerous. Some of the most notable ones include the facilities planned by European countries. German Pellets is planning a 500,000 metric ton pellet manufacturing plant in Woodville, Tx. and a 1 million metric ton plant in Urania, La. Drax Biomass also has plans for two pellet manufacturing facilities – one each in Gloster, Miss. and Morehouse Parish, La. Full operations at both are expected to start next year with a combined capacity to produce 900,000 metric tons of biomass pellets.
Even with the planned port facilities, the planned pellet capacity is growing faster than the port capacity, which could make port infrastructure an even larger problem for pellet exporters in the near term. But with new facilities being announced often, the logistical efficiency of the industry could increase.
“Without additional port capacity (some of which is planned) pellet capacity announcements in the south could outstrip port capacity development, exacerbating the problem,” said Madden. “The industrial pellet industry is still emerging and one could expect as other projects come online the costs of supplying pellets in the global marketplace should trend lower as supply chain efficiencies increase.”