Download Finland: Wood heat has become real business

Telling the story – how wood heat
has become real business in rural
areas
Woodheat solutions – IEE/07/726/SI2.499568
Jyrki Raitila, VTT
Author: Jyrki Raitila. Telling the story – how woodheat has become real business in rural areas, Wood
heat Solutions Project Report 10/2009, Project IEE/07/726/SI2.499568. Jyväskylä, Finland, October
2009, 10 pages.
Keywords
Woodheat, entrepreneurship, district heating
Abstract
Finnish municipalities have a long tradition in investing in wood fuel plants. After the World War 2
district heating was favoured in order to increase energy efficiency in energy generation. The
exploitation of renewable energy sources was boosted in the 1990’s by efforts to mitigate climate
change. Other factors favouring the increasing use of renewable energy sources in Finland include
the need to guarantee the energy supply from local sources where possible, and the desire to
increase employment opportunities in rural areas and find new uses for set-aside farmland.
In the beginning of the 1990´s some municipalities started to invest in biomass heating systems for
municipal buildings like schools, retirement homes etc (output < 1 MWth). A new form of business
was born in the Finnish countryside during the 1990s, when farmers started to produce heat from
wood fuels, first supplying heat for schools and old people’s homes and later expanding into
municipal district heating and the provision of heat for industrial processes. This ‘heat
entrepreneurship’ has boosted rural employment while also reducing carbon dioxide emissions.
The authors are solely responsible for the content of this publication. It does not represent the opinion of the
European Communities. The European Commission is not responsible for any use that may be made of the
information contained herein.
Introduction
Finnish municipalities have a long tradition in investing in wood fuel plants. At the end of 1960´s,
when the major cities started to build up district heating networks and CHP plants, the main fuel
was milled peat or wood fuels. Natural gas was, and still is, widely used in coastal areas. However,
when cheap oil, and fossil fuels as a whole, came into market, oil and coal fired energy plants and
boilers started to dominate in energy generation.
The exploitation of renewable energy sources was boosted in the 1990’s by efforts to mitigate
climate change. Reducing greenhouse gas emissions became a political objective as early as 1990,
when Finland pioneered carbon taxes on fossil fuels. Other factors favouring the increasing use of
renewable energy sources in Finland include the need to guarantee the energy supply from local
sources where possible, and the desire to increase employment opportunities in rural areas and find
new uses for set-aside farmland.
In the beginning of the 1990´s some municipalities started to invest in biomass heating systems for
municipal buildings like schools, retirement homes etc (output < 1 MWth). A new form of business
was born in the Finnish countryside during the 1990s, when farmers started to produce heat from
wood fuels, first supplying heat for schools and old people’s homes and later expanding into
municipal district heating and the provision of heat for industrial processes. This ‘heat
entrepreneurship’ has boosted rural employment while also reducing carbon dioxide emissions.
Heat entrepreneur/enterprise is a single entrepreneur, a co-operative, a limited liability company or
an entrepreneur consortium that supplies customers with heat. The heating enterprise typically
operates locally and the main fuel is wood. The fuel comes from the entrepreneur's own forest or
from local forest owners or wood processing industry. The heat entrepreneur operates the heating
plant and earns income based on the amount of heat generated. The price of heat was usually bound
to the price of light fuel oil in the beginning but nowadays it is more common to use different
indexes (e.g. the cost of living index or prices of a set of fuels).
Development
Heat entrepreneurs supply heat mainly for municipal buildings like schools, retirement homes or
industrial buildings. The number of sites has grown from the 3 plants in 1992 to today’s 372 (at the
end of 2007) installations (Fig.1). There were 181 plants managed by cooperatives or limited
companies, and the rest were managed by single entrepreneurs or entrepreneur networks, 27 % of
all heat plants were district heating plants while the rest were single building heating plants. The
heating business has turned out to be successful, which accumulates new plants also in larger scale.
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Figure 1: The total number of heating plants managed by heating enterprises. Source: TTS Institute.
The number of plants has been constantly on the increase since the first heat entrepreneurs started
their business. In 2007 the total heat capacity was 190 MW, the annual growth being about 10 % in
both the number of plants and the boiler capacity. An average boiler capacity was 0.5 MW but the
trend is to find customers that need bigger installations – a 300 kW or 3 MW plant require roughly
equal amounts of service and management but only the bigger one renders a decent profit. When
looking at new heating plants, an investment was made by the entrepreneur in every other case.
In 2007 heating entrepreneurs used approximately 730,000 loose-m3 of forest chips, which is about
11 % of the total volume of forest chips used in all heating and power generation. In addition, more
than 60,000 loose-m3 of other wood fuel and about 30,000 loose-m3 of sod and milled peat were
used in these plants. Most often forest chips are made of unmerchantable wood, e.g. small diameter
trees, damaged timber and logging residues. Primary sources for wood chips are private forest
owners and forestry societies.
