The new shape of the original renewable fuel: wood
Posted on 30 July 2009
The wood pellet is coming back. The recent trend in the export of pellets from North America to Europe to meet EU rules has spurred plans to build a series of large scale pellet producing plants across the US South. Europe’s RPS rules require 21% of electricity generation and 20% heat to come from renewables by 2020.
The European market for wood pellets is already 8 million tons in 2008, driven mainly by residential and commercial heating. It is scheduled to grow to 13 million tons in 2010 (as the WSJ reported) or 63%. Europe can internally supply 6 million tons of that demand, leaving the rest open to imports. Traditionally, Canada and the US have filled the gap with their roughly 1.2m tons of small-scale capacity each. Now, a renewed push for RPS in Europe stands to spur another demand boom, and given the limits on fiber on the Continent, one that would favor the US.
Fad or Sustainable Trend? Both. Subsidy, which is what the RPS is, can have long lasting effects on demand. While substituting wood for fossils may not be economically compelling, using wood for renewables, particularly for those with existing coal-fired capacity, would be a cheap way to meet RPS. So as long as RPS is enforced, wood can fill the lowest cost option for many looking to meet the standard.
This hints at a second big driver for pellet demand: Utilities in the US South. With a national RPS in the US a likely product of Waxman-Markey, a provision that allowed for wood fired electricity would be big for southern produced pellets. Southern states have been clear in their opposition to RPS based on their perceived lack of renewable energy sources from which to supplement fossil driven generation. Alabama, for example, has little viable wind, solar or geothermal potential. But it does have trees, and a powerful lobby of timberland owners. The US south – an historically cheap fiber basket of predominantly Southern Yellow Pine – could not only meet growing European demand but would have the lowest cost delivered prices for local utilities scrambling to meet their 20% renewable requirements.
Who wins? We’d argue that the highest return on wood fiber goes back to the timberland owner and not at the manufacturing level. For the pellet producer, a host of risk awaits. First, the price of substitutes, namely gas, will set the price for pellets while the demand for lumber and paper will set wood prices at the raw material level.
As we’ve seen with ethanol, when raw material prices are a significant cost component but are delinked from end product selling prices the cycle usually brings a period of negative spreads. Right now, lumber demand is dismal and the pulp & paper sector is shrinking. Cheap residuals may not be abundant but because of these factors, competition for standing timber is low. Prices are cheap, but given the cyclicality of the forest products end markets, that situation won’t last. Unlike current plants in the South with annual capacity of 25 thousand tons, these new plants coming online at 250 to 500 thousand tons will be large competitors for wood, ultimately driving up prices, and stumpage.
1 Response to The new shape of the original renewable fuel: wood
see guys, I told you all we have to do is plant alot more trees?Wooden pellets???