Economic sustainability for wood pellets production – A comparative study between Finland, Germany, Norway, Sweden and the US

b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 6 8 e7 7

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Economic sustainability for wood pellets production e A comparative study between Finland, Germany, Norway, Sweden and the US Erik Trømborg a,*, Tapio Ranta b,1, Jo¨rg Schweinle c,2, Birger Solberg a,3, Geir Skjevrak d,4, Douglas G. Tiffany e,5 a

Department of Ecology and Natural Resource Management, Norwegian University of Life Sciences, PO Box 5003, N-1432 A˚s, Norway b Lappeenranta University of Technology, Prikaatinkatu 3E., FIN-50100 Mikkeli, Finland c Johann Heinrich von Thu¨nen-Institute (vTI) Federal Research Institute for Rural Areas, Forestry and, Fisheries, Institute of Forest Based Sector Economics, Postbox 80 02 09, 21002 Hamburg Leuschnerstr. 91, 21031 Hamburg, Germany d Norwegian University of Science and Technology, Department of Energy and Process Engineering, Kolbjørn Hejes v. 1, N-7481 Trondheim, Norway e University of Minnesota, Extension. 316D Ruttan Hall, 1994 Buford Avenue, St. Paul, MN 55108, USA

article info

abstract

Article history:

The consumption of wood pellets grew rapidly during the last decade. In this paper we

Received 14 May 2012

compare the development of the production factors for wood pellet markets in Finland,

Received in revised form

Germany, Sweden, Norway and the US; we analyze how domestic market prices for pellet

23 January 2013

production factors as well as domestic market prices for pellets vary among the countries.

Accepted 27 January 2013

The analyses are based on two model plants. The first represents common technologies for

Available online 13 March 2013

small scale pellet production based on dry residues from sawnwood production, while the second represents large scale production based on a blend of dry and wet materials. The

Keywords:

results show how differences in costs of feedstock, energy and labor affect the profitability of

Bioenergy

pellet production and hence the development of pellet production in the analyzed countries.

Profitability

Pellet producers in the US have lower feedstock costs than producers in the analyzed Eu-

Market comparison

ropean countries. The economic sustainability for European pellet producers depends to

Technical Production Coefficients

a large extent on their domestic markets as internationally traded pellets are priced lower

Biomass Costs

than their production costs. Future pellet production will, to a greater extent, be based on wet feedstock such as roundwood and wet sawdust. These feedstocks are also demanded by wood-based industries (pulp and paper, particle- and fiber-board) as well as for traditional

* Corresponding author. Tel.: þ47 64 96 57 96; fax: þ47 64 96 58 01. E-mail addresses: [email protected] (E. Trømborg), [email protected] (T. Ranta), [email protected] (J. Schweinle), [email protected] (B. Solberg), [email protected] (G. Skjevrak), [email protected] (D.G. Tiffany). 1 Tel.: þ358 40 86 44 994. 2 Tel.: þ49 40 73 96 23 05; fax: þ49 40 73 96 23 99. 3 Tel.: þ47 64 96 57 28; fax: þ47 64 96 58 01. 4 Tel.: þ47 95 74 47 66. 5 Tel.: þ1 61 26 25 67 15; fax: þ1 61 26 25 27 29. 0961-9534/$ e see front matter ª 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.biombioe.2013.01.030

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fuelwood. The transition from smaller pellet plants using dry feedstock to larger plants using wet feedstock in future pellet production, can be expected to follow comparative advantages regarding feedstock and energy costs, but also with respect to economies of scale. ª 2013 Elsevier Ltd. All rights reserved.

1.

