Government support for bioenergy in Finland The forest ... · electricity production capacity varies with the type of the boiler. ... tic pulp industry due to its high importance

Government support for bioenergy in Finland –

The forest industry dilemma

Mats Lindström

Energy economics and policy

Spring 2011

Contents

1. Introduction ........................................................................................................................ 4

2. Bioenergy in Finland ........................................................................................................... 5

2.1. Finnish energy production and industry.......................................................................... 5

2.2. Renewable energy goals .............................................................................................. 7

2.3. Feed-in rate .................................................................................................................. 7

2.4. Energy production from biomass ................................................................................ 8

3. Effects on the pulp industry .............................................................................................. 10

3.1. Effect of the feed-in rate on the wood use ............................................................... 10

3.2. Wood supply .............................................................................................................. 12

3.3. Wood prices ............................................................................................................... 14

3.4. Total forest-based resources ..................................................................................... 17

4. Conclusion ......................................................................................................................... 19

5. References ........................................................................................................................ 20

List of acronyms

CHP Combined heat and power

FFRI Finnish Forest Research Institute

FMI Finnish Ministry of Industry

IEA International Energy Agency

TRCF Technical Research Center of Finland

1. Introduction

Concerns about the climate change have resulted in political actions to mitigate the CO2

emissions in order to prevent global warming. Especially the EU has been pushing CO2 relat-

ed energy policies forward and set renewable energy goals for its member countries. These

energy policies, both national and international, are affected by the gains and losses a specif-

ic country get from them, which has been seen for instance in the validation process of the

Kyoto-protocol.(NY Times 2001 and FRI 2010) In a corresponding manner, also the Finnish

government has to take its national industry structure into notice when shaping the national

energy policies (Tekniikka ja talous, 2007). For EU member countries the main goals for de-

creasing green house gas emissions are set by the EU, but in addition the member countries

are allowed to further subsidies renewable energy technologies. In Finland this has been

done through the creation of feed-in rates for renewable electricity generation, and through

energy taxation policies favoring renewable energy production. The energy production mix

in the EU countries is very heterogenous, and Finland and its neighbor country Sweden are

the only two countries in Europe, for which energy from biomass constitutes for a consider-

able amount of the total energy production (IEA 2010). This is understandable, while forests

cover 66% of the land area in Finland (Ericsson 2004), and Finland hence has a large biomass

supply. It is also the reason why the Finnish government wants to support the use of bioen-

ergy and especially the use of wood-based energy. The aim with this paper is to look at the

feed-in rates for wood based energy from a resource-based view. The annual amount of for-

est biomasses is limited due to the limited growth, and the energy production units might

hence have to compete with other users for their raw material. In Finland the largest use of

wood takes place in the pulp1 and paper-production, where process side-streams are used

for energy generation. (FFRI 2011) This industry has strongly opposed the subsidies for wood

burning, claiming that they will not increase the renewable energy production as expected

(Finnish Forest Industry 2011). This criticism will be further evaluated in this paper to exam-

ine to what extent the feed-in rate is beneficial for the bioenergy use in Finland.

1 Pulp is the main raw material for paper and paperboard production. It is a cellulosic material obtained through the disintegration of the fibers in wood and other biomasses.(Gullichsen and Fogelholm 1999)

2. Bioenergy in Finland

2.1. Finnish energy production and industry

In 2010 the renewable energy production Finland corresponded to about 25% of the total

energy consumption in Finland (Statistics Finland), which can also be observed in Figure 1

offered by the International Energy Agency (IEA 2010). Of this share, the wood based energy

constituted for 85%, which is about 21% of the total energy consumption. Further examining

this share, one can see that an important part of the Finnish production of renewable energy

takes place in the pulp production of the forest industry, which is shown in Figure 2 (FFRI

2011). It is however important to observe that these values and fractions are calculated on

the total energy, and hence no difference is made between electricity and heat production.