Timely actions of promotional and fiscal measures together with active supporting networks have
been successful on policy level. R&D of the Wood Energy Technology Program has improved
technologies for heat entrepreneurs. The fuel chain from forest to the heating station has become
better controlled and less vulnerable. However, development in large scale applications has been
slower than technologically possible. The wood fuel potential is great and new wood fuel heating
systems and stations could be established at a faster rate.
Privatisation of municipality heating
Municipalities have been a key player in establishment of heating enterprises that have taken the
responsibility in heating public buildings, such as hospitals, schools, offices and libraries, private
houses and industrial estates. This privatisation and mixing of responsibilities in municipal heating
is part of the division of responsibilities between the state and private sector for the delivery of
public goods and services that has been continuing in western economies during the last two
decades (Shleifer 1998).
Privatisation of heating provides mutual benefits. For heat entrepreneurs, e.g. forest owners, local
farmers and contractors, heat entrepreneurship provides extra income, use for fuel wood (otherwise
unmarketable), benefits of improved forest management, use for under-utilised harvesting
equipment and increased employment. For the municipality, heat entrepreneurship provides
increased security of heat supply, savings on operational and investment costs of energy production
when fuel oil is replaced with cheaper woodfuels, increased use of local labour and creation of new
business opportunities, support for existing employment (e.g. contractors), environmental benefits
and local indirect and induced economic impacts of local spending (Madlener and Myles 2000).
The Heat Entrepreneur Finland project estimated that about 45-55 % of the energy generation and
transport costs will be circulated back to municipality (ReAct 2004).
In privatising heat production of a municipality, several issues must be considered to assure the
reliability of the service: e.g. the selection of operational models, invitation of tenders, plant
investment and heating contracts (Puhakka 2005). On the basis of heat energy provision contracts,
two basic models of organising heat energy entrepreneurship in Finland can be distinguished:
public-private partnership model and private investment and management model.
Public-Private Partnership Model
A public-private partnership is a partnership between the public and private sector for the purpose
of delivering a project or a service traditionally provided by the public sector. Public-private
partnerships are based on the idea that both sectors have certain advantages relative to the other in
performance of specific tasks. (Okkonen, Puhakka and Suhonen 2006)
Since the 1990’s Finnish municipalities have started to reduce their role in the heating service
through mixed responsibilities and partnerships with the basic idea that public and private actors
take responsibilities and divide the tasks according to their relative strengths. Often the boiler and
grid investments are made by the municipality and an entrepreneur or enterprise takes care of the
woodfuel supply, and the control and maintenance work of the plant. This also means that the
municipality takes a financial risk for the plant and grid investments. (Okkonen, Puhakka and
Suhonen 2006)
Private Investment and Management Model
Privatisation of municipal heating services can also be implemented completely if an entrepreneur
or enterprise is capable to invest both in the heating plant and in the grid and also to take care of
fuel supply, and the control and maintenance work of the plant. The heat entrepreneur then sells
heat to the customer, that is usually the municipality, as a comprehensive service. The price for heat
is set in relation to an energy unit (€/MWh). In this model the entrepreneur has to take a financial
risk of the plant and grid investments. On the other hand, the entrepreneur is then independent in
business related decision-making as long as heat is provided according to the provision contract.
(Okkonen, Puhakka and Suhonen 2006)
Table1: An example of the business volume of a 500 kW heating plant (Okkonen, Puhakka and
Suhonen 2006)
Amount of produced heat/a
1,200 MWh
Annual fuel consumption
1,900 loose- m3
Heated building volume
27,000 m3
Length of the network
400 metres
Investment costs
267,000 € + VAT
Total price for the heat
48 €/MWh
Heat generation and maintenance of plant
28 €/MWh
Capital costs
20 €/MWh
Main elements of success
In Finland the bioenergy markets are mostly local. There are only a few diversified companies that
operate on a national level. Also some forest industry companies supply wood fuels through their
forest departments. These companies work on energy, wood processing and are also involved in
biofuels business. They can utilise industrial wood residues from their own mills for production of
wood chips or pellets. By integrating harvesting of logging residues into timber or pulp wood
harvesting the fuel prices are kept competitive. (ReAct 2004)
Locality
Heat entrepreneurs operate locally producing heat from local wood fuel sources. Municipalities play
a key role in establishment of heating enterprises. However, in recent years private companies have
become customers of heat entrepreneurs to a larger extent. Relatively stable energy prices, local
security in energy generation, improved technology and long term contracts have increased the
competiveness of local SMEs in energy business.