Introduction

The global use of renewable energy has almost doubled in absolute terms between 1973 and 2008, but is still only about 13% of the global energy consumption. Combustible renewables and waste represent more than 90% of the renewable energy sources (IEA 2010). The rapid increase of wood pellet consumption is mainly due to legislation in several European countries that support renewable energy but also to some extent the increase of oil prices. These legal frameworks created markets for bioenergy and the technical properties of pellets are favorable compared to wood chips or split wood regarding handling, transport, energy density, storage etc. These technical properties make pellets a preferred feedstock for small/medium scale users in applications like central heating and for co-firing in large applications for replacing coal. During the last decade investments in wood pellet production were made in many countries like Austria, Germany, Sweden, Canada, Russia and the US. Hence, between 2000 and 2008 the production grew rapidly. The production stagnated in some countries during 2008 (e.g. Austria, Sweden and Norway), but the overall production was growing again in 2010 [1]. USA, Canada, Sweden, Germany and Russia are the largest pellet producers, while Sweden, the USA, Italy, Germany and Denmark and the Netherlands are the largest consumers [2]. The price of pellets varies between countries, areas within countries and by quality and packaging. The prices have decreased in most markets since March 2009 [3]. The tradability of wood pellets has been documented by relatively large intercontinental trade flows from North America to Europe, as well as between regions and countries. It has been estimated that up to 50% of global wood pellet production is traded internationally [4]. The tradability of wood pellets implies a stronger competition between producers and countries than for other biofuels like waste and wood chips, which, to a larger extent, are dominated by local heat and biomass markets. The high energy density of wood pellets and their ability to be stored compared with other solid biofuels reduces the logistics costs of wood pellets relative to wood chips. Dry residues from sawnwood production have been the main feedstock for wood pellet production, with dry residue materials from nearly dry shavings being especially attractive because there is almost no need to dry, low prices and homogenous composition. Future increase in pellet production, however, will to a large extent have to be based on wet feedstock like wood chips, roundwood and wet sawdust in close competition with wood-based industries and wood-based energy generation in domestic households, heat and power plants. Peksa-Blanchard et al. [5] estimated the potential pellet production based on sawnwood residues and found that 13,000,000 t could be produced globally from available sawdust, i.e. less than the global production of about 15e16,000,000 t in

2010. Thereof 9,200,000 t are produced in EU 27 [1] and about 6,000,000 t in North America. Spelter and Toth [6], who analyzed the development of the North American pellet industry, report a rapid production growth from 1,100,000 t in 2003 to 4,300,000 t in 2008 and expected 6,200,000 t in 2009. Due to the 2008e2009 recessions in the sawmilling industry they report an increased use of roundwood and other non-sawmill resources in pellet production. Projections by Obernberger and Thek [2] assume continued increase of demand and indicate a potential global demand of 130e170,000,000 t y1 in 2020. Wolf et al. [7] analyzed pellet production in the forest industry and concluded, based on case-studies, that excess by-products and waste heat were important drivers for successful pellet production. Pirraglia et al. [8] developed a techno-economic model for the determination of production costs for manufacturers of wood pellets in the US, and found that production was profitable but especially sensitive to changes in the costs of biomass and labor. Very few studies compare pellet markets, market conditions and/or conditions for pellet production. Thek and Obernberger [9] compared wood pellet production costs in Austria and Sweden and Selkima¨ki et al. [10] compared the structure of the pellet markets in Sweden and Finland. The development of wood pellet production and consumption differs greatly between countries, and it is of high interest for forestry, forest industries, pellet producers and the society at large to get better knowledge about the causes for the differences and their likely development. Hence, the main objectives of this paper are to 1) compare the development of market conditions in Finland, Germany, Norway, Sweden and the US; 2) analyze how domestic market prices for pellets, costs of capital, feedstock, energy and labor vary between these countries, and 3) how these factors affect the economic sustainability of pellet production in each country. The European countries represent different developments regarding pellet production compared to the US where pellet production is increasing.

2.

Material and methods

2.1.

Production technologies

The following analyses are based on two model plants e one that represents common technologies for small scale pellet production (20,000 t y1) based on dry residues from sawnwood production, and one plant representing large scale production (120,000 t y1) based on a blend of dry and wet materials. The economic performance of the two pellet plants is analyzed for each of the countries with country specific production costs and revenues. Information required for a full cost accounting of pellet production was derived from available literature and consultations with actors in the pellet markets. Although the two model plants

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do not necessarily represent optimal technology choices in each country, they do represent common technologies that reflect the economies of scale for most pellet producers. The size and technology for the small model plant assume availability of dry feedstock but not necessarily full-time operation. We assume dry planer shavings as a feedstock. In contrast the large plant reflects full-time operation with a blend of feedstocks like shavings, sawdust and roundwood. Fig. 1 shows the typical production steps of pellet production, starting with storage facilities for the feedstock and forwarding the wet feedstock to a dryer as reduction down to 10% water content is required. The exact energy demand for drying depends on factors such as relative temperature, air humidity, particle size of the feedstock as well as the drying technology. After drying the material other than sawdust is chipped and/or ground to achieve the required particle size for pellet production, after which the particles are pelletized. Due to heating from friction in the pellet machine, the pellets are forwarded to a counter stream cooler and from there finally to a storage facility. Table 1 shows the technical specification of the two model plants. We assume a technical staff of 4 persons per shift in the small and 7 persons per shift in the large scale plant. The operation hours are set to 4000 h y1 for the small and 8000 h y1 for the large scale plant. The working hours are set to 1.1 times the full load hours, which give annual working hours of 46,200 h for the dry line and 96,800 h for the wet line.

studies, public statistics and reports available for the different countries. All reported prices are exclusive of value added tax (VAT). In order to reflect the characteristics of wood pellet production, we have divided the total costs into the categories described in Table 2.

