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Biomass Economics 101: Opportunities and Challenges
Biomass Economics: A forestry policy expert discusses the opportunities and challenges of using woody biomass as well as the economic and policy factors that can encourage or discourage its use.

By Jay O’Laughlin
Date Posted: 8/1/2012

                The utilization of woody biomass for a variety of products, including energy, has heightened in recent years. The range of economic and policy factors that can encourage or discourage the use of woody biomass create challenges as well as opportunities to use low-value wood resources. This article provides an overview of the conditions and considerations that shape wood biomass-to-energy (bioenergy) markets.

                Biomass, in the broad sense, is any organic material that comes from plants or animals. This article focuses on forest biomass residues (i.e., logging slash and small-diameter trees thinned to improve forest conditions) and to a lesser degree mill residues. Although biomass can be used for a variety of products, energy has drawn the most interest. The unique thing about biomass is that it can be used to create any of the three major uses of energy:

  • Heat, (biomass thermal)

  • Transportation fuel, (biofuel)

  • Electricity, (biopower)

                Other renewable resources lack this feature. Many wood bioenergy facilities produce combined heat and power (CHP or co-generation). Producing liquid transportation fuels from woody biomass is more difficult than grain ethanol because of the chemical structure of wood. This can be done in the laboratory but has not yet been scaled for commercial application.

 

Challenges

                Forests supply wood biomass, which is defined differently in various government agency reports and public policies. Since 2004, 14 different definitions of biomass have been promulgated in federal laws and several others in the tax code. Too many definitions create marketplace confusion and, according to the Society of American Foresters (SAF), conflicting definitions in federal energy policies hinder policy implementation and the development of biomass markets. An example of this is the restrictive definition of renewable biomass in the Energy Independence and Security Act of 2007 (EISA), which limits biomass that can qualify to meet the advanced biofuels renewable fuel standard (RFS) mandate. Biomass from all federal lands and any non-plantation forests is disqualified, meaning only biomass from tree plantations qualifies. The biomass definition in the 2008 Farm Bill did not have these exclusions. The National Alliance of Forest Owners (NAFO), which represents the largest forest industry land-owning companies in the country, reported on the difference between the EISA and Farm Bill definitions. Nationwide, the EISA limits the forests that qualify for the RFS to only 15% of the forest area that would be available for biomass programs under the Farm Bill. In Idaho, for example, only 49,000 acres of the state’s 17 million acres of timberland would qualify as a source of renewable biomass under EISA; in Colorado, not a single acre would qualify. The SAF believes wrapping all the different federal definitions of renewable biomass into one universal definition would help promote the development of sustainable energy resources. The American Council on Renewable Energy (ACORE) offers such a definition.

                Definitions aside, who wants woody biomass? Facilities that manufacture lumber and wood products want the most valuable product of a timber harvest – the wood in the bole or trunk of a tree. But who wants the tops, branches, logging slash and pre-commercial thinnings? And can we turn the slash and trash into cash? The short answer: not likely. Let’s explore the challenges and opportunities to find out.

                In many places, landowners are required by law to reduce fire hazards by removing the fine fuels after a timber harvest. The most economical method is to pile and burn it. This “waste wood” is a potential energy resource, and if a market exists landowners can avoid the cash outlays and environmental impacts associated with slash burning. However, there are some economic challenges that get in the way of doing that, specifically transportation costs.

 

Opportunities

                The key to making wood bioenergy work is a reasonable hauling distance from forest to a conversion facility – 50 miles or less. The closer a forest is to a facility that uses wood to produce energy, the more likely it is that the forest biomass will have cash value.

                In the electric power sector, several stand-alone, wood-fired biopower plants are currently in the planning stages, comparable to those built in the 1980s but with more efficient technology. Although opportunities may arise in several parts of the country, northern California has been the leading region for stand-alone wood biopower production. A cautionary note is that half of the facilities operating there during the 1980s and 1990s have closed as energy economics and state subsidy policies have changed.

                Lumber mills are the most likely sites for installation of wood bioenergy capacity. A sawmill will be interested in forest biomass if it is making biopower in addition to boards. Mills use sawmill trimmings to heat buildings and dry kilns. Some mills also burn surplus residues to generate electricity. Public buildings that burn wood for thermal or heat energy are also a possibility. More than a dozen school buildings in Idaho and Montana have converted to burning wood, using subsidies from the U.S. Forest Service “Fuels for Schools” program. But keep in mind that public schools operate seasonally, and few will consume much more than 1,000 dry tons per year. The University of Idaho, for example, heats its campus with residues from local sawmills, and since the 1980s has been consuming 20,000 dry tons per year. By comparison, electricity generation takes considerably more wood, roughly 10,000 dry tons per megawatt of electricity, enough for about 1,000 homes. Economies of scale for stand-alone wood biopower production are in the range of 15 to 20 megawatts.

