By R. Bruce Striegler
The theme that emerged from the Wood Pellet Association of Canada’s (WPAC) November 2013 conference and annual meeting in Vancouver was that the future of the industry looks strong, but will require sustainable fibre supply to remain viable and to continue its current extraordinary growth. WPAC Executive Director, Gord Murray, who has long advocated the creation of a long-term plan for sustainable fibre resources in B.C., said during his opening presentation, “We must establish fibre security for the wood pellet sector in this province, and that will be the number one priority of WPAC in the upcoming year.” Earlier in 2013, WPAC released a position paper outlining the historical growth and significance of B.C.’s wood pellet sector, detailing the changes needed to B.C.’s fibre allocation, if the sector is to remain competitive. The paper points out that the province’s “hands-off approach” to bioenergy fibre supply has hindered investment in pellet capacity, sending that investment to the southeast U.S. instead.
British Columbia accounts for about 65 per cent of Canadian capacity and production, while Alberta, Quebec, New Brunswick, Nova Scotia, and Newfoundland collectively account for 35 per cent. As of 2012, Canada had 42 pellet plants with annual capacity of three million tonnes. The operations in B.C. tend to be larger than those in Eastern Canada, with B.C. plants each producing about 150,000 tonnes, and two new facilities are being built with annual capacity of 400,000 tonnes. Eastern pellet plants tend to be smaller, based on available fibre supply and different markets. Most have about 50,000 tonnes capacity, while the two largest eastern plants produce 100,000 tonnes annually. New pellet facilities may be developed, including a new 50,000 tonne mill constructed in 2010 by Holson Forest Products of Roddickton-Bide Arm, Newfoundland. While the company has expressed its intention to export pellets, it has not apparently done so yet for various reasons, including inadequate export dock facilities.
In May 2013, U.S.-based Rentech Inc. acquired Georgia-based Fulghum Fibres, Inc. (a contract wood chipping company), and two decommissioned fibre mills in Ontario (Wawa and Atikokan), for conversion to produce wood pellets. Not long after, Rentech announced an off-take agreement with U.K. utility Drax Biomass, which will result in new investment in ports to increase pellet-loading capacity, and in rail transportation, along with the construction and operation of the two pellet facilities themselves.
Pellet exports from North America to Europe continued to rise during the second quarter of 2013, representing a steady growth over seven quarters, according to data compiled by Wood Resources International LLC and reported in the North American Wood Fiber Review. Volumes exported to Europe have more than doubled, from just over 500,000 tonnes in the third quarter of 2011 to over 1.1 million tonnes at the end of the second quarter of 2013. Steady growth of wood pellet shipments from Canada and the U.S. are in response to increased demand from European Union (EU) countries, driven by the 2009 Renewable Energy Directive which requires member countries reduce greenhouse gas emissions by 20 per cent, produce 20 per cent of total energy from renewables and decrease energy consumption by 20 per cent. Wood pellets are considered carbon neutral since they are manufactured from sustainably harvested wood waste and emit less carbon than a decomposing tree. Various streams of waste wood are processed into pellets that are uniform in size, shape, moisture, density and energy content.
Wood pellets have rapidly gained acceptance for widespread industrial use while rising pellet demand as home-heating fuel both in Europe and North America are opening new market potentials. In order to tap this potential, producers have had to meet a range of product quality standards and environmental specifications, developed first across Europe. The European sustainability requirements drove both Canada and the U.S. to adopt similarly stringent measures covering wood source and type, harvesting methods, as well as production and quality control issues.
United Kingdom’s largest power plant converts to biomass
Wood pellets and solid biomass have emerged as a critical fuel to meet the 2009 Renewable Energy Directive targets, being fired as he primary fuel in a utility that has been converted to operate on wood pellets or other solid biomass, or through co-firing with coal in existing coal-fired generating stations. Several U.K. power plants have already been converted from coal to biomass and more are in the process of doing so, including Drax Power Station, the largest coal-fired power station in the country. Built in stages but completed in 1986, it was the newest and most efficient coal-fired power station in the UK, with a total capacity of just under 4,000 megawatts.
In 1988, Drax became the first power station to invest in the retrofit of flue gas desulphurization equipment, making it the cleanest coal-fired power station in the UK. The biomass conversion will ultimately see three of the six power station’s generating units converted to burn sustainable biomass in place of coal. The first unit has been running successfully on sustainable biomass since the beginning of April, 2013 with the second planned for next year and the third in 2016. Each converted unit will provide enough renewable electricity to meet needs of over one million homes and as the conversions are completed, are expected to require 7.5 million short tonnes a year by 2016.
Drax’s Vice-President Sustainability, Richard Peberdy, told conference delegates that when the company began testing biomass in 2008, it realized that sustainability of supply was going to be critical. Total North American pellet production is currently between five and six million tonnes per year, creating a capacity gap of 22 million tonnes to be filled in the next six years. “We’re aware of the supply gap and the difficulty of establishing supply fast enough to maintain our needs, so we’re building two plants in the U.S.” He also noted that compelling evidence from real data (as opposed to modelling) shows genuine and growing carbon savings from biomass use in power generation.