3.

Development of market conditions

3.1.

Development of domestic pellet markets

3.1.1.

Finland

In 2010 in Finland, 290,000 t pellets were produced, a decline of 3% from the previous year and even more from the peak year 2008 when 373,000 t were produced. The pellet export was 191,000 t, an increase by 40% from 2009. 94% of this was imported by Sweden and Denmark. The average export price was 124 V t1. Pellet import declined to 18,000 t, with 60% coming from Russia and 33% from Latvia. The average import price was 123 V t1. In 2011, the production increased to 308,000 t, export 136,000 t at 127 V t1 (FOB), import 14,000 t at 148 V t1 (CIF), i.e. production and domestic use increased, export and import decreased [11,12]. The target according to the National Renewable Action Plan is to double pellet use to 7.2 PJ or 420,000 t in 2020 [13].

3.1.2. 2.2.

Production factors

The factor costs for wood pellet production are given in more detail in Section 4 of this paper. They are based on other

3.1.3.

Fig. 1 e Production steps for pellet production in small and large scale pellet plants.

Germany

The German pellet market is characterized by a continuous increase of production as well as consumption. According to the German Pellet Institute [14] domestic production of pellets increased from 470,000 to 1,600,000 t between 2006 and 2009. Twenty-eight percent or 448,000 t of the production was exported in 2009. Within the same time period consumption of pellets increased from 470,000 t to 1,100,000 t. The majority of pellet consumers are private households, where in 2009 about 125,000 pellet stoves were installed. In Germany, pellet based electricity generation by means of co-firing is not common, and pellets are a minor feedstock for biomass in CHP plants. Average price at mill gate for DINplus-pellets was 170 V t1 in 2009 [15]. In 2009 the bid price for imported pellets from North and South America cif Rotterdam was 120 V t1, and the corresponding price for pellets from Central and Northern Europe was 130 V t1 at mill gate [15].

Norway

The pellet industry in Norway consists of 6 plants of which only 3 have an installed capacity above 10,000 t. The Biowood Norway plant at Averøya on the Norwegian west coast started its operation in 2011 at an installed capacity of 450,000 t, but the plant was closed down in 2012. About half of the domestic plants are based on pulpwood or wood chips as the main feedstock, while the other half uses dry materials. Domestic pellet production increased steadily from 20,000 t in 2003 and reached 50,000 t in 2006, followed by reduction in 2007 and 2008 and a slight increase in 2009 and 2010 to the 2007-level of 45,000 t [16]. These changes are accompanied by increased costs and low capacity utilization. The consumption of pellets has grown slowly and is estimated to be 43,000 t in 2009; hence, wood pellets represent a very small fraction of the energy market in Norway. The domestic producer pellet

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Table 1 e Technology specification for the small and large scale model pellet plants. Factor

Dry line

Production capacity Wood consumptiona

20,000 100% pre dried

Heat consumption Power consumption Total staff Operating time

0.0 80 6 46,200

Wet line 120,000 20% pre dried, 20% wet sawdust, 60% wood chips 4.3 120 33 96,800

Unit 1

ty GJ t1 pellets GJ t1 pellets kWh t1 pellets Personeyears Working h y1

a

The wood consumption in volume varies with moisture content, bulk density and base density of the biomass. The production of one pellet tonne requires about 7 bulk m3 sawdust or 10 bulk m3 cutter shavings or 6 bulk m3 wood chips. No loss of wood energy is assumed for the conversion of biomass to pellets.

price increased up to 2008, but showed a small decline in 2009 when the bulk price was 171 V t1, but increased to 203 V t1 in 2010, partly because of stronger Norwegian currency. About 30% of the market is for pellet stoves in private households, while 70% is sold in bulk and used for heating in local heating centrals [16].

3.1.4.

Sweden

Sweden is one of the largest consumers of wood pellets in the world. In 2008 the consumption was about 1,850,000 t and in 2010 already 2,280,000 t. About 40% of the pellets are consumed by large district heating plants, which have converted from coal. Imports in 2008 were 380,000 t with only minor exports to nearby countries [17]. The Swedish Energy Agency [18] reported a price for pellets and briquettes delivered at district heating plants of 298 SEK MWh1 in 2009, which corresponds to 135 V t1. The estimated pellet market price for bulk deliveries of 154 V t1 is based on Olsson et al. [19].

3.1.5.

The US

The U.S. pellet market represents a small share of the U.S. markets for space heating and power generation. A growing proportion of U.S. wood pellets have become an item in international trade, with most of the activity directed toward

Table 2 e Cost categories. Cost category Raw material Heat Power

Labor Other operational costs Capital costs

Specification Biomass including transport External procurement of energy for drying External procurement of electricity for machinery and other electric devices Operational and administrative labor Miscellaneous operational and maintenance costs are not included in the above stated cost categories Investments in construction, infrastructure and planning for the whole plant. Interest rate and depreciation rate.

