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What’s Happening in the Wood Energy Market?
Many believe that the wood energy market is just getting started. But what sectors are the most promising? And what factors could affect future demand?
By DeAnna Stephens Baker
Date Posted: 8/1/2012
The demand for renewable energy is here to stay and wood-based energy’s share of the market is only expected to increase. Wood energy offers the United States energy security due to its potential for local energy generation and reduced dependence on foreign energy sources. Because of this potential, many believe that the wood energy industry is just getting started.
According to RISI’s North American Bioenergy 5-Year Forecast, the capacity of the bioenergy industry is expected to more than double in the next five years, creating tremendous demand growth for wood biomass, intensifying competition for fiber and changing the playing field for wood biomass supply.
In Europe, wood has been confirmed as the primary source of renewable energy from as early as 2009, when it accounted for 3% of the total primary energy supply and 47% of the renewable energy supply (RES), according to the United Nations Economic Commission for Europe. The Nordic countries especially have tapped into this source of renewable energy, with both Sweden and Finland already supplying close to 20% of their total primary energy supply with wood energy. Based on these numbers, the United States is lagging behind, at around 2%. But there are many who are working to change that.
The potential includes all forms of woody biomass, but as of now, the amount ranges significantly between the different forms as well as geographical locations. Out of the different energy sectors, biofuel is currently receiving the most attention in the country, but it is not the biggest. Though it is a promising market – especially in financial terms - it is still in need of a lot of research and development. As Graph 1 shows, of the three bioenergy markets, biofuels currently has the lowest fiber consumption rate and is expected to see the smallest increase over the next five years. Using wood to produce electricity and heat is being done now on a commercial scale. But an economical way of producing fuel from wood has not yet been developed. This means that it is not yet a big market driver, but it could become one, according to William Perritt, executive editor of RISI’s Wood Biomass Market Report.
“In the future it could become a significant driver, especially when you look at oil playing around the $100 a barrel mark, and there being a lot of excitement about getting biofuels into the stream and getting us off of foreign oil,” Perritt said. “It could be a big market.”
Biofuels also have the benefit of large amounts of funding right now, from both private investors who are expecting a big payback and governments that are pouring research and development money into promising renewable energy sources.
Examples of recent federal government funding for biofuels include military research into jet fuel, a $40 million grant from the Department of Agriculture (USDA) to help the Northwest Advanced Renewables Alliance (NARA) research develop a viable aviation fuel industry using wood and wood waste, and the USDA, Department of Energy and the U.S. Navy announced over $130 million in new funding opportunities for the development of drop-in biofuels.
“The federal government is very big on putting funding into that technology because it is politically popular. It causes a lot of excitement in Washington when you say ‘We can squeeze gasoline out of a tree.’ That really gets attention,” said Perritt. “Wood fired power is an old technology. It’s been around for decades. Before we got into the whole biomass hype back in 2006 or 2007, it was already the largest source of renewable energy in this country. When the buzz dies down on this thing, it will still be the largest source of renewable energy. But it’s not a technology that gets people very excited, at least on the regulatory side.”
Despite all the hype currently surrounding biofuels, the biggest increase is expected to be in the wood pellet sector, which remains the most promising opportunity for wood energy – both domestically and for exports. According to Dr. Bill Strauss, president of FutureMetrics, a bioenergy consultancy and chief economist for the Biomass Thermal Energy Council, biomass thermal yields the most efficient use of biomass by far.
“Pellet fueled boilers get 85% to 95% efficiency,” he said. “That compares to maybe 30% from a biomass to power plant. Biofuel is as yet not commercially proven or the energy balance (net energy out given energy to produce) is poor. The best use of this wonderful ‘solar battery’ is direct thermal conversion.”
Domestically, residential use of pellet boilers is probably going to be the biggest driver, particularly in regions where the gap between natural gas availability and heating oil dependence is the greatest, according to Strauss.
“The natural domestic growth areas are where it is cold and there are lot of trees and a thriving forest products industry,” said Strauss. “There are more than 9 million homes in the Northeast that use heating oil but do not have natural gas and most will never have natural gas due to the rural demographics. Pellet fuel is half the cost of heating oil so the market is there.