In the pulp production sector of the forest industries, the wood is disintegrated into fibers to

enable the manufacture of paper and board. A part of the disintegrated wood material,

mainly lignin that binds the fibers together, cannot be used in the paper production, and is

hence burned in a recovery boiler, as described by Gullischsen and Fogelholm (1999). The

recovery boiler recovers the chemicals used in the disintegration process, as well as gener-

ates heat and electricity from burning the wood substances. The heat is mainly used as pro-

cess heat, but low temperature heat can also be used for district heating. Part of the electric-

ity is used for covering the pulp plants own consumption, while the excess of electricity is

sold generating additional revenue to the pulp manufacturer. The supplied amount of excess

electricity production capacity varies with the type of the boiler.

Fig 1. Energy production from different sources in Finland from 1972 to 2009.(IEA)

Fig 2. Fractions for different sources of the Finnish renewable energy production in 2009. (FFRI 2011)

36.5%

30.1%

18.6%

14.4% 0.3%

Renewable energy production in 2009 in Finland

Forest Industry

Heating and Power Plants

Small scale combustion of wood

Hydro Power

Other

The pulp production is in this case interesting while its energy production in 2006 accounted

for as much as 42% of the total renewable energy consumption in Finland, corresponding to

about 10% of the total energy consumption (Statistics Finland). In addition, the main raw

material in pulp production is wood, accounting for about half of the cost per produced pulp

unit, which makes the wood prices an important issue (Fordaq 2010). From the wood supply

in Finland, the most expensive quality, the saw wood, is used in the saw industry. The pulp

industry uses pulpwood, which is wood of a medium quality. Low quality wood and logging

residues are used for energy production (FFRI 2011). Despite the different raw material

preferences, the pulp industry can use partly the same raw material as biomass fired plants

in Finland, although the biomass fired plants in Finland mainly concentrate on logging resi-

dues and thinning wood not suitable for pulp production (Finnish Forest Industries).

2.2. Renewable energy goals

The EU (2008) has set a national goal for the Finnish energy production according to which,

the renewable energy production should reach a value of 38% of the final consumption by

the year of 2020. Calculated on the energy consumption in 2010 this means an increase with

13%, and it has been suggested by Technical Research Centre of Finland (TRCF 2011) that

this increase would constitute for a capacity need of 38 TWh of new capacity until 2020. This

need of new renewable energy production capacity is why the Finnish government has been

reshaping its energy policies. The burning of biomass is due to the large supply thought to be

one possible option to reach this goal. It is for instance suggested that forest biomasses

could be a substitute for a part of the coal fired power plants, constituting for 12.9% of the

total energy consumption in 2010. In already existing coal fired power plants a part of the

coal is suggested to be substituted for biomass, while the new capacity is suggested to be

designed for biomass use only (TFCF 2011).

2.3. Feed-in rate

In the end of 2010 the Finnish government decided on the creation of both feed-in rates and

fixed subsidies for renewable electricity production, which will be starting in the end of

March 2011. The supported technologies are wind energy, biogas energy and wood based

energy, and the goal is to increase the profitability, and hence support investments in new

capacity. The fixed subsidy is given to all three technologies as well as to hydropower. In the

new law, the use of forest converted chips (chipped wood biomass from stem wood, logging

residues and thinnings), are guaranteed a subsidy of 6.90€ per MWh of produced electricity.

Wood-based energy does not have a feed-in rate dependent on the electricity price, but

there is an additional subsidy based on the price of greenhouse gas emissions credits. This

feed-in rate has a maximum of 18€/MWh paid when the emissions credits for 1 ton of CO2-

equivalent costs 10€. It then decreases linearly to 0€ at an emission credit cost of 23€.

(Finlex 2011) This approach is used in order to favor the use of wood based energy before

the use of fossil fuels, and the feed-in rate are calculated based on quarterly average prices.

The length of the feed-in rate is maximum 12 years for one specific power plant. In addition

to the mentioned feed-in rates, the production is already indirectly subsidized through dif-

ferences in taxation of energy production depending on fuels use, and also through the car-

bon emissions trade (Ericsson 2004). As the law has only been in effect since the end of

March, there is yet no information available on the affect on investments or on fuel substitu-

tions.