Europe and Asia. U.S. pellet production was 4,400,000 t in 2009 with 250,000 t being exported [20]. Eighty percent of U.S. pellet production is consumed in domestic markets, and most of that volume is packaged in 16 kg plastic bags for residential space heating. The export is mainly for Europe. U.S. regional pellet prices for medium to large wholesale customers fob plant are reported by the Pellet Fuels Institute and varied between 150 and 229 V t1 (short ton) in 2009 [21]. The market price for wood pellets delivered in bulk in the U.S. in 2009 is estimated to be around 161 V t1.

3.1.6.

Comparison of market structures

Table 3 gives an overview of the market characteristics for pellets in the five countries covered by this study. A summary over pellet production in all European countries is also given by Sikkema et al. [3]. The EUBIONET project has done a survey of pellet prices in Europe and the collected bulk prices for 2009 are used in this study [19].

3.2.

Biomass markets and cost

3.2.1.

Finland

The annual roundwood harvest was about 60 hm3 in 2009 [11]. Roadside prices in Finland 2009 were 29.4 V m3 for spruce pulpwood, 26.4 V m3 for pine pulpwood, 26.7 V m3 for nonconiferous pulpwood and 13.3 V m3 for biowood (low grade roundwood used for energy production), which is given a production subsidy, 11.25 V m3, subtracted from the roadside price. The cost of wood chips delivered at plant in 2009 was estimated to be 5.1 V GJ1 in 2009. The forest industry accounts for about 80% of the bioenergy production and consumption in Finland. Some 40% of the wood raw materials received by the industry’s production facilities are used to generate energy in different process phases, which makes bioenergy a fundamental operating requirement for the forest industry [23]. The consulting company Po¨yri reported costs of wet sawdust delivered pellet mills of 6.5 V GJ1 in 2009.

3.2.2.

Germany

Wood is the most important resource for bioenergy generation in Germany [24]. After the highest cut ever in 2007 of 76.7 hm3 of roundwood, the German harvest decreased due to the economic crisis in 2008 to 55.4 hm3 and in 2009 to 48.1 hm3 [25]. Production of sawnwood followed the same trend as the annual

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Table 3 e Characteristics of the analyzed pellet markets in 2009. Country

Pellet production, t

Domestic pellet consumption, t

Market price, V t1 (bulk) excl VATa

Number of plants 0e5000 t

Number of plants 5 e20,000 t

Number of plants 20 e100,000 t

Number of plants above 100,000 t

Finlandb Germanyc Norwayd Swedene USf

290,000 1,600,000 46,500 1,576,000 4,400,000

188,000 1,100,000 43,000 1,958,000 4,150,000

170 193 152 166 161

7 5 5 6 4

9 10 3 8 25

11 15 0 16 48

0 11 0 6 8

a

Source: Prices for bulk deliveries for Finland, Germany, Norway Sweden from Olsson et al. [19], and for the US from the Pellet Fuel Institute [21]. b Official Statistics of Finland [12], production and consumption values from Metla [11] and number of plants from the Finnish Pellet Energy Association [22]. c Number of plants in 2010. Plants up to 10,000 t annual production are included in the first category. Source: German Pellet Institute [14]. d Source: Nobio [16] and own survey. e Mill structure from Swedish Association of Pellet Producers [17]. f Source: US mill structure based on Ref. (Spelter and Toth) [6].

cut. In 2007 production reached almost 25.1 hm3, decreased to 19. hm3 in 2008 and reached 20.7 hm3 (estimate) in 2009. Although prices for industrial roundwood as well as pulpwood do have a significant variation depending on the region and the quantities sold per contract, a representative price for spruce pulpwood delivered roadside and noted oven dry was 88 V t1 in 2009. The corresponding price for beech pulpwood was 64 V t1 (4.9 V GJ1) [23]. For industrial residues and sawdust 95 V t1 (V5.3 GJ1) and 90 V t1 (5.0 V GJ t1) oven dry delivered mill gate are representative prices (EUWID, 2010). Transport costs for 50 km are 15 V t1 oven dry for roundwood (0.8 V GJ1) and 20 V t1 oven dry for residues (1.1 V GJ1) [26].

3.2.3.

