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A r g u s M e dia
New opportunities emerge as biomass market
branches out
By Jessica Dell and Stephen Hall, Argus Biomass Markets
The biomass market has
evolved significantly over
the last year — and is poised
for further development.
Prospects for a model built on
certainty, in which producers
sell under long-term supply
contracts to power plants
backed by government
subsidies, are showing signs
of fading. But in its place are
new opportunities created
by emerging and flexible
markets — particularly the
burgeoning residential sector.
Argus Media has been assessing
industrial wood pellet prices in the
US and northwest Europe since
2009, noting fundamental shifts in
supply and demand and tracking
short-term movements and longerterm developments in the spot
markets. Backed by Argus’ decades
of experience as a market-leading
provider of news, data and pricing
to the global energy commodity
industries, the Argus cif ARA
spot index brings greater price
transparency to an often opaque
market, helping companies to
manage their exposure as well as
driving liquidity.
Industrial demand in Europe is
beginning to fall short of the bullish
expectations of a couple of years ago
– hindered by a series of regulatory
hurdles. But with the industrial
demand curve looking less steep
and steady, other opportunities are
emerging. Trading companies and
systems set up to take their share
of a biomass power industry fed
generously on subsidies see other
doors opening to them. The wood
pellet industry is increasingly showing
signs of finding a home in the
residential market. The situation may
well reverse again in the next couple
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Figure 1- Cif Ara, Fob Baltic, Fob Portugal
With the
industrial
demand curve
looking less
steep and
steady, other
opportunities
are emerging.
The wood
pellet industry
is increasingly
showing signs
of finding a
home in the
residential
market
of years, but for now we are seeing
premium consumption overtaking
industrial consumption.
to have encouraged reductions in
the government’s biomass capacity
targets.
The inroads being made by the
residential sector are largely down to
the regulatory risk that has emerged
in Europe’s major consumption
centres for industrial pellets. The
UK’s recent decision to award only
RWE’s Lynemouth conversion, MGT’s
dedicated CHP biomass plant and one
of Drax’s conversion units an early
contract-for-difference (CFD) subsidy
signalled to many in the industry
the government’s unwillingness to
strongly back biomass as a renewable
technology. And only a handful of
smaller-scale projects are now
making the leap from the drawing
board to reality. The cooling of the
UK government’s ardour for biomass
has much to do with economic
imperatives on the one hand, and
the requirements of getting its
subsidy scheme past the EU’s state
aid rules on the other. Budgetary
restrictions, amid concerns over
consumers’ high energy bills, seem
The impact of government support —
or the lack of it — on the growth of
the biomass market has never been
more evident than in this last year.
Belgian biomass demand has fallen
significantly, after regulators,
industry and government fell into a
stalemate over green power
certificates in Flanders. Co-firing
levels in the Netherlands continued
to drop as subsidies expired, while
Poland remains a fragile market
after several utilities sharply reduced
co-firing biomass in their coal and
lignite-fired generators last year due
to the decline in prices of tradable
green certificates.
Some major markets offer the
promise of substantial increases in
demand, but are behind schedule.
In the Netherlands, utilities and
environmental groups are trying to
find a consensus on sustainability
criteria that will allow the Dutch
World Biomass
Biomass
World
The International review of the Biomass Industry
The International review of the Biomass Industry
energy agreement to take effect
and enable power output of up to
25 PJ/yr from biomass co-fired
alongside coal under the SDE+
subsidy scheme. And Denmark’s
biomass industry is waiting for a
solution to the government’s fuel
tax regime problems so that it can
push ahead with development. The
government has now proposed a
marginal increase in income taxes
to support the energy agreement’s
aim of phasing out fossil fuels
from the country’s heating and
power sectors by 2035. When the
new rules are implemented, the
country’s consumption should rise
considerably.
All in all, there have been significant
fluctuations in the demand curve in
Europe for the next few years, causing
volatility in prices. If the issues of
waning or uncertain government
subsidies are resolved soon and
there are strong subsidy support
schemes in place to boost industrial
consumption, then this market will
easily regain dominance over the
premium market — buoyed by further
expected growth in the Asian market.
But in the meantime, we have seen
traders and producers embrace
opportunities in the residential
sphere, where consumption levels
rely much less on government
subsidies.
Residential markets in Germany,
France and Italy are showing
particularly strong growth, aided by
the fact that heating oil has climbed
back to pre-recession levels on the
wholesale markets. Oil companies
and utilities are starting to join the
market, selling pellets through
existing supply networks alongside
heating oil, while many industrial
producers are making the requisite
adjustments and investments to
make premium pellets and can easily
switch between grades. Production
of premium wood pellets is on the
rise in Portugal and the Baltics,
while US premium pellet exports to
Europe are steadily increasing as
well. The industrial market created
the system - including production and
transportation infrastructure - that
the residential market has adeptly
Figure 2- 5 year Cif ARA in Euros
taken advantage of. What we have
therefore seen is a market that has
adapted to significant regulatory
changes and uncertainties.
If the issues
of waning
or uncertain
government
subsidies are
resolved soon
and there are
strong support
schemes in
place to boost
industrial
consumption,
then the
industrial
market will
easily regain
dominance
over the
premium
market,
buoyed
by further
expected
growth in Asia
The residential market’s demand
curve is also not clear-cut over
the next decade, with consumption
levels dependent on weather and
the comparative cost advantage of
pellets over competing fuels to heat
homes. But its outlook appears more
stable and predictable than that of
the industrial market, with its volatile
support schemes and dramatic rises
and falls in likely consumption levels.
The premium market does not put the
same stress on government budgets
– or attract the same criticism from
campaigners - and can consequently
grow more organically. In the UK, this
is particularly evident as government
enthusiasm for industrial biomass
has arguably dampened — but its
fledgling premium market is poised
for strong growth. Biomass has
accounted for 99pc of heat produced
under the Renewable Heat Incentive
scheme so far, highlighting a
preference for the technology over
alternatives. Biomass is a reliable
source of base-load power — but
without the EU or individual countries
implementing subsidy schemes to
support its use, it is increasingly
likely that residential consumption
will be a growing focus in the market.
The overall outlook for the biomass
market is highly dependent on policy.
But, given emerging patterns in the
market, there are several interesting
developments on the horizon. We can
expect to see the residential market
continuing its growth trajectory, Asia
competing with Europe for volumes
as the South Korean market grows
under the Renewable Portfolio
Standard, implementation of uniform
sustainability criteria boosting
liquidity in the market, increasing
numbers of long-term contracts
and financial swaps deals based
on floating spot market prices, and
longer-term offtake deals for EN
Plus pellets. But at least one thing
is certain: the biomass market will
adapt to changes in consumption
patterns, as it already has over the
last year.
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