But what’s seeing the most action and expected to be the main driver of the pellet sector in the coming years is exports. Thanks to renewable energy mandates throughout Europe, the already established European biomass market is poised for a dramatic growth spurt – and the accompanying growth in wood demand.
“Looking through 2015 or 2016 all of the biomass power projects that have been announced in Europe could bump up demand for wood biomass, on a green ton basis, by as much as 80 million tons a year,” Perritt said. “Most of that is going to come in the form of pellets. So it would be about maybe 40 million tons of wood pellets.”
With so much demand on the horizon, the Southern United States is in the best position to benefit, according to many industry watchers, due to its port facilities and shorter shipping distances than other regions that have enough supply, strong wood supply, and currently the most affordable wood prices in North America for roundwood. There is currently a lot of activity going on in the region, in terms of new pellet mills and increasing capacity. According to Forisk Consulting’s wood bioenergy research, though the South has fewer announced and operating wood bioenergy projects than the North, the projected total wood use of the southern projects is significantly higher than in the North – 62.8 million green tons per year, versus 41.6 million green tons by 2020. When analyzed through Forisk’s viability screens, the South is still expected to annually use 33.2 million green tons compared to 26.3 million green tons in the North. That is an additional 18.5 million tons of wood per year in the South over the next decade, but only 9.7 million additional tons in the North.
The rising demand for wood pellets has pulp mills in the region concerned about competition for wood fiber. Some analysts do not see this as too much of a problem for pulp mills, as they can afford to pay more for fiber than pellet mills. However, the new pellet mills might be able to gain an advantage by trying new procurement practices, according to a recent article in RISI’s Wood Biomass Market Report. “Long avoided by pulp and paper, new elements being rolled out among pellet players include guaranteed, long-term volume orders to loggers and timber owners, as well as binding commitments sufficient for bankrolling efficient but expensive harvesting crews,” wrote Chris Lyddan, timber director at RISI.
“These pellet mills are not like the conventional, domestic premium grade pellet mills that produce material that goes into stoves in people’s homes,” Perritt said. “Those consume shavings, sawdust and chips – clean, dry material that comes out of sawmills. Whereas the export pellet mills of the South are large capacity and they’re just taking in pulpwood.”
Additionally, there are several large OSB mills in the South that were idled following the housing market crash. Perritt believes these facilities will be started back up again as the housing market recovers. OSB prices are already beginning to stabilize, and other OSB mills are already starting to add additional shifts, he said. These OSB plants are vying for the same pulpwood that pulp mills and export pellet facilities are.
The biomass market is still very subsidy driven due to certain challenges, such as the lack of an established supply chain, slow moving legislation and opposition from other industries.
“One of the problems we have in the United States, is we have 16 different definitions of biomass,” said Bill Holmberg, biomass coordinator for the American Council On Renewable
Energy (ACORE). “So if someone wants to stop a biomass project, they can basically go into the regulations and find a reason to stop it, or they can take it to court, or they can prolong the permitting process for an amount of time that makes the project uneconomically viable.”
ACORE is currently working to have Congress adopt a single, universal definition of biomass to eliminate the current competing definitions, which it believes hinder progress in scaling up the biomass industry. But some point out that domestic policy is not going to change very quickly, especially since it is an election year. Perritt said he expects that state standards will drive localized demand, but that the biggest driver in the next several years will be foreign policy.
“As far as policy drivers are concerned, they’re not domestic. It’s European. And that’s what’s making things tick for the southern industrial pellet companies,” explained Perritt.
Unfortunately, these problems make it hard for small or start-up companies to make it in the biomass market. Cory Schrock, plant manager at Fiber By-Products, Corp., a pellet producer said that he has seen many small players jumping into the biomass industry over the past several years, with an especially high glut of new companies in the last year to year and a half. However, due to the difficulties involved with being in the market, such as new regulations and costs, he believes that many of them will soon be gone.
“Because of the cost to produce and the regulations that are coming, I don’t think the small players will be able to play much longer,” said Schrock.