Norway

Forest resources are the main potential feedstock for increased bioenergy production in Norway [27,28]. The harvest of industrial roundwood was 8.1 hm3 in 2008, but declined to 6.6 hm3 in 2009 due to reduced demand [29]. The pellet plant at Averøya with an annual production capacity of 450,000 t was planned to mainly use imported feedstock [30]. Roundwood prices have been relatively stable the last 10 years, but decreased significantly in 2009 before they increased again in 2010. Pulpwood prices delivered roadside in 2009 varied from 17.2 V m3 for biowood (low grade roundwood not suitable for pulp production and used for energy production) to 27.3 V m3 for spruce pulpwood [27]. Estimated costs for 40 km transport from forest road to plant as well as chipping, storage, administration totals 4.5 V m3. With a water content of 45% the total estimated cost for wood chips for pellet production is 4.8 V GJ1 in Norway. The production of sawnwood has been relatively stable the last 10 years. The production was 2.2 hm3 sawnwood in 2008, a slight decline from 2007 [31]. Statistics of market prices for dry feedstock are not available. Based on interviews among pellet producers, we have estimated the costs for dry materials (max 10% moisture) to be 110 V t1 (6.1 V GJ1) delivered at mill gate, and V36 t1 (5.0 V GJ1) delivered mill gate for wet sawdust.

3.2.4.

Sweden

The roundwood harvest in 2009 was 65.1 hm3. In addition Sweden imported 4.7 hm3 roundwood of which 91% was

pulpwood mainly from the Baltic States. Consumption of the sawnwood in Sweden was 17.5 hm3 in 2009. This is an increase from 1990 when the level was 11.7 hm3. In 2009 Swedish sawnwood industry produced 11.6 hm3 of side products. The main utilization is as pulp chips for the pulp industry, which has increased their consumption since 1990 by about 9 hm3. This trend is opposite to the fiber- and particle-board industry, which is greatly reduced and only demanding minor volumes of feedstock [32]. The average price level of pulpwood was 27 V m3 in 2009 [32]. This represents a large increase from 2005 when the average price level was 21.5 V m3 at 2005 exchange rates. Based on consultations with stakeholders in the pellet industry the price of dry shavings was 95e115 V t1 (average of 5.6 V GJ1) and 85e100 V t1(dry price) for wet sawdust (average of 4.9 V GJ1).

3.2.5.

US

The harvest of industrial roundwood in the US was 292 hm3 in 2009, increasing to 300 hm3 in 2010. The US was a net exporter of about 10 hm3 roundwood in 2010 [33]. Waste residues of wood processing represent 69% of the feedstock used for wood pellet production in the U.S, while chips and roundwood make up 16% of the feedstock with 14% from other residues. The size of pellet mills depends upon having adequate supplies of sawdust and shavings in reasonable proximity to the pellet mill, which is a distance within 80 km. In particular larger plants need to supplement their supplies of wood residues with roundwood, a process which entails bark removal and drying in order to make quality fuel pellets. The cost of the feedstock is important to the final cost of the pellets with regional price differences in residues prices reflecting the levels of wood processing activity in each region of the U.S. ranging from 27 V t1 in the Northeast to 40 V t1 in the West (about 4.2 V GJ1). In some cases the U.S. Forest Service offers to pay to remove pine trees killed by pine beetles. Average delivered pulpwood prices in the U.S. South in 2008 were 30 $ t1 (green tonne) [6]. By including chipping and storage cost of 3 V m3, cost of wood chips for pellet production is estimated to be 3.6 V GJ1. The large pellet mills built in recent years in the South may find it necessary to buy

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Table 4 e Estimated feedstock costs at pellet mill gate 2009 in the five countries. Country

Assortment

Total price V GJ1 (primary GJ)

V t1 (dry tonne)

Finlandb

Dry shavings (10% moisturea) Wet sawdust Wood chips from roundwood Dry shavings (10% moisture) Wet sawdust Wood chips from roundwood Dry shavings (10% moisture) Wet sawdust Wood chips from roundwood Dry shavings (10% moisture) Wet sawdust Wood chips from roundwood Dry shavings (10% moisture) Wet sawdust Wood chips from roundwood

5.3 4.6 5.1 5.6 5.0 5.0 6.1 5.0 4.9 5.6 5.0 5.1 4.4 3.6 3.6

95 83 92 101 90 90 110 90 88 101 90 92 79 63 65

Germanyc

Norwayd

Swedene

USf

a

Water content from shavings is normally between 7% raw weight and up to 20%. Additional drying or a binding agent is needed if feedstock exceeds 15% moisture. An average of 10% is assumed here. b Finland: Cost of dry residues is not available in the Finnish market, a cost of 5.3 V GJ1 is applied based on the prices of chips and wet sawdust and the price structure in the other countries. c Germany: No public statistics for wood chips prices are available. The price for wet sawdust of 5.0 V GJ1 is used as an estimate in the calculations. d Norway: 70% pine pulpwood, 10% non-coniferous pulpwood and 20% energy wood with a moisture content of 45% are assumed used for wood chips from pulpwood in Norway. The transport distance for roundwood/chips is assumed to be 40 km. The water content in sawdust is assumed to be 31%. e Sweden: 40% pine pulpwood, 40% non-coniferous pulpwood and 20% biowood are assumed for wood chips in Sweden. f US: Estimates based on Ref. (Spelter and Toth) [6]. Cost of residues is estimated to be about 3 V GJ1 (70% wet and 30% nearly dry residues). The cost for dry residues is set 10% above this average and the costs for wet sawdust are set 10% below.

