Wood Pellet Manufacturing is Risky Business and it Just Got Even Riskier
In just the last two years or so, the wood pellet export industry in the US has exploded to meet spiking demand in Europe, where utility companies are phasing out coal and phasing in wood as a primary fuel source for electricity. Almost overnight, a multitude of new companies no one has ever heard of have incorporated and set up manufacturing facilities that are turning trees from America’s forests into wood pellets to supply this new global market.
The US South is ground zero for this new phenomenon, where wood pellet exports jumped from over a million to three million tons in roughly the past year. UK utilities like Drax, are way out in front, actively converting coal boilers to wood and co-firing wood along with coal. In the absence of enough forests in Europe to supply the fuel needed to run these giant power plants, Drax and others rely on imported wood in the form of pellets from elsewhere, particularly the US South. Scrambling to be the leader in this new market is Enviva, the South’s largest wood pellet manufacturer and supplier to Drax. Enviva and Drax are now working in concert to increase investment in the expansion of two port facilities on the coast of North Carolina.
Just how stable is this market? What are the economic risks to investors? What kind of long-term impacts will this industry have on economic development in coastal and rural communities across the South?
The very existence of this market hinges on government policy propped up by huge government subsidies. In Europe, government mandates to reduce carbon emissions and retire coal burning power plants combined with massive government subsidies for renewable energy have combined to create the new global market for wood pellets. Companies like Drax and Enviva are pointing investors to industry projections that exports from the South will reach as high as ten million tons in the next three years.
Hmmm… not so fast. This is one market whose very existence depends on its ability to deliver real, verifiable environmental benefits. Yet, at the same time this market is taking off, a mounting body of scientific evidence has emerged documenting that burning trees for electricity could actually increase carbon emissions when compared to coal and other fossil fuels. Environmental organizations across the US and Europe have joined forces to stop the burning of trees for electricity in favor of low carbon intensive alternatives, such as solar and wind. Government is starting to take notice, and investors are soon to follow.
In just the past two weeks, the UK government announced a cap on the construction of new wood burning power stations, and all government subsidies for biomass will come to a screeching halt in 2027. In an article that ran in BBC on July 16, 2013, Ed Davey, the UK’s Energy Secretary stated, “Making electricity from biomass based on imported wood is not a long-term answer to our energy needs – I am quite clear about that.” A similar signal came out of the Netherlands last week with news of an Energy Agreement that was signed by employers, labor unions, energy companies, governments, NGOs and others announcing that as five coal power plants close, the co-firing of biomass will be capped so that it will stay relatively small as the country focuses on a scaled-up reliance on wind power. Even here in the US, where utilities like Dominion Power are burning wood as a fuel source, a federal court, citing scientific studies demonstrating significant carbon emissions from burning trees, reversed an EPA rule exempting biomass from carbon regulations under the Clean Air Act.
Clearly, the writing is on the wall – the recent market boom is going to bust and investors won’t want to get caught in the bubble. Within an evolving policy context where the science is in direct contradiction to the business model, it’s likely we’ll see even more restrictions on tree burning and associated wood pellet exports in the next few years, making new investments pretty risky.
Take a look at this video of Gainesville Mayor Braddy calling biomass a scam:
Of perhaps greater importance, however, are local communities where these wood pellet facilities are locating. The prospect of new jobs is enticing, but what happens in 15 years when the government subsidies run out and the demand for wood as a fuel source dries up? What happens when even tighter restrictions on biomass in Europe are enacted and demand shrinks in the nearer-term? Local communities will be left with a degraded landscape of destroyed forests and countless hardworking folks will lose their jobs. Hard-earned tax dollars will have been wasted, burned up in smoke in European power plants along with the surrounding forests. Wood pellet manufacturing is not only not the path to a clean energy future, it’s also not the path for community economic revitalization or long-term economic stability.
Drax, Enviva and others are painting a much rosier economic picture. After all, they are the front-runners, and they have already sunk a lot of money into this market. Investors will most likely increasingly take their financial forecasts and market projections with a grain of salt. Hopefully, local economic development agencies across the South will do the same.