2.4. Energy production from biomass

The biomass supply is, as mentioned, one of Finland's strengths, and a supply network for

wood already exists due to the forest industry. The biomass available mostly constitutes

from the forest, including logging residues, thinning and wood not suitable for industrial use.

The creation process for the renewable energy feed-in rates did, despite the large supply,

meet strong opposition from the Finnish forest industry, claiming that such feed-in rates

would hurt its profitability and possibly lead to the shutdown of production capacity in Fin-

land. The Finnish forest industry association is the main user of wood in Finland, and it con-

sidered the feed in rates as a severe threat to its pulp manufacturing sector, where the

wood-use constitutes for over 50% of the total expenses. The Finnish Forest Industry Federa-

tion suggested that this policy change would increase the prices of wood dramatically, forc-

ing the shut-down of several pulp manufacturing plants in the country. The association fur-

ther pointed out that as forest industry is the major producer of renewable energy, this poli-

cy change might lead to a decrease instead of an increase in renewable energy production.

(Finnish Forest Industries 2011) Indeed Forest industry companies already shut down 3 pulp

plants in the last decade, partly due to increased wood prices. (Metsäliitto 2009)

The Ministry of Industry showed concern (FMI 2011) about the forest industry association

complains, partly as the industry is of great importance for Finland, while it is suggested to

employ about 200 000 people directly and indirectly. This is a considerable amount com-

pared to the whole population of 5.2 million people (Finnish Forest Industries). Considering

the fact that the Finnish government is keen on retaining the competitiveness of the domes-

tic pulp industry due to its high importance for the Finnish industry, it is interesting to look

more into depth on how the new feed-in rate will affect the production of wood-based en-

ergy, as well as the possible effects on the pulp manufacturing industry. The key issues in

this analysis are the supply and the demand of wood, determining the price paid by the us-

ers.

3. Effects on the pulp industry

3.1. Effect of the feed-in rate on the wood use

There is little information available on Finnish producer prices for different energy source,

but the Technical Research Center of Finland (TRCF 2011) has done annual estimations com-

paring the total costs for a CHP plant using both biomass and coal. These plants do not cur-

rently profit from the feed-on rates, but there have been suggestions to include them in the

future. The calculations were made on a plant producing 115MW of electricity and 230MW

of district heating, which is suggested to be a somewhat typical plant in Finland. For a coal

fired power plant the annual cost was about 45 Million €, while about 47 million € for a plant

using 70% coal and 30% of dried and chipped wood biomass or logging residues. The use of

biomass is hence not profitable in this case, and the feed-in rates would be needed also in

this case. When examining the feed-in rate and constant subsidy for wood burning power

plants we can use Figure 3. This figure illustrates the placing of coal and wood fired energy

production on the marginal cost curve as suggested by TRCF (2011). Because of the lower

marginal cost for the use of coal-based energy, this capacity is utilized before including the

use of the more expensive wood based energy. The figure does only compare coal- and

wood-based energy, and the marginal cost is assumed to be constant for each of them. The

feed-in rate should aim at changing the order of use between purely coal fired and biomass

and coal fired power plants, to achieve a switch from wood to coal in case of a sub maximal

use of the energy production capacity as for the demand level D1 in figure 2. When the de-

mand is at level D1, according to law of supply and demand, only coal fired capacity is used,

while at D2 the whole coal fired capacity plus a part of the coal and wood capacity is used.

Hence, if the government want to optimize the situation to achieve a higher use of bioener-

gy, the feed in rate should be set so that energy (heat and electricity) produced by biomass is

just below the price of the fossil fuel based energy. However, as the price of coal-based en-

ergy is unaffected, one could suggest that the feed-in rates would lead to an increased ener-

gy usage at demand levels corresponding to D2 in the figure. This might be the case as the

feed-in rate lowers the marginal cost at this particular demand quantity.

Fig 3. Assumed relation between the electricity production capacity from coal and wood in Finland before the

feed-in rate, according to values offered by FFRI(2010).

