Global wood pellet burn for power generation to rise in 2024


The industrial wood pellet spot market experienced unprecedented volatility in 2022-23, with the Argus index balancing around a new, higher range in the second half of 2023 compared with pre-2022 levels. The pace of developments in supply-demand fundamentals will set the tone for 2024, with January-March seemingly bearish but the market expected to strengthen later in the year.
Wood pellet-fired power generation in northwest Europe is expected to increase in 2024, particularly because of a stronger outlook for UK output. A similar trend is expected in Asia-Pacific, owing to the ramping up of installed power generation capacity in Japan and South Korea. On the production side, capacity in the Atlantic basin and Asia-Pacific is also set to increase, although supply remains structurally short in the near term.
UK, Danish generation to rise 
Wood pellet-fired power generation in northwest Europe is expected to increase in 2024 as a result of a stronger outlook for 


UK output, although overall weaker power prices and planned outages at major units may limit the scope of the upside in continental Europe. Wood pellets lost their competitiveness against coal in November-December for 2024 deliveries, although pellets regained their advantage for first-quarter deliveries in early January. 
Generation at the UK’s contract for difference (CfD) units ramped up considerably in the fourth quarter of 2023 compared with a year earlier, after holding at close to zero in the 12 months to September because the scheme was unprofitable. The CfD units are expected to continue generating in the first quarter of 2024. And early indications from forward wood pellet and power prices suggest that CfD output will continue to be profitable in summer 2024. UK generator Drax, which operates a 645MW pellet-fired unit at its 2.6GW plant in York, said in its latest trading update in December that it had hedged 2.1TWh of sales for CfD generation in 2024, suggesting that the utility expects the unit to be profitable this year.
Wood pellet consumption by CfD units in summer 2023 was only an eighth of the more than 800,000t they consumed a year earlier, and just a small fraction of the average 2.1mn t consumed during the same period in the three years before 2022, assuming 40pc generating efficiency. Wood pellet consumption at CfD units in 2023 is estimated to have dropped by around 1mn t from a year earlier and by 2.9mn t compared with 2021, using National Grid data and assuming 40pc generating efficiency.
There is scope for pellet burn in the UK to ramp up significantly in 2024 compared with a year earlier, should the CfD units operate around historical averages. This upside could be partly offset by lower generation from units operating under the UK’s renewable obligation (RO) scheme, because of scheduled maintenance. Drax’s unit 3 is scheduled to undergo a planned shutdown for nearly three months in May-July, National Grid data show. The company carried out large-scale maintenance at its two other units with the same capacity last year. 
The UK’s CfD-supported 299MW MGT Teesside pellet-fired plant, which was testing generation in October but has since been off line, could also support pellet consumption, should the plant start commercial operations this year. The plant’s start-up has been delayed by multiple years because of technical issues. 
Elsewhere in northwest Europe, pellet-fired generation is expected to be higher in Denmark, particularly as utility Orsted’s 380MW Studstrup 3 plant is scheduled to be available in the first quarter of 2024. The unit experienced an unplanned outage of more than six months following a fire at its silo in late September 2022. 
The outlook for Danish power generating units is less robust for the summer, particularly if base-load power prices for the period settle below the cost of generating power with pellets.

Danish pellet-fired power and heat generation typically peaks during the heating season, which can at times extend to April-May. Utilities have an obligation to generate heat at district heating units, for which they receive state support. But power generating units do not receive any support during the summer, and are incentivised to burn pellets only when power prices are sufficiently high to generate positive profit margins, as in summer 2021. 

Maintenance shutdowns may also pare pellet use. Orsted’s 548MW Avedore 2 pellet fired unit is scheduled to be taken off line for around two months from mid-May, Remit data show. 
Inventories and weather conditions at the start of the summer season will also be key determinants for European power sector pellet demand in April-September. Many utilities in northwest Europe entered 2024 with higher stocks than usual for the time of year.

Pellets lose ground to coal
The 2024 outlook for wood pellet burn at flexible units that co-fire biomass with coal, particularly in the Netherlands, is also mixed. 
Over the past few weeks, wood pellets have been becoming less competitive against coal for power generation in 2024, which could limit demand from co-firing units for additional pellet supplies, or even encourage a decline in wood pellets’ share of the fuel mix. 
The wood pellet breakeven power price for 40pc-efficient units — which reflects the fuel cost for generating power by burning pellets — is currently at a premium to emissions-adjusted coal breakeven power prices for units with the same efficiency.

Dutch biomass-fired generation in January-October — the latest period for which CBS data are available — also dropped, to an hourly average of around 795MW from around 980MW a year earlier, mostly because of a sharp fall in output in June-September. Production is likely to have remained below year-earlier levels for the rest of 2023 because of planned and unplanned outages. 
Further out, German utility RWE’s 630MW Amer 9 plant will undergo a three month shutdown in April-June, and its 790MW Eemshaven unit B in the Netherlands is scheduled to undergo maintenance on 21 June-19 July. The 1.1GW Maasvlakte plant operated by German utility Uniper will be off line for maintenance from 2 May–19 July, Remit data show.
Asia-Pacific demand outlook strong 
Demand for industrial wood pellets in Asia-Pacific is expected to rise strongly in 2024 compared with a year earlier, in line with newly commissioned plants and capacity expansions in Japan and South Korea. 
Unplanned outages at a number of biomass-fired units in Japan and delays to start-ups in the second half of 2023 cut wood pellet and palm kernel shell (PKS) consumption well below previously anticipated levels. At least 621MW of biomass-fired capacity was commissioned in 2023, of which 275MW was brought on line late in the second half of the year. And at least just over 580MW of additional capacity is expected to come on line in 2024, which will use wood pellets, PKS and other types of biomass as feedstock. 
Japan’s biomass-fired installed capacity has increased significantly in recent years, mostly as units operating under the feed-in-tariff or feed-in-premium state support mechanisms were commissioned. This has bolstered the country’s wood pellet demand, which is expected to surpass industrial pellet consumption in the UK — currently the largest consuming country globally — in the next few years.

