Biomass Pellet Prices – Drivers and Outlook What is the worst that can happen? European Biomass Power Generation 1st October 2012 Cormac O’Carroll Director, London Office Pöyry Management Consulting (UK) Ltd.
Biomass Pellet Prices – Drivers and Outlook What is the worst that can happen?
European Biomass Power Generation1st October 2012Cormac O’CarrollDirector, London OfficePöyry Management Consulting (UK) Ltd.
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CONTENT
1. Biomass Supply & Demand for Power Generation in Europe
2. Biomass Availability
3. Pellet Demand
4. Wood Pellet Trade Flows
5. Wood Pellet Supply
6. Pricing Dynamics for Pellets
7. Pellet Market Liquidity
8. Summary and Conclusions
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NREAP ANALYSIS- SOLID BIOMASS FOR POWER GENERATION
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Based on NREAP, the 9 most energy consuming European countries will have acombined solid biomass-based demand of ~1,600 PJ for power generation by 2020.
0
100
200
300
400
500
600
700
800
900
Peta
joul
e
Solid biomass demand for power generation
2010 2015 2020
3.5%
11.6%
14.1%
5.2% 7.1%6.0% 8.9% 14.0%
4.7%
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BIOMASS SUPPLY AND DEMAND OUTLOOK EU27 (NREAPs)
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A total biomass supply gap of ~50 Modt/a (wood equivalent) is likely to develop by2020.
Mill
ion
odt /
a
0
50
100
150
200
250
300
350
Supply Demand Gap Supply Demand Gap
2010 2020
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WOOD BIOMASS AVAILABILITY – GLOBAL
Woody biomass availability
Stable harvest potentialIncreasing harvest potential
Raw material deficitStable harvest potential but in high demand
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GLOBAL PELLET CONSUMPTION – 2015 AND 2020 OUTLOOK
Million tonnes/a201020152020
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24
35
WesternEurope
3 4 6
NorthAmerica
0.1 0.1 0.2
LatinAmerica
0.0 0.1 0.1
Oceania
0.9 1.4 1.8
Eastern Europe
04 6
Japan & South Korea
13
10
China
0.0 0.1 0.1
Russian Federation
Year Total Consumption2010 16 million tonnes/a
2015 37 million tonnes/a
2020 59 million tonnes/a
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Source: Pöyry Wood Pellet Multiclient
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WORLD PELLET TRADE FLOWS IN 2011Increasing volumes will be exported from the US and Brazil to Europe.
1,200
1,000
500
400
4,400*
* EU 27 internal trade
CurrentEmerging
50
Trade flows (1,000 tonnes)
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Capacity increase hot spots
Planned wood pellet production capacity increases (as of 2011)
More than 80 pellet production projects have been announced globally
PLANNED PELLET PRODUCTION CAPACITIES
US
Bra
zil
Rus
sia
Can
ada
UK
Ger
man
y
Chi
na
Latv
ia
Number of planned mills 20 3 14 5 9 9 4 1
Total planned capacity
(1,000 mt)4,024 3,000 1,817 1,055 795 560 350 200
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New emerging supply from lower wood cost regions may push higher costproducers further back on the global cost/supply curve.
Demand 2
INDUSTRIAL PELLETS – PRICING DYNAMICS AND OUTLOOK
Demand 1
ILLUSTRATIVE
- Delivered cost to end-user, USD/GJ-
- Cumulative capacity, million tonnes/a -
Potential additional low cost supply
Demand 3
Key variables:• speed of demand vs.
supply development• cost woody biomass
• cost for transport• exchange rates
• pellet paying capability
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PÖYRY’S PELLET PRICING MODEL
We construct forward supply and demand curves from our data on power plants,pellet mills, and our views on future markets and regulatory environment
Volume
Price
• Existing and planned co-firing and biomass conversion power plants and CHP units:
• Volume determined by plant capacity, plant availability, and efficiency.
• Capacity of existing and planned mills• new pellet mills endogenously
deployed within the model, adding to supply volumes.
Each power plant and CHP plant has a paying capability, for the peak and off-peak block of each month, based on:
• wholesale power price;• coal and carbon price (including
Carbon support in GB);• biomass incentives; and• each individual plant’s efficiency.
