Way out West to the Far East
With 2017 well into its latter half, the year has already seen some seismic shifts and trade tremors in the wood pellet industry, in particular for industrial pellets. And with two major North American (NA) pellet industry events coming up, it is an opportune moment to take stock of where NA pellets may be shipping out to. Westwards to the Far East for sure.
While globally Europe is still the largest producer and consumer of wood pellets, looking ahead to the post-2020 period, it would seem that the majority of demand growth for industrial wood pellets is likely to come from the Far East – Japan and South Korea.
Notwithstanding the pellets for MGT’s Teeside project and possible future Drax conversions in the UK, DONG Energy’s final coal phase out in Denmark, Helen’s co-firing in Finland, RWE’s co-firing at Amer and Eemshaven power plants in the Netherlands and Bord na Móna’s possible US pellet plant plans for Ireland, these volumes are set to be eclipsed by the stream of dedicated biomass power and co-firing projects slated for Japan and South Korea, many of which will use imported wood pellets.
Biomass power players
CMT’s 8th Biomass Power conference in Tokyo last May was one recent occasion that provided a vivid portrayal of the state of play. The well-attended two-day conference with optional dinner and post-conference study tour was preceded by a workshop. Those that had also participated in the Asia workshop at Argus Biomass in London a few weeks prior would have heard some overlap in Tokyo yet here it was more vivid in context.
The hint of urgency, expressed by Japanese representatives at Argus as being ready to sign long-term pellet supply agreements, was more tangible in Tokyo – the end of September deadline is nigh after which the revised 20-year feed-in tariff (FIT) takes effect. For large-scale (>2MWe) biomass power projects based on imported biomass, the FIT drops JPY3/kWh.
As in Europe, both the South Korean and Japanese biomass power markets are policy driven markets and, although the policies and how the supply for those wood pellets is secured in each country are quite different, both policies result in creating a demand for industrial wood pellets as a replacement or as a co-firing fuel in power plants.
South Korean demand
According to figures bandied both in London and Tokyo, South Korea imported close to 2 million tonnes of pellets 2016 primarily from Vietnam. The numbers include 230 000 or so tonnes of so-called “woody bio SRF pellets”. Demand is set to rise significantly to 2020 as the renewable portfolio standard (RPS), a policy mechanism that mandates generating companies (genco’s) that have facilities with installed capacity >500 MWe to produce a minimum proportion of their power with ”new and renewable energy sources”, increases incrementally year-on-year. From 4 percent 2017 to 10 percent in 2024.
Other renewables along with domestic woodchips and pellets such as from SY Energy’s recently commissioned 300 000 tonne-per-annum plant will go some way towards helping South Korean genco’s meet RPS requirements.
However, according to Argus and other initiated industry observers, this translates into a potential wood pellet demand of between 7 to 8 million tonnes by 2020, given that genco’s have large pulverised coal (PC) assets and co-firing with pellets is the readily available option in the short-term to medium term. Combined, three new projects alone lend credibility to the numbers; KOEN’s full conversion of two units at its Yeongdong coal-fired plant, Kompio’s Gunsan and Hanyang-KNHP’s Gwangyang biomass power plants could, as Argus estimate, require 3.6 million tonnes of pellets in 2020 when all are scheduled to be online.
Five-years of FIT in Japan
As explained during Argus in London, four interlinked and long-term pieces of policy are pushing the Japanese power generators; the “best energy mix for 2030”, required minimum efficiency, carbon reduction and the FIT.
The latter ”Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities” (FIT Act), the only policy instrument that provides a monetary incentive, was passed in August 2011 and five-years have passed since its enactment in July 2012. It superceded the “Act on Special Measures Concerning New Energy Use by operators of electric utilities”, the RPS Act that was enacted in 2003.
According to a recent report, ”Feed-in Tariffs in Japan: Five Years of Achievements and Future Challenges” published by the Renewable Energy Institute (REI), the FIT has ”succeeded as a system to support the promotion of large deployment of renewable energy in the early stage” and that ”power generation cost has declined as well. In 2011, renewable power accounted for a 9 percent and by fiscal year (FY) 2016 this had increased to 15 percent, excluding waste and pumped hydro that had 3 percent and 1 percent respectively.
