Pellets replace PKS when METI expands sustainability policy – FutureMetrics
In Japan, the Ministry of Economy, Trade, and Industry (METI) are said to be considering a sustainability requirement for palm kernel shells (PKS), as it will have other imported biomass fuels, used for energy under the feed-in tariff (FIT) scheme. In a new paper, US-based pellet industry consultants FutureMetrics LLC discusses the implications of a policy requiring PKS to meet sustainability criteria similar to what other jurisdictions place on industrial wood pellets.
The paper entitled “What Happens if Japan Requires Sustainability Credentials for Palm Kernel Shell (PKS)?” looks at the implications of a policy requiring PKS to meet sustainability criteria for existing and planned biomass power plant projects under the Japanese feed-in tariff (FIT) scheme.
While FutureMeterics stress that the Japanese Ministry of Economy, Trade, and Industry (METI) has yet to formally publish regulatory documents on specific sustainability, legality, and traceability requirements for palm kernel shells (PKS), it appears “very probable” that Japan is moving toward a more rigorous set of requirements on biomass fuel procurement.
Already largest PKS importer
Japan is already a major importer of palm kernel shells (PKS), a residual from the palm oil industry commonly used as a biomass fuel. In 2018 Japan imported 1.265 million tonnes of PKS, 75 percent of which came from the world’s largest palm oil producer, Indonesia. The balance was imported from Malaysia, the world’s second largest palm oil producer.
This compares to around 287 000 tonnes PKS imported in fiscal year 2014-2015 and discussions in 2016 that the 1 million tonnes per annum of PKS imports were an “unsustainable” level. Assuming METI promulgates the rules for the sustainability of imported biomass fuels, some portion of the current PKS imports is likely to become ineligible as fuel for Independent Power Producers (IPPs) who want to keep the FIT rate.
Given that most plants built to use PKS have “multi-fuel” capabilities thanks to employing circulating fluidised bed (CFB) boiler technologies, these IPPs can switch to other biomass fuels such as woodchips and/or wood pellets. FutureMetrics expects that Japanese IPPs will respond by increasing their use of industrial wood pellets despite the approximately 15 percent higher cost per MWh than PKS as IPPs seek alternative fuel to keep the rate of power generation from their power stations at the required level.
Increased import of wood pellets likely
At least in the near-term and medium-term, the FIT is sufficient to compensate for the higher cost of pellet fuel. FutureMetrics has calculated that in these early years of the FIT, there is enough buffer built into the rate to allow higher cost pellet fuel to substitute for PKS.
This is due to the way the FIT is crafted. With a fixed rate over 20 years, the FIT is very generous in the early years in order to provide a buffer between a fixed top line revenue and the inevitable increasing costs of fuel and plant operations that will occur over 20 years. In later years margins are expected to shrink due to cost increases (inflation) while the top line FIT revenue remains fixed.
Thus FutureMetrics expects that in the near to medium terms after METI requires sustainability certification for imported biomass-derived fuels unless there are exemptions for PKS, the demand for industrial wood pellets in Japan will increase significantly and quickly.
As FutureMetrics suggest, PKS imports will trend upward again after what is likely to be a rapid and relatively sudden drop when sustainability requirements are implemented. The PKS supply chain is highly fragmented with many independent smallholder farmers while at the same time, building trust in how future palm oil industry growth is managed will also take time – the current biofuels feedstock controversy with the European Union (EU) a case in point.