Fuelling a greener future: wood pellets and the biomass boom

Fuelling a greener future: wood pellets and the biomass boom

Biomass pellets have been fuelling the world's energy needs significantly in recent years. According to IEA Bioenergy, global wood pellet production observed phenomenal growth, from 6-7 million tonnes in 2006 to 26 million tonnes in 2015, with an annual growth rate of 14%. More than 60% of the pellets are designated for export markets, which has propelled the annual growth rate of global wood chip and pellet exports to 11% for the past five years, reaching US$2.5 billion in 2016.

What has sparked the increase in demand for wood pellets? The continuing trend to optimise value from wood by-products as biomass pellets is deemed by some as an efficient way to turn waste into a lucrative business. Industrial agricultural residues such as sawdust from the milling of lumber, eucalyptus bark, rice husks and tapioca trunks are among some of the valuable waste items in the pellet business.

Among the various types of biomass pellets, wood pellets are the most popular given the high availability of raw materials and higher fuel efficiency in comparison to other biomass feedstocks.

In addition, wind, solar and biomass energy are in strong demand in countries such as China, Japan, South Korea and the United Kingdom as a result of the enactment of Renewable Portfolio Standards (RPS) policies, which aims to increase the production of electricity from renewable energy resources.

According to the International Trade Center (ITC), the top three exporters of wood pellets are the United States, Canada and Latvia. Vietnam is the sixth largest exporter in the world as well as the largest exporter in Asia. It is also the fastest-growing exporter, contributing to 5% of global wood pellet exports.

Vietnam benefits from its furniture industry, the second largest in Asia behind that of China. This provides Vietnamese pellet producers, who are mostly small, with a large pool of wood scrap to be used as cheap feedstock to make pellets that can be sold cheaply.

South Korea and Japan are the two leading Asian importers, primarily due to the implementation of RPS policies. In 2012, South Korea set a target for large power utilities to increase the use of renewable sources in their energy production from 2% to 10% by 2024. As a result, utilities in South Korea turned to wood pellet to fulfill the regulatory obligation. This prompted a surge in imports from 100,000 tonnes in 2012 to 1.7 million in 2016, with Vietnam benefiting as the top export partner for South Korea.

In Japan, an RPS-equivalent policy was also introduced in 2012, following the aftermath of the Fukushima disaster in 2011. Under this feed-in tariff programme, power utilities are obliged to purchase electricity generated from renewable sources such as wood pellets. As a result, Japanese wood pellet imports have spiralled toward a 48% annual growth rate since 2012, from just 20,000 to 350,000 tonnes.

Is Thailand hopping on the global wood pellet bandwagon? Currently, there are 77 pellet factories in Thailand, half of them located in the southern provinces where there is an abundant supply of rubber wood, which enables pellet factories to utilise residue generated from the lumber industries as feedstock.

Thai wood pellet exports declined significantly in 2014 because of a short-term halt in imports by South Korea due to changes in import regulations. Despite being in a nascent stage, with most pellets produced only for industrial use, the industry has seen a healthy increase from almost no exports in 2011 to sales of $2 million in 2016, thanks to South Korea as the major importer in view of the proximity advantages enjoyed by Thailand.

Despite a rosy outlook, the Thai wood pellet industry can be a double-edged sword. First, Thai pellet producers have to compete for a constant supply of feedstock from biomass power plants that also use wood residue such as wood chips and sawdust to generate power.

Wood pellets are not typically used by Thai biomass power plants due to their high cost. According to the Energy Regulatory Commission, Thailand's installed biomass power plant capacity is 242 Megawatts, consuming some 3 million tonnes of wood chips and sawdust per year.

Second, procurement of suitable equipment for the production of wood pellets is an uphill task. Many Thai pellet producers encounter problems in importing expensive pellet machines that are incompatible with the production of local rubber wood pellets, and at a prohibitive cost. This is due to the differences in the types of wood used in Thailand and other pellet-producing countries where the machines originate.

Third, export opportunities are being hindered by sustainability certification requirements by prospective customers such as Japan. Forest Stewardship Council (FSC) certificates are issued to ensure the traceability of wood pellets that come from responsibly managed forests. As most Thai rubber plantations are smallholdings, they lack the expertise and resources required to obtain proper FSC certification. Some cooperative groups have introduced initiatives to encourage Thai small rubber plantation owners to apply for this type of certification.

Although Thailand's exports of wood pellets are modest at this stage, domestic demand for wood pellets is gaining a stronger foothold, as more and more industrial boilers are switching from other fuels such as fuel oil and firewood to wood pellets. According to the Department of Alternative Energy Development and Efficiency, wood pellets are 60% cheaper than fuel oil for generating the same energy output.

Even though wood pellets are a costlier resource compared with firewood, pellets are preferred due to their many advantages over counterparts, including a higher density, which makes pellets easier and cheaper to transport and store. The homogenous quality of pellets makes it easier for boilers to operate at a constant burning rate.

Despite challenges, the outlook for wood pellet exports in the medium term looks promising, as global demand is gradually shifting from Europe to Asia. Japan and South Korea are projected to demand 4.4 million more tonnes of wood pellets by 2020 for power generation, according to IEA Bioenergy. In addition, China is striving to replace the use of coal with 30 million tonnes of biomass pellets by 2020.

Although the Thai wood pellet industry remains at an infant stage, given the marginal export quantity of 22,000 tonnes in 2016, there is room for local producers to dream of bigger export markets in the long run while continuing to concentrate their efforts on the domestic market in the short term.

EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th

Do you like the content of this article?
COMMENT