The company’s move in large power plant conversion from coal to biomass in Selby, England, has made news across North America. In the spring of 2013, Drax Biomass International Inc., a U.S.-based subsidiary of Drax Power, announced that it will develop, construct and manage two pellet plants, as well as a port storage and loading facility clustered along the Gulf Coast in Louisiana and Mississippi. Drax Biomass has located its port-side storage and loading facility on property leased from the Port of Greater Baton Rouge, and will have the capacity to store about 80,000 metric tonnes of biomass pellets. The facility will be designed to accommodate delivery of pellets by rail and truck, and is expected to be operational later this year.
Assessing pellet global supply and demand
Arnold Dale Vice-President Biomass, Ekman & Co. headquartered in Gothenburg, Sweden put the supply and demand issue succinctly, saying “The demand will be in countries with no forests. The supply will be from countries with forests.” Ekman is one of the world´s leading sales and marketing organizations focusing on the global forest industry. Mr. Dale added that it was only in 2008 that Ekman began trading in wood pellets. He identified the world’s three largest supply countries beginning with Russia at 7,762,602 square kilometres of forest, Canada with 3,101,340 km2 and the U.S. at 3,030,890 km2. In 2012, Russian pellet exports to the EU were 900 tonnes, Canada exported 1,600,000 tonnes and America came in at 1,900,000 tonnes. Ekman & Co. are the sales agents for the Scotia Atlantic wood pellet plant in Canada as well exclusive agents for Russia’s Vyborgskaya, which is “physically the largest pellet plant in the world, with a design capacity of 900,000 tonnes, but not the largest producer in the world, since it is running at less than half capacity,” says Dale. The plant is located about 25km from Port of Vyborg, 130 km northwest of St. Petersburg, and underscores the relationship between pellet production and the need for affordable transportation access. Dale noted that Vyborgskaya owns and operates eight river vessels to transport up to 50 per cent of the raw material it requires. A purpose-built port is under construction which will set new standards for wood pellet exports, and will have the ability to load and discharge up to five vessels simultaneously.
Turning to Asian markets, Dale says that demand in Japan and South Korea is expected to grow, with Japan developing substantial demand, although he noted that both countries are characterized by a high level of political uncertainty as Japan’s nuclear policy continues to be debated. “Supply will most likely come from within the Asian-Pacific region with Far East Russia being the most attractive source, at least from an economic point of view.” He suggested only weak interactions with the Atlantic basin, “But we do expect a separate Asian-Pacific market to develop over the next few years.” Russia accounts for over 20 per cent of the world forests but its share in the world forest products trade is below 4 per cent, semi-processed round wood and sawn wood make up over 54 per cent of its exported wood products. With forests occupying over half the land, the share of the forest sector in the GDP is only 1.3 per cent. By 2011, more than 30 million hectares of Russian forests had been certified under the Forest Stewardship Council, ranking Russian second after Canada for area of certified forest.
Eastern Canadian logistics study seeks to increase production and improve transport
“You’ll note that 52 per cent of the current eastern production capacity is in Quebec,” says Michele Rebiere, Chief Financial Officer of Viridis Energy Inc., a Vancouver based company in the green energy and the biofuels sector. Viridis owns two pellet manufacturing facilities, Okanagan Pellet Company, in Kelowna, BC. and Scotia Atlantic Biomass, in Musquodoboit, Nova Scotia. Ms Rebiere was discussing the results of an independent study analyzing supply and export chains for pellets produced in Eastern Canada, commissioned to help implement an efficient and optimized supply chain.
“There were a number of conclusions, including the assessment that rail was the most competitive means of moving product to export, including short distances.” Rebiere also observed that the large majority of producers in eastern Canada do not have rail spurs. She touched on what is called virtual consolidation as a means of trying to aggregate small producers in multiple locations and trying to find an efficient way to export. “Virtual consolidation would provide significant savings, minimal cost, and physical consolidation is necessary to generate infrastructure savings.” The factors playing a role in virtual consolidation include developing customer demand and contracts, establishing freight rates and securing short-term commitments. Additionally, buying and taking delivery of capacity should provide benefit by dispensing with the need for logistics, sales personnel and travel costs. Physical consolidation efforts would include building infrastructure at ports in Quebec and creating segregated storage capabilities in Halifax.
Discussing transportation costs, she noted that depending upon distance and equipment, road costs vary between $0.07 – $0.11 per tonne, rail between $0.02 and $0.08 per tonne. “Port fees per tonne can account for another five cents to $1.05, with terminal handling fees between $12 and $20.” In addition, producers face ocean freight rates that vary from east coast back to the Great Lakes as much as $24 to $54 per tonne, and depend on size of the vessel.