pulpwood at higher prices than wood residues and then spend additional money to debark, dry and grind the wood before pellets can be made.

3.2.6.

Biomass costs for pellet production

The costs for feedstock used for the cost calculations are reported in Table 4. They are based on documented average market prices in 2009 in the different countries.

3.3.

Other factor costs

The electricity costs vary by sector and scale. It is assumed that the electricity costs per MWh are 10% higher the small scale pellet production due to higher grid hire costs. Heat prices vary locally and representative data for national and comparative analyses are hard to obtain. We assume heating by a biomass fueled direct dryer with 90% energy efficiency for the large scale plant requiring 0.9 MWh t1 pellets for drying of wet biomass in the large scale plant. Table 5 shows the electricity prices for industry including grid rent and energy use tax. Labor costs including non-wage costs are shown in Table 6. Other costs such as capital costs, interest rates, transport costs for pellets and other production costs other than labor, biomass and energy are assumed to be the same in the analyzed countries. Ocean shipping costs have fluctuated significantly the last 10 years. Sikkema et al. [35] report freight costs from North America to Europe varying from 27 to 69 V t1 since 2002. We assume freight costs of 15 V t1 within the European market and V30 t1from the US to Europe. The costs applied in the analysis are shown in Table 7.

3.4.

Total production costs

Fig. 2 shows the estimated production costs for pellets by country and technology in V t1. The total production costs vary between 119 and 160 V t1 including domestic transport. The production costs for the smaller plant dry feedstock are very similar to the production costs in the large plant in all countries. Overall production costs are significantly lowest in the US due lower feedstock costs. In Europe, Finland has somewhat lower production costs than the other countries. Looking at the cost structure, about 60% of the total costs are expenses for feedstock and feedstock transport. Labor, energy and capital costs are almost equal and of comparable low importance. Hence, the most effective way to cut production costs and raise profitability is to minimize feedstock costs. Cutting capital, energy or labor costs has comparably small effects. For instance, a 10% reduction in costs except feedstock costs would reduce the total cost by about 4%. Since feedstock cost is the decisive factor, it is comprehensible from a cost perspective that in recent years prominent investments into pellet production have been made in the US or, in case of Norway, are based on feedstock from the US.

3.5.

Profitability of pellet production

The pellet prices delivered Rotterdam increased from around 115 V t1 in July 2007 to 140 V t1 in the beginning of 2009. Since then, prices have steadily been declining towards to 125 V t1 by the end of 2010 [3]. Fig. 3 shows profitability per tonne pellet for bulk deliveries in the domestic markets (prices shown in column 4 of Table 3), compared with profitability

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Table 5 e Energy costs in 2009.a,b Finland

Germany

Norway

Sweden

USc

66.1 5.5

100.5 5.6

57.3 5.7

59.6 5.7

48.3 4.4

Electricity e large scale (2e20 GWh annual consumption), V MWh1 Heat (biomass fueled direct dryer) V GJ1 a

Eurostat [34] is used for the European countries. In Norway the “Production of wood and wood products” sector paid 57 V MWh1 for electricity in 2009 [35]. c The price of electricity in U.S. averaged 0.483 V kWh1 in 2009 for industrial customers, although there are regional variations across the country [36]. b

when delivered to the European industrial pellet market at 140 V t1. Based on the market prices for 2009 and the factor costs applied in this study, Fig. 3 shows that export to the European market is close to profitable only for producers in the US, whereas delivering to the domestic markets is profitable in each of the countries except for Norwegian producers.

3.6.