Each pellet mill is modeled using Pöyry’s proprietary Virtual Pellet Mill
• Pellet production costs – wood, power, propane, labour
• Transport to ARA – inland transport cost (rail or road) and shipping cost
• CAPEX, where the market can support it
Supply Demand
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Pellet price, year Z
Co-firing rate / conversion – coal plant X, country A,
year Z
Oil price - year Z
Cumulative demand alt. region AA, year Z
Bioenergy incentives / mandates for co-firing -
country A, year Z
PPC - coal plant X, country, A year Z
Demand volume – coal power plant X, country A
Aggregated demand curve –year Z
CO2 emission cost, year Z
Electricity wholesale price, country A, year Z
PPC – dedicated plant X, country A, year Z
Port to plant transport distance – plant X, country
A, year Z Cumulative demand new dedicated plants , country
A, year Z
Inland transportation cost algorithm (cost / distance),
country A, year 0
Inland transportation cost escalator, year Z
Port to plant transportation cost – plant X, country A,
year Z
Coal price, year Z
Demand volume –dedicated plant X, country A
Generation / No generation – dedicated plant A, year Z
Bioenergy incentives / mandates for dedicated -
country A, year Z
Aggregated supply curve –year Z
USD / country A exchange rate – year Z
Input Calculation Output / Iteration
Legend
MODEL STRUCTURE – DEMAND
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Biomass surplus – supply region K, year 0
Other production costs escalation – supply
region K, year Z
Other pellet production costs – mill XX, supply
region K, year 0
Biomass price algorithm (cost to biomass surplus),
supply region K, year Z
Biomass surplus - supply region K, year Z
Biomass price escalator -supply region K, year Z
Biomass price – supply region K, year Z
Oil price - year Z
Other pellet production costs – mill XX, supply
region K, year Z
Marginal cost of production – mill XX, supply region K,
year Z
Mill to ARA shipping cost algorithm (cost / distance),
mill XX, year 0
Mill to ARA shipping distance – mill XX
Mill to ARA shipping cost escalator – year Z
Mill to ARA shipping cost –mill XX, year Z
Marginal cost of supply –mill XX, supply region K,
year Z
Pellets supply volume –mill XX
Aggregated supply curve –year Z
Aggregated demand curve –year Z
Pellet price, year Z
Other pellet production costs – new mill ZZ, supply
region K, year Z
Standard scale for new pellet mill – Supply region K
CAPEX algorithm (CAPEX / scale) - year 0 CAPEX escalation – year Z
CAPEX new mill – supply region K, year Z
IRR requirement for new pellet mill – Supply region K
Other pellet production costs for standard size mill –
supply region K, year 0
Build new mill XX –yes/no
Incremental biomass demand – supply region K,
year Z
USD/ Supply region K exchange rate – year Z
Mill deployment rate –supply region K
USD/ Supply region K exchange rate – year Z
Incremental biomass demand – supply
region K
Input year Z + 1
Input Calculation Output / Iteration
Legend
New mill assessment
MODEL STRUCTURE – SUPPLY
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ALTERNATIVE SCENARIOS
Transportation costs
• Indexed to high oil price
• Indexed to central oil price
• Indexed to low oil price
High scenario Central scenario Low scenario
Coal, power and carbon prices • High • Central • Low
Level of conversion and
co-firing• High • Moderate • Limited
Demand
Supply
• High pellet demand• High paying
capability
• Central demand• Central paying
capability
• Low pellet demand• Low paying capability
• Highest supply costs • Central supply costs • Lowest supply costs
Driv
ers
Driv
er
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SUPPLY AND DEMAND DYMANICS – ATLANTIC BASIN
Each point on the supply and demand curve represents an individual pellet mill, orpower plant
Main Drivers• UK - conversion of a few
large coal fired plants.• Denmark - new Energy Plan
drives the conversion ofnumerous coal CHPs tobiomass.
• Netherlands - 10% co firingmandate.
• Belgium - favourableincentives for co-firing inFlanders.
2015 Indicative High Scenario
Supply
-50
0
50
100
150
200
250
300
350
400
450
0 5 10 15 20 25 30
Pric
e (U
SD /
t, re
al 2
011
mon
ey)
Volume (Mt / year)
SuppyDemandGBRNETBELDEN
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• Dutch APX-ENDEX has recently launched an exchange for wood pellets delivered toARA
• Trade of wood pellets currently takes place only to very limited extent• Churn rates are estimated to be near 1, i.e. traded volumes are approx. equal to
physical volumes• Currently, only suppliers and users participate – introduction of clearing shall change
this• If establishment of the APX-ENDEX exchange is successful, market liquidity is
expected to increase
LIQUIDITY OF PELLET MARKET – CURRENT STATUS
Crude Oil
150
Wood Pellets
Churn Rate Bid/Ask Spread
Crude Oil
Wood Pellets
6.8%
0.1%
17
1
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PELLET SUPPLY – LIQUIDITY OUTLOOK
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0%
20%
40%
60%
80%
100%
-
5
10
15
20
25
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025US Southeast BrazilCanada NW RussiaBaltics Other (PO, PT, UA)Short Term Pellet Availability (million tonnes) Short Term Pellet Availability (%)
Perc
enta
ge S
hare
of P
elle
ts A
vaila
ble
on S
hort
-Ter
m B
asis
(%)
Indu
stria
l Pel
let M
arke
t in
the
Atla
ntic
B
asin
(mill
ion
tonn
es)
Note: Long-term supply agreements persist beyond pellet mill debt term.
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SUMMARY AND CONCLUSIONS
Wood Pellet demand in Europe will continue to grow, driven by subsidies and legislation.
The emergence of large pellet production facilities in low cost regions will shift the supplycost curve to the right, mitigating price rises.
We expect market liquidity to remain relatively low - project financing requirements meanlong term contracts will dominate
Pellet availability and pricing will not be a limitation to the growth of biomass power. Theworst that can happen is in the hands of governments.
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Thank You! Cormac O’Carroll
Pöyry Management Consulting (UK) Ltd. + 44 (020) 7932 8200