Advanced technology
The technology has improved the fuel chain from forest to heating plant. Now it is better controlled
and less vulnerable. Bioenergy technology programs, launched by TEKES (the National
Technology Agency) in the 90’s and in the beginning of this Millennium, contributed to the
development of new technology solutions for biofuels remarkably. At the same time many Finnish
forest machine and boiler manufactures have brought new innovations to the market.
Figure2: Supply chain of small diameter trees for heat generation. Source: VTT
Figure 3: An example of a wood chip heating system under 100 kW in Finland. Source: VTT.
The boiler plant usually consists of the fuel storage with an automatic fuel feeding system to the
boiler (Fig.3). The boiler plant has a stoker-burner and a mechanical moving grate with an
automatic combustion control system. Plants usually operate unmanned and heat entrepreneurs only
visit the plant for feeding the fuel storage or if some operational disturbances occur in the plant.
Plants are equipped with an automatic alarm system. (ReAct 2004)
Support activities
Regional forestry centres promote private forestry through guidance to forest owners. Local forestry
societies provide expert assistance to forest owners in conjunction with pulpwood and timber sales,
and other forest operations. Wood energy advisors at regional forestry centres give advice and
information about wood fuel production and look for new outlets for heating enterprises. These
experts are specially trained people with a background in forestry. Similar help is available for
farmers at regional agricultural centres. (ReAct 2004)
Research organisations, e.g. TTS Institute and VTT, have carried out several studies on heating
entrepreneurship and the results have been widely disseminated. The follow up studies at heat
enterprises by TTS have been very important to guarantee that the sites are well implemented (right
size, right form of entrepreneurship, quality of fuel, etc.). The experiences of the first sites have
been widely shared in newspapers, articles and seminars. (ReAct 2004)
Policy measures
The government energy research, development and demonstration funding for renewable energy is
about 10 million euros yearly (ReAct 2004). The support is primarily granted through the National
Technology Agency TEKES. The European regional development program is another important
source of funding for regional development projects.
Fiscal measures
Taxation is one of the main instruments related to climate change and environmental policy in
Finland. Finland was the first to impose a carbon based environment tax in 1990 by introducing a
CO2 tax on fossil fuels. In heat generation, solid biofuels like wood fuels, biogas and REF are not
taxed. Fossil fuels attract tax, which is based on the carbon content of the fuel. (ReAct 2004)
Subsidies granted for energy investments, development projects and energy conservation constitute
an important means of implementing the National Energy and Climate Change Strategy. The
maximum grant for investments in renewable energy based on conventional technology is 25-30 %
and for innovative projects 40 %. Investment grant is allocated for companies and communities, not
for private people or state organisations. (ReAct 2004)
The Ministry of Agriculture and Forestry (MAF) launched a campaign in 1997 to promote the
tending of young stands (ReAct 2004). The state support is about 50-70 % of the harvesting costs of
thinnings from young stands if the harvested wood is used for energy generation in a heat plant that
is not owned by the forest owner. However, most of this support is spent in silvicultural tending
operations. Yet for small heat plants that mainly use wood chips made from whole trees for energy
generation, the government subsidy is very important to keep the price of forest fuel competitive.
Conclusions
Timely actions of promotional and fiscal measures together with active supporting networks have
proved to be successful. Research and development programs have improved technologies and
business concepts for entrepreneurs. The fuel chain form forest to heating plant has become more
effective, better controlled and less vulnerable. However, development in large scale applications
has been slower than technologically possible. The wood fuel potential in Finland is remarkable,
and thus many more heating enterprises could be established in the future. Cost-effectiveness, fuel
quality, logistics, storage and feeding systems are areas where further development is still needed.
Also the activation of new entrepreneurs calls for training and support at both national and local
levels.
References
Alakangas, E., Rautanen, J. and I. Lappalainen. 2004. Biomass Heating Entrepreneurship in
Finland. In: Bioenergy 2003 International Nordic Bioenergy Conference 2.-5.9.2003 Proceedings,
FINBIO.
Madlener, R. and H. Myles. 2000. Modelling Socio-Economic Aspects of Bioenergy Systems: A
Survey Prepared for IEA Bioenergy Task 29 Workshop, Brighton, U.K.
Okkonen, L., Puhakka, A. and Suhonen, N. 2006. Management models of heat energy
entrepreneurship in Finland. PUUT49. Project report summary. NCP.
Peltola, T. 2005. Business on the margin: Co-operative heating and the politics of forests in Finland.
Draft paper.
Puhakka, A. 2005. Energiaratkaisujen valinnan ohjaus kunnissa. Pro gradu -tutkielma. Oikeustieteiden laitos. Joensuun Yliopisto.
ReAct (Rautanen, J.). 2004. Renewable Energy Action. Case study 16: Biomass Heat
Entrepreneurship.
Shleifer, A. 1998. State versus Private Ownership. Journal of Economic Perspectives. Vol. 12, No.
4. Pp. 133-150.