If the Finnish feed- in rate for wood based electricity generation is efficient this means that

this would shift the position of the wood based energy to become more of a base load ca-

pacity. This should lead to new investments in wood fired CHP plants, as their profitability

rises. Hence, according to these assumptions, also the wood demand should be increasing as

an effect of the feed-in rate and the subsidy. It is however difficult to assess, whether this

feed-in rate would make it profitable to burn also wood suitable for pulp production, but

from available price statistics and estimated wood removal potentials it is possible to take a

closer look at this problem.

As about 40% of the wood consumption at a pulp plant is used for energy production, the

amount of electricity and heat produced might be compared to that of a purely biomass

fired power plant (Statistics Finland). Thus an appropriate assumption could be that the

amount of produced energy from one unit of biomass in pulping corresponds to about 40%

of the energy produced in a purely biomass fired CHP plant. Although this assumption does

not take into account the possible efficiency differences originating from new technologies

or other causes, or efficiency increases due to economies of scale. According to this assump-

tion, the critic against the feed-in rates can be examined for a simplified case where the

market for pulpwood is only national, and the forest industry is already operating at the

maximum stable removal from the Finnish forests. If the only two players competing for

pulpwood were the forest industry and the energy industry, and the forest industry wood

use would be constant, then every additional unit of pulpwood used in a wood fired power

D2 D1

P(wood)

P(coal)Price

Coal Wood

Quantity

plant would increase the price of wood according to the law of supply and demand. Hence,

the increase of one unit of wood-use in wood burning would result in the decrease of 0.4

units of wood-use in the energy production in the forest industry. According to this very

simplified assumption, the critic from the forest industry seems to be correct at least at a

basic level, but it needs to be further evaluated. One important factor that was not consid-

ered in the previous example is the features of the wood supply, and whether there is excess

potential of wood supply available in Finland.

3.2. Wood supply

The Finnish Forest Research Institute (FFRI 2011) analyzes the use of the Finnish forests on

an annual basis. When examining Figure 4, which was published in their forest sector out-

look for 2010, one can see that the annual removal from the Finnish forests, in the last ten

years, has been at least 10%, or 10 million m3, below the estimated maximum sustainable

removal. Hence, there should be an excess capacity available for use in wood fired power

plants that is currently not used because of profitability issues or due to forests owners' val-

uation of their forest as a recreational area (Ericsson 2004). One could hence suggest that it

from this point of view would be beneficial for Finland to reach the maximum sustainable

removal in the future due to the renewable energy goals set by the EU. The currently unused

potential of approximately 15 million m3 can be converted into energy potential by assuming

the average energy content of one m3 of pulpwood. The FFRI (2011) uses a converting ratio

of 2 TWh of primary energy content for 1 million m3, which gives an excess potential of 30

TWh of primary energy content from wood. When knowing the primary energy content, we

can use the average efficiency for wood burning CHP plants to calculate the available

amount of secondary energy in the form of heat or electricity. The law on the feed-in rate for

wood-based electricity production stated that the overall efficiency of the power plant has

to be at least 50% for small plants from 100kW to 1MW. By using this value and neglecting

additional efficiency losses due to logging or transportation, we obtain an approximate value

of 15 TWh of excess potetntial.

Fig 4. Annual removal and maximum sustainable removal from Finnish forest from 1999 to 2009, including

estimated values for 2010 and 2011. (FFRI 2011)

One the other hand, since the wood market is international also the possible imports and

exports should be examined in the scenario. Finland is currently a large importer of wood

(FFRI 2011), which can be seen in Figure 5. When comparing the imports to the annual re-

movals, it is interesting to see that before the closing of some Finnish pulp plants around

2008, as the wood use reached a peak, there were very high imports of especially pulp-

wood). These imports significantly decreased in 2009, partly due to export duties introduced

by the Russian government in 2008, starting at 15€ per m3, and further increasing to 50€ per

m3 in 2009. Compared to the total wood use, imported wood still constituted for a large

share in 2009, but it is important to notice that the fraction of pulpwood has decreased since

2008.