REI also point out that although the FIT surcharge has increased, the total unit cost, i.e. the cost of generating, transmitting, distributing, and selling of 1 kWh of electricity, has decreased highlighting that other factors apart from the FIT surcharge can significantly affect the unit cost of electricity. REI also note that high costs related to construction in Japan may hamper development and suggest that a ”detailed study is needed to examine whether there are unnecessary, excess regulations related to construction.” Furthermore, REI also advises that the revised FIT is implemented ”properly and strictly” in order to be effective in addressing the challenges in operating the system going forward.
A look at the installed renewable capacity under the five years of FIT compared to the five years prior illustrates the challenge; a 12-fold jump in solar PV capacity from 2.68 GW to 33.5 GW whereas installed bioenergy capacity increased from 0.52 GW to 0.85 GW. The total installed biomass capacity is currently pegged at 3.1 GW, and, according to a recent survey carried out by Nikkei Asian Review, this is set to increase by 1.7 GW to 4.8 GW installed capacity by 2023 with investment seen exceeding JPY 700 billion (≈US$6.42 billion).
Japan’s biomass import
There’s more. According to an analysis from the Japanese Ministry of Economy, Trade, and Industry (METI), the country is expected to demand about 1065 TWh’s of electricity in 2030 of which 23 percent is to be met with renewables. Within renewables, biomass is expected to have a 4.3 percent or 6.15 GW nameplate installed capacity.
In a recent brief of a coming market report by Dr William Strauss from US-headed international pellet industry consultancy, FutureMetrics LLC, Strauss points out that if 30 percent of the 6.15 GW’s i.e. 1.845 GW’s are generated using pellets then Japan will have an annual consumption demand of about 7.4 million tonnes from the PC plants co-firing at 10 percent as this the three policy (the “best energy mix for 2030”, required minimum efficiency, and carbon reduction) sweet spot. Just as for South Korea, there is ample “evidence” in the form of projects and project announcements that tally up.
Since the introduction of FIT in 2012, wood pellet consumption in Japan has grown rapidly albeit from a low level. Figures from the Ministry of Agriculture, Forestry and Fisheries (MAFF) show that domestic production 2015 was 120 000 tonnes. The industry is characterized by numerous small-scale (<3 000 tonnes per annum) plants. Pellet imports have grown from almost 70 000 tonnes in 2012 to just over 346 000 tonnes in 2016.
The lion’s share, throughout the period, has been from Canada that has increased supplies from 66 000 tonnes in 2012 to 261 000 tonnes in 2016. US supplies have essentially been non-existent, a few hundred tonnes each year though this is surely about to change.
Peak for PKS?
As highlighted during the CMT conference, Japan’s year-on-year import of palm kernel shells (PKS) over the same period has been more dramatic, from 26 000 tonnes in 2012 to over 761 000 tonnes in 2016. These are exclusively sourced from Indonesia and Malaysia respectively.
Whilst stakeholders right across the wood pellet industry value chain, from forest to furnace, have gone to considerable lengths to establish pellets as a commodity like product with standardised quality, contract and shipping specifications along with sustainability certification schemes, it would seem, judging from the presentations and discussions during the CMT conference that much remains to be done on the PKS value chain. Be that as it may, it is not unlikely that both countries will seek to utilise PKS themselves.
Nonetheless, just as Strauss and others conclude, there is an expected large and stable market in Japan that will bring about significant potential for healthy sustainable growth in industrial pellet production. Taken together with potential demand from South Korea, the two countries will soon eclipse Europe as the go-to destination for North American, and other, producers – Pinnacle’s decision to build pellet production in Alberta, Sumitomo’s majority stake in Pacific BioEnergy in addition to its Cosan Biomassa joint venture along with Enviva’s 650 000 tonne-per-annum off-take Memorandum of Understanding (MoU) with a major Japanese utility are all testament to that.
This article was first published in Bioenergy International no. 5-2017. Note that as a magazine subscriber you get access to the e-magazine and articles like this before the print edition reaches your desk!