Rebiere noted while rail offers the best transportation value, the lack of rail spurs for current producers means that trucks become the only option, even in the face of issues such as lack of loading equipment and storage. “Mitigating these deficits is the fact that truck transportation limits those needs. Super-B hopper trailers are an option where regulations permit, but there can be difficulties in securing sufficient equipment.” If producers are shipping by rail, they need to acquire or lease rail hopper cars, “But hopper cars are more expensive in Canada than the U.S., costing about $90,000, leasing out at between four to five hundred dollars per month.” Calculating 270,000 tonnes of capacity from a producer, that would require anywhere from 100 to 175 cars, costing $9 to $15 million annually. “If we turn to the consolidation model, it makes more sense for a single player or a series of aggregators to take on some of those costs on behalf of the producers.”
When it comes to ports and marine transportation, Rebiere says the study identified optimum requirements for terminals that include ports with efficient rail access, sufficient draft to accommodate volumes, year-round accessibility, dedicated pellet terminals and relative proximity to production sites. “At the time of the study, there were no dedicated pellet terminals in eastern Canada, not all ports have sufficient land for new facilities and new facilities are costly,” she says, citing the price-tag of Pinnacle’s recent construction of a new pellet terminal in Prince Rupert at $42 million for 60,000 tonnes of capacity. Rebiere added that many existing Saint‐Lawrence ports are potentially well placed to deliver these attributes.
Other recommendations consisted of increasing eastern production, and making it and its logistics requirements more efficient by promoting greater connections with the expertise of western producers, promoting the industry actively with passive investors to stimulate investment, making a better case to government for access to funding for new facilities, and to raise the eastern industry awareness of existing funds. “Consolidation can generate benefits that include investments in handling infrastructure that could decrease costs by as much as $7-8 dollars per tonne, and could see the reduction of ocean freight rates by $7-12 per tonne. This remains challenging, Rebiere acknowledges, “There is no export-focused producer in Ontario or Quebec to become a leader, there are large distances between producers and there still exists a lack of export expertise.”
Uri Szyk, CN’s Market Manager for wood pellets and wood chips, offering a perspective from the rail company, noted that he has presented a market perspective on wood pellets to CN’s CEO and his leadership team. “I can tell you that from their reaction they see the opportunity and are on-board and it fits into CN’s strategy of working in collaboration with customers to develop supply chain solutions.” He said that with respect to the wood pellet market, CN’s rail network and infrastructure is well-placed, close to fiber sources, producers and ports. “We’ve seen the trend over the past few years, beginning in 2005. Car-loadings are up, and we expect to move 17,000 rail cars of pellets this year.” He says that in Western Canada, B.C.’s competitiveness has been helped through larger scale facilities that are all rail-served, with producers collaborating, and the presence of Fibreco Export’s Terminal in Vancouver’s harbour as a dedicated terminal for wood chips and pellets.
“However, there are increased transportation costs moving product through the Panama Canal. Our goal in Western Canada is to continue to support the current producers grow existing business and also help with projects or new sites for additional market entries from B.C. and Alberta.” Szyk adds that CN is also looking for opportunities to invest in new infrastructure, “Where it makes sense for CN and makes sense for the pellet producers and the industry.” He notes that as Pinnacle’s Westview Terminal in Prince Rupert begins full capacity operation, it increasingly will draw traffic from producers in northern B.C., freeing-up capacity for southern B.C.’s Fibreco Terminal.
New B.C legislation the answer to improving supply?
Writing in the fall issue of Canadian Biomass magazine, Gord Murray, WPAC’s Executive Director, expresses hopes there will be new capacity in B.C. He notes that, despite giving the industry repeated assurances since 2008, the B.C. government, in its role as landlord over the province’s public forests, has still not delivered any meaningful way for pellet producers to obtain fibre supply security.
He says, “One easy way for the B.C. government to increase fibre supply for the wood pellet sector would be to ban slash burning across the province, similar to the way in which it banned the use of sawmill waste-wood beehive burners beginning in 1995. Presently, B.C.’s Forest Act does not provide mandatory utilization standards for primary forest tenure holders. The government allows the province’s lumber industry to harvest public forests, remove only the best timber and burn the rest – some 9.3 million dry tonnes annually, charging lumber producers nominal or zero stumpage for whatever timber they choose to waste.
The amount of wood fibre being burned and wasted by B.C.’s lumber industry is six times greater than the total annual production of B.C.’s wood pellet industry. It is a common experience for pellet producers to reach out to B.C.’s lumber producers in an attempt to obtain access to leftover low-grade logs, branches and tops, only to find that those lumber producers prefer to burn this material rather than allow the pellet industry to have access to it. This is an egregious waste of a precious public resource that the B.C. Government should be preventing.”
New legislation was introduced in February 2013, but debate on the measure delayed until the May provincial election. Reportedly, re-elected Premier Christy Clark has instructed her Forests Minister to get on with the job of expanding that area of forest, under area-based tenures. The government argues that area-based tenures will, “create an incentive for licence holders to make enhanced silviculture and infrastructure investments that will improve the mid-term timber supply.” WPAC’s Gord Murray says, “The wood pellet sector must carefully monitor the progress of this initiative and respond vigorously to any proposed conversions. This may present an opportunity for pellet producers to offer support for conversions in exchange for secure access to residual fibre. This could help the pellet industry to reach its full potential. If proposed conversions do not provide for the needs of the pellet sector, then we must protest in the strongest possible terms.”