Fig 5. Finnish imports of wood between 1999 and 2009, including estimated values for 2010 and 2011. The

value of the y-axis is an index where the price in 2002 is set as a value of 100. (FFRI 2011)

3.3. Wood prices

To get a better view of the supply structure we need to examine also the price changes of

wood during the last decade, to see how the wood prices correlate with the quantities of

used wood. Figure 6 (FFRI 2011) shows the price of saw wood on the left and pulpwood on

the right, where the different lines are brown for imports and green for the national market

price. The prices for imported wood are the prices paid at the border, including duties. The

price correlation between the imports and the domestic supply of saw wood seems to corre-

late to some extent according to the figure. For pulpwood on the other hand there tends to

be a mechanism in the system preventing an increase in pulpwood prices on the domestic

market although the prices of imported wood increase dramatically. This can be seen as the

large difference between the import prices and the domestic prices around 2008.

Fig 6. Monthly price indexes for sawlogs (left) and pulpwood (right) in Finland, were the imports are marked

with a brown line, and the domestic supply with a green. (FFRI 2011)

This issue can be further investigated by comparing the price elasticity of demand, while this

should correspond to the elasticity of demand for the forest industry, as they are the main

user of pulpwood in Finland. In the price elasticity calculations the arc elasticity is used as a

measure of elasticity, and it is calculated with the formula (Wall and Griffits, 2008),

(1)

The values for point 1 and 2 are two on each other following years. Hence, the calculated

elasticity of demand includes some variation due to the absence of a primary price and de-

mand values. In this case, when the elasticity of demand is calculated from two on each fol-

lowing years, the elasticity of supply equals the elasticity of demand. The calculations are

done separately for the demand of imported wood and domestically supplied wood. When

comparing the values in Figure 7 we see that there is a significant difference in the forest

industry's elasticity of demand for wood, when comparing import and domestic supply

around 2008. This is confusing while there seem to be two separate markets for imported

and domestically supplied pulpwood enabling different prices on different markets. In addi-

tion, the same Finnish forest industry companies are active on both markets, and in a perfect

market one would suggest that there would be a competition for cheaper Finnish pulpwood

increasing the prices and removing the arbitrage possibility. The elasticity differences might

however, partly originate from the export duties on wood set by the Russian government,

while there might have been a lock-in on Russian wood due to already existing supply net-

works and contracts, forcing the Forest industry to continue the procurement of Russian

wood while other import possibilities where inadequate. There might also be price differ-

ences due to quality differences in the pulpwood between the imports and the domestic

supply, which are not seen in statistics. In addition the supplied quantity for a specific year

might be affected by storms of other events causing an increased removal domestically or

globally. It is despite these factors difficult to explain why the market price of domestic

pulpwood did not follow that of the imports in 2008, especially when comparing it with the

market for saw logs for which the mechanisms are expected to be quite similar, due to the

similarity of the traded goods.

Fig 7. Elasticities of demand calculated with the formula for arc elasticity.

When examining this case it might be important to bear in mind that there in the end of the

1990s was a cartel in the pulpwood market (Tekniikka ja talous 2010), were the three large

pulpwood users in Finland, Metsäliitto, Stora Enso and UPM, cooperatively decided on the

consumer prices of pulpwood. This was possible as the buyers constitute of a few large play-

ers, while the Finnish forest ownership is very diverse, as about 60% of the forests are

owned by private non-industrial owners (Ericsson 2004). These features resulted in differ-

-25

-20

-15

-10

-5

0

5

10

15

2004 2005 2006 2007 2008 2009 2010

Elasticity of demand for domestic supply and imports

Imports

Domestic supply

ences in negotiation power between the suppliers and the buyers. One suggestion to the

price difference between imports and domestic supply might hence be that the forest indus-

try companies want to gain from their oligopoly structure in the wood market. This is possi-

ble if they succeed to keep a lower price at the national market by increasing their imports,

and simultaneously prevent other buyers from entering the domestic market.