Future biomass cost for pellet production

Development of forest industries will be determined on availability and price of feedstock for pellet production. An interesting question is the amount that feedstock prices will increase if the demand for pellets increases. The pellet production in Europe was around 10,000,000 t in 2010 [3]. If we assume a ratio of 2.5 m3 of pulpwood per tonne pellets and an 80% share of pulpwood in the increased pellet production, a doubling of pellet production from 10 to 20,000,000 t requires additional 20 hm3 of pulpwood. The figure of 20 hm3 of harvest for pellets corresponds to 11% of the European pulpwood harvest of 189 hm3 in 2010 (harvest figures from FAOSTAT [31]). Increased pellet production from 10 to 40,000,000 t would imply a 32% increase in European pulpwood harvest. The direct price elasticity for pulpwood in European markets varies depending on the market model or study, but is often in the range of 0.8e1.2 (see e.g. Bolkesjø et al. [40]). If we assume a direct price elasticity of 1.0, a 32% increase in the European pulpwood harvest would imply increases in the biomass costs of similar magnitudes. As feedstock costs constitute about 60% of the production costs for pellets, 11% and 32% increase

Table 6 e Labor costs 2009.a Finland Germany Norwayb Sweden USc Labor costs, V h1 a

33.9

35.6

42.2

33.7

30.2

Data for 2009 for different European collected by Eurostat and published by the German Federal Statistical Office [37]. b The average labor costs for manufacturing in Norway were 67,200 V per maneyear in the manufacturing sector in 2008 [29]. The annual costs were divided by 1720 h per maneyears when the per hour costs were specified per product output and increased by 5% to get 2009 costs, which gives an annual cost of 42.2 V h1 in pellets production. c Wages of U.S. workers show some variation between those making wood products receiving on average 26,870 V y1, while workers making paper products received 41,853 V y1 in 2009. The applied hourly cost of 30.2 V includes additional costs of approximately 30% are paid by the employers in terms of health insurance premiums, annual leave, and other benefits. Based on data US Department of Commerce [38].

in biomass costs caused increased pellet production costs of respectively 7% and 20%, all other factors remaining equal. Significant increases in pulpwood prices would, however, lower the profitability and production in the forest industries. Current pellet production is around 4,400,000 t in the US and about 1,000,000 t in Canada. Using the same assumptions as for Europe e a doubling of pellet production will demand 11.6 hm3 of pulpwood, which corresponds to 7% of the 2010 pulpwood harvest of 159 hm3 in Northern America. A fourfold increase in pellet production would increase the wood demand to about 22% of the total US and Canadian pulpwood production. The production costs for pellets would increase by 4% and 13% for doubled and quadrupled pellet production. These calculations do not consider wood residues and other market factors, and should be seen as upper estimates of the price effects.

4.

Discussion

4.1.

Methodology

The cost and profitability part of the study is based on two types of pellet plants, and best estimates of their production inputs. It would of course be better to use empirical data from a random sample of a sufficient number of pellet plants in each of the five countries. However, that was not possible since few official statistics are available for pellet production. Our “second best” solution is probably the only way at present to make possible comparative studies of this kind for pellet production. The greatest uncertainty in this study is that each country has mill input structures (size, staffing etc.), which differ from the two types we assumed. Hence, there are pellet plants with more efficient production than assumed here. In contrast it is a prevailing problem in many countries that pellet plants based on dry feedstock struggle with the availability of dry residues within their procurement area. Low capacity utilization for pellet plants implies higher costs for labor and maintenance than in the specified model plants. Other factors of uncertainty are the price of pellets, which may vary considerably with quality and market segment, as well as comparable price data for both pellets and biomass. As such, our results are burdened with considerable uncertainty, and should be interpreted with that in mind. Sikkema et al. [39] compared production costs for pellet production in Sweden, Italy and the Netherlands and found production costs ranging between 110 and 170 V t1. The production costs for a pellet plant with a capacity of 80,000 t in Sweden for deliveries to

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75

Table 7 e Other costs. Cost factor Interest rate Investment costs, V per plant Maintenance Domestic transport International transport

Small scale

Large scale

6% p.a 4,000,000

6% p.a 9,400,000

4.0 V t1 pellets 12 V t1 pellets

1.6 V t1 pellets 12 V t1 pellets

20 V t1 pellets Europe, 35 V t1 pellets Trans Atlantic

20 V t1 pellets, Europe, 35 V t1 pellets Trans Atlantic

district heating plants and based on wet feedstock were estimated to be 148.8 V t1 pellet including domestic distribution, compared to 134.4 V t1 found in our analysis. We have higher biomass costs, but the estimated production costs other than biomass are found to be lower in our analysis. The basis for the Swedish production costs is partly from 2002 and partly from 2008 which can explain the differences from the 2009 figures in our analysis. Zakrisson [41] found biomass costs for Swedish pellet plant with an annual capacity of 10,000 t pellets and based on wet sawnwood to be 89.6 V t1 pellet, compared to 88 V t1 for the wet line in this study. Thek and Obernberger [9] found optimal pellet plant production sizes of about 24,000 t pellet in Austria and about 80,000 t pellets in Sweden. The biomass costs constituted 38% of the production costs for production based on wet raw material and 53% based on dry raw material in 2001 in Austria and 50% for raw material in Sweden, compared to biomass costs between 54% and 65% in our study. They also found that the biomass costs per tonne doubled between 2001 and 2009, which explained the doubling of pellet production costs in the same period.