 

Costs

                Recently, several lumber mills announced plans for new co-generation facilities, but projects were put on hold for two reasons. First, in 2007 the lumber market collapsed along with the housing market. Second, there was a sharp decline in the price of natural gas. Why use wood to heat a building or make electricity when it is cheaper to use gas?

                How much is forest biomass worth? Not much. The price for forest biomass is generally negative because it often costs more to collect, harvest, and transport it to a biomass conversion facility than the value of the energy that can be made from it. Based on an analysis done for the Idaho Strategic Energy Alliance, electricity costs $0.10/kWh or more to produce from forest biomass. By comparison, the retail price for electricity in Idaho is $0.09/kWh or less. The exception to this is if mill residues are being used, which lowers production costs to about $0.05/kWh. This price varies between regions, with Idaho enjoying one the nation’s lowest electricity rates because the state uses a lot of hydropower, which costs about $0.03/kWh to produce, and electricity from burning coal which is about a penny more.

                The key is that transportation costs are the driving factor in costs. If there is a biomass conversion facility within 50 miles of a forest site someone may be willing to collect and transport forest biomass. The general rule of thumb is that once you get beyond 50 miles, the biomass cannot pay its way out of the woods. Up to that point you can make some money, given the following assumptions:

  • Delivered price: $19/green ton (or $38/dry ton)

  • Trucking costs: $80/hour

  • Harvesting costs: $2/hour

                As Graph 1 shows, the farther biomass is transported, the less profit it can earn. Of course, it is possible for this range to be extended somewhat by state and federal subsidy payments.

 

Material and Markets

                The biomass market is well established in some areas, but still developing in others. Consequently, the amount of material needed to enter a market varies by region. For example, states in the Northwest have varying degrees of slash disposal requirements, requiring landowners to get rid of branches, tops, and other debris considered a fire hazard after a timber harvest. Biomass collection therefore should be viewed more as a waste disposal service than a money-making opportunity in this region. If a landowner has enough biomass to make it worthwhile to collect, it could be easy to convince him to let you acquire it for little to nothing. However, it is important to keep in mind that there are soil productivity tradeoffs that must be considered. Some biomass has to be left on-site for soil productivity, which will limit how much biomass can be removed. For this reason, loggers, foresters and landowners must work together with buyers to figure out what is reasonable for all involved.

 

Government Incentives

                Biomass is our largest source of renewable energy, and capturing the energy stored in biomass is a back-to-the-future strategy. Before petroleum came online in the late 19th century – followed by coal and natural gas, which are also fossilized biomass – wood was our primary source of energy. Today converting biomass to liquid fuels provides 2% of our energy needs, mostly for corn ethanol as a gasoline additive. Wood-burning also provides 2% of the U.S. total energy consumption. Sawmill and pulpmill residues provide about 80% of all wood bioenergy, with much of the remainder from residential heating, primarily in the Northeast, making biomass our largest source of renewable energy (see Graph 2).

                Although we know how to use wood to produce energy and have been doing it for a long time, our government does not do much to encourage forest biomass markets. One exception was the Biomass Crop Assistance Program (BCAP) featured in the 2008 Farm Bill. In less than one year BCAP expended more than $225 million in “matching payments” to move biomass to energy production facilities. The program was suspended because it distorted markets for higher-valued panel products made from sawmill residues. The BCAP rules were recently rewritten to eliminate this problem, but it remains to be seen if the Farm Bill reauthorization in 2012 will include BCAP matching payments. Even if it does, Congress would need to appropriate funds for it. Although the states of Oregon and Washington provide payments of $5/green ton for transporting biomass to energy production facilities, other states have not yet followed suit. 

                Currently, there are more barriers than opportunities for additional energy production from woody biomass, with coal-fired electricity and natural gas still relatively inexpensive by comparison. For this reason, woody bioenergy will likely continue to function mostly as a byproduct of value-added wood use and new opportunities for utilization of forest biomass will depend on government subsidy programs to encourage the construction of new facilities as well as reducing collection and transportation costs.

                However, using forest biomass for energy production provides additional benefits to society from improved forest conditions, reduced wildfire risk, and from the jobs necessary to move this material from the woods to a biomass conversion facility. This “triple win” from forest biomass utilization – improved forest conditions, energy feedstocks, and jobs – creates a rationale for state and federal subsidy programs.

                Editor’s Note: Jay O’Laughlin is a professor of forestry and policy sciences at the University of Idaho, chair of the Forestry/Biomass Task Force for the Idaho Strategic Energy Alliance, and provides leadership on biomass utilization issues for the Western Governors’ Association Forest Health Advisory Committee.








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