3.4. Total forest-based resources

As pulpwood is suggested to be mainly used for paper production, the main feedstock for

the wood-based power plants are logging residues and thinning. (Statistics Finland) One of

the aims with the feed-in rate is to increase the usage of these in the energy produc-

tion.(FMI) The available quantities of logging residues and thinning has been estimated by

(Ericsson 2004) to amount of 34,7TWh. The law on the feed-in rate for wood-based electrici-

ty production stated that the overall efficiency of the power plant has to be at least 50% for

small plants from 100kW to 1MW. Hence the potential of this wood residues and thinnings

would be in the size of 17TWh. Comparing this value with that of the energy production

from wood chips, which consists of both logging residues and low quality roundwood, which

in 2009 was 10,8TWh (FFRI 2011), we get an additional capacity of at least 7TWh. Adding

this to the already calculated excess potential from the annual maximum sustainable remov-

al, we end up with a total annual value of at least 22 TWh of heat and electricity. When

comparing this with the total expected value of 38 TWh, the new renewable energy capacity

required by 2020 (FTRI 2011), we see that for the current situation there is a large additional

potential of forest based energy available. The reason why these resources are not currently

used might be due to low profitability or non-existing networks (Malinen 2001). Hence an

increased price of wood used for energy generation might bring these resources to the mar-

ket. As the marginal costs for these quantities are not known, no future prices for pulpwood

are calculated in this paper.

A simplified calculation can however be made for the decrease in demand of pulpwood from

the forest industry. In Figure 7 we saw that the average elasticity of demand for domestic

pulpwood was about -0.75. We can now use this value to check how much the forest indus-

tries demand of pulpwood would decrease due to a specific price increase. This value can

then be used as a measure for the decrease in the renewable energy produced in the forest

industry. An interesting issue would be to explore how a large increase of10€ per m3 would

affect the forest industries demand. By rearranging the formula for demand elasticity (Wall

and Griffits, 2008) we get,

(2)

When calculating with the values obtained for 2009 (FFRI 2011), 24.2 million m3, and 81€ per

m3, we get a decrease in demand of 2.2 million m3. This corresponds to about 8% of the total

demand by the forest industry in 2009. The values used for this calculation are very inaccu-

rate, and the obtained answer is hence not very valid.

4. Conclusion

The criticism presented by the Finnish forest industry is valid when such a competition be-

tween the energy and the forest industry about pulpwood would take place, which would

increase the wood prices and force the Forest industry to cut its capacity. This would not be

a sufficient way to increase the total quantity of renewable energy produced in Finland, due

to the large energy production in the pulp sector, where about 40% of the wood is used for

heat and electricity production. Opposite to the complains by the Forest Industry, the FFRI

has estimated the supply of logging residues and thinnings to an amount sufficient to cover a

significant amount of the biomass needed due to an increased demand. In addition the sta-

tistics also suggests that the annual removals during the last decade continuously have been

about 10% below the maximum sustainable removal from Finnish forest, which further add

up to an annual value of 22 TWh of potential forest-based secondary energy. In addition the

price elasticity of the demand for the last decade shows that despite an increased price of

imported pulpwood in 2008, this did not result in a price competition between the buyers of

domestic pulpwood. A simplified calculation on the demanded quantity of pulpwood by the

forest industry does however suggest that there might be a significant decrease the pulp

production if the pulpwood price increases.

In this analysis the changes in the global wood market have been neglected, and as Finland

in 2009 imported almost 10 million m3, similar energy policy actions in its neighbor countries

might affect the domestic wood prices in Finland. Furthermore, the support of wood burning

might make it profitable to export thinnings or logging residues to Finland, and it is ques-

tionable whether the feed-in rate works in an efficient way if it leads to increased imports of

pulpwood or forest residues from other countries, not increasing the utilization of the Finn-

ish forests. This paper does not examine whether it for Finland would be more profitable

from a GDP point of view, to move from the energy-intensive forest industry to a more prof-

itable industry. It is also neglected that a part of the produced paper products are burned

with other waste after use, and hence add to the amount of produced energy.

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