4.2.

Markets

Dry feedstock for wood pellet production is by-products of the wood working industries like production of i.e. lumber or € t-1 180

160 140 120 100

80 60 40 20

0

Labor

Energy

Biomass

Domestic transport

Other costs

Fig. 2 e Cost structure of pellet production per country and technology, V tL1. Biomass costs are delivered pellet mill gate, domestic transport is costs for transport of pellets from mill gate to customer or harbor.

Fig. 3 e Profitability of pellet production for domestic bulk prices and for deliveries to the European industrial market, V tL1.

furniture, and pellet producers relying on this feedstock are vulnerable to business cycles in this sector. In addition, these by-products have low bulk density, with normal values from 100 to 150 kg m3 dry matter, which means that transportation and storage are limited by volume and relatively costly. Since several other users are bidding for the same resource competition for this feedstock from e.g. the board industries (particle- and fiber-board, MDF and OSB) and for animal bedding is rather strong in some markets. Competition for wet feedstock such as wood chips, pulpwood or forest residues very much depending on the country. Pellet production based on wet feedstock usually relies on high volumes and continuous operation (normally >40,000 t/ year), while the small scale wood pellet industry needs dry feedstock. The potential increase in the availability of dry feedstock is limited by low increase in sawnwood production and alternative local use of the feedstock. This implies lower price elasticity for dry feedstock compared to wet feedstock when used for pellet production. There are marked differences in the markets for the countries analyzed. Pellet consumption in Sweden is about 10 times higher than in Finland, even if these countries are relatively equal in terms of forest resources. A more active policy of substituting oil with wood pellets in central heating facilities and preferences for wood pellets before wood chips also in district heating are explanations for the large pellet consumption in Sweden compared to the other countries. A very active replacement of oil burners implies a competitive advantage for wood pellets when wood chips are too bulky for storage and filling, making district heating not applicable. It is noteworthy that that none of the five countries so far makes much use of pellets for co-firing in CHP plants like in the

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Netherlands or UK. This may be an interesting possibility for future increase in the use of pellets.

4.3.

Costs and profitability

Except for US, the biomass costs are rather similar in the five countries studied. The profit is limited, which suggest that the production there has reached a more mature stage due to relative mature technology and low entry costs for especially for small scale production. The revenues are highest for the US because of lower energy and biomass costs. The regional variation of both biomass and pellet costs can however reduce the profitability in many regions. Reduced or non-increasing availability of dry residues from sawmills implies higher biomass costs and/or low capacity utilization for many pellet plants. Germany has by far the highest electricity costs for the large scale mill, with the US having the lowest electricity costs. The analyses indicate rather clearly that the profitability of European producers depends on the domestic market, and that the market price to large scale industrial consumers in Europe is approximately the sum of estimated production costs in the US and Trans Atlantic shipping costs.

5.

Conclusions

Dry residues from sawnwood production have historically been the main feedstock for wood pellet production due to low prices, no need for thermal drying of the feedstock and a relatively homogenous composition. Such feedstock also gives low ash contents. Declining activity in the sawnwood industry has reduced the availability of feedstock for many wood pellet plants. Biomass costs represent close to 60% of the overall production costs and the US producers have about 25% lower biomass costs than the European producers. The economic sustainability for European pellet producers to a large extent depends on their domestic markets as the international pellet prices are lower than European productions cost. Some economic support for biomass and renewable heat production existed in the analyzed countries. However, no direct support for pellet production seems to occur, implying that wood pellets must be competitive due to price and logistical properties. Future pellet production will, to a larger extent, be based on wet feedstock such as wood chips, roundwood and wet sawdust. These feedstocks are also demanded by other wood-based industries like the traditional forest industries (pulp and paper, particle- and fiber-board), but also for bioenergy production as wood chips and firewood. Increased feedstock prices must hence be expected if the pellet production shall continue to increase. The transition from smaller pellet plants using dry feedstock to larger plants using wet feedstock in future pellet production can be expected to follow comparative advantages, especially regarding feedstock and energy costs, but also with respect to economies of scale. Increased production in the medium term will probably take place in larger mills based on pulpwood which offers more secure biomass supply compared to dry residues. Increased biomass costs and hence pellet prices must be expected over time, but do not necessarily imply that wood pellets will lose competitiveness

compared to other technologies or prevailing energy prices. Long term development of biomass costs and wood pellet production costs depends on the development for biofuels, bio-refineries and other technologies for renewable power production as well as the development in the forest industries.

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