As capacity ramps up, long-term supply contracts for North American and southeast Asian pellets will kick in. This in turn means consumers in Europe and Asia-Pacific may have to compete for North American supplies, particularly during high-demand periods. 

In South Korea, the Samcheok Blue Power plant is expected to start up in the first half of 2024, followed by the Gwangyang Green Energy facility in 2025, with anticipated wood pellet consumption of 380,000 t/yr and 880,000 t/yr, respectively.

Near-term supply tight
On the supply side, production capacity in the Atlantic basin is expected to continue growing in 2024 and beyond. But supply will remain structurally short in the near term, as new additions are yet to plug the deficit resulting from sanctioned Russian supplies alongside rising demand. 
Millions of tonnes of production capacity expansions are planned, or came on line last year, in North America, Europe and Asia-Pacific. 
At least 1mn t/yr was added in North America in 2023, as US wood pellet producer Enviva fully ramped up its 750,000 t/yr Lucedale plant in Mississippi and as Copenhagen Biomass Merchants added about 270,000 t/yr of wood pellet production capacity to its operations in the US. 
Looking ahead, nearly 5mn t/yr of pellet production capacity is expected to come on line in the next few years in North America, including pellets made from alternative feedstocks, with around 2.1mn t/yr expected to become operational in 2024 (see table).
Further out, Drax’s 450,000 t/yr plant in Longview, Washington, is due to come on line in 2025. And Californian forestry company Golden State Natural Resources plans to commission two industrial wood pellet production plants on the US west coast with a combined capacity of 1mn t/yr by early 2025. 
Enviva said in late 2023 that it was evaluating a potential deferral of up to 12 months to 2026 for its 1.1mn t/yr Bond plant project in Mississippi “in light of ongoing liquidity management initiatives”. The company, which is the world’s largest industrial wood pellet producer, owns and operates 10 plants with a combined production capacity of about 6.2mn t/yr. 
Canadian wood pellet producer Prairie Clean Energy aims to increase its production of flax pellets to at least 150,000 t/ yr by 2026, utilising untapped agricultural residues in the US and Canada. 
In Europe, about 2.4mn t/yr of new capacity is in the pipeline — at different stages of financing and with varying commissioning lead times — including plants that will use industrial and residential wood pellets as well as torrefied material, demand for which is growing for industrial applications and to meet decarbonisation initiatives. 
Capacity in Austria, the largest supplier of premium wood pellets to Italy, was due to increase by 200,000 t/yr to about 1.9mn t/yr in 2023. Total new capacity expected to be added in 2022-24 is estimated at about 650,000 t/yr, data from industry association ProPellets Austria show. Significant additions are also expected in Germany and France.

European supply uncompetitive 
Industrial wood pellets exported from key European producing regions — the Baltic countries and Portugal — continue to struggle to compete with North American pellets, with the fob Baltic and fob Portugal spot markets widening their premium to the Argus cif NWE spot index at the start of 2024. Baltic and Portuguese material was more expensive than North American product throughout last year, when pellets resold by utilities to the spot market were the marginal source of supply for extended periods. This weighed significantly on the cif NWE Europe spot market, pulling the price for deliveries to northwest Europe to a large discount to the fob Baltic and fob Portugal markets. 
The competitive disadvantage has been deeper for Baltic pellets, partly because of the supply shock resulting from wood products from Russia and Belarus being sanctioned in 2022. This caused a large feedstock supply deficit that lifted raw material costs for pellet producers to double their 

historical averages for most of 2022. Raw material prices have since eased, although they remain above pre-2022 long-term averages, and inflationary pressures have lifted other production costs, lending support to the overall cost of producing pellets. 
Spot wood pellet trading has been limited over the past few years for loadings from the Baltic region but there has still been some market activity, mostly as a result of demand from heat and power generators in the Baltic Sea basin that lack the logistical capacity — access to port terminals and storage facilities — to receive larger cargoes. Some wood pellet volumes have also been diverted from exports to local markets in the Baltic region, where governments are continuing to incentivise the consumption of non-Russian origin fuels. 
Producers in the Baltic region and Portugal are expected to continue to focus primarily on the delivery of their long-term contractual supplies, until fob spot prices switch to a discount to the spot cif NWE market. 

Asian pellet production capacity to rise 
In southeast Asia, wood pellet exports from Vietnam, the largest producer and exporter in Asia-Pacific, are estimated to have increased by more than 2pc on the year to over 4.7mn t in 2023. And production capacity is expected to rise by around 650,000 t/yr in 2024, with Vietnam believed to have scope to ramp up exports to as high as 5.5mn t/yr from 2024, if required. 
Indonesia’s wood pellet production capacity was expected to rise by nearly 1mn t/yr in 2023, provided that all projects were completed on schedule, bolstering the country’s overall capacity to 1.5mn t/yr. Indonesian production capacity is expected to rise to 2.5mn-3mn t/yr by 2027.
Note: - The above content is extracted from Argus research.