Canadian Biomass • Winter 2021 • Growing demand

Wood pellets are an upgraded renewable solid fuel which, if sourced sustainably, offer a low carbon-emitting alternative to fossil fuels. They are widely used for heating homes and businesses. or as a substitute for coal in electric power generating stations.

This article will mostly focus on what are commonly called industrial wood pellet pellets that are used in power plants.

But it should be noted that the heating pellet markets are expected to continue to have steady growth. Heating pellet markets are influenced by policy and, in some cases, are supported by it. Policies that impact the cost of fossil heating fuels, lower the cost of installing a pellet-fueled appliance, or provide support for using renewable energy, facilitate the decision to switch to a pellet boiler or install a pellet stove and use wood pellets for heating.

The heating pellet market is substantial. FutureMetrics estimates that global demand for heating pellets in western nations will reach about 26 million metric tonnes in 2027, up from the estimated 18.2 million metric tonnes consumed in 2020 (see Figure 1).

Whereas the heating pellet market is influenced and supported by policy, the industrial wood pellet market is entirely dependent on policy support in most jurisdictions. In the heating sector, in some locations, pellets are the lowest-cost fuel, but in the power sector, coal is typically more costly than pellet fuel. Lowering carbon emissions from electricity generation via co-firing pellets and coal or converting a power station to operate on pellets requires government mandates and support.

The outlook for growth depends on which policy scenario one chooses: current policy with no changes, or evolving policy in response to climate change.

Under current policy support schemes, after 2023 there is limited future growth forecast in the industrial wood pellet market. Europe and the UK will have reached the limits of the current policy support in 2023. It is possible that some support in the UK and western Europe will expire in the late 2020s, causing demand to fall. Japan’s growth in pellet demand will continue for a few more years. But, most of Japan’s feed-in-tariff (FiT)-supported independent power producer (IPP) projects are expected to be up and running by the end of 2024. South Korea has potential for higher demand, but the collapse of renewable energy certificate (REC) prices and changes in REC weightings have depressed pellet demand and thrown great uncertainty into how support for pellet fuel as a substitute for coal will evolve.

However, even under the “current policy” scenario, there is still growth expected. The forecast is for an additional 6.8 million tonnes per year of demand in 2027 compared to 2020 demand levels, with most of that new demand online by the end of 2023. But, FutureMetrics expects that policies will evolve and demand in 2027 and beyond will be much higher than shown in Figure 2. The increasing negative impacts of climate change are likely to motivate policies that will support using industrial wood pellets for power generation.

Under the evolving policy scenario, Future- Metrics is confident Japan will have policy that supports co-firing, and perhaps a few full conversions to pellets, at major utility power stations. The Japanese government has set goals for how power is generated that, under most scenarios, will require some portion of the coal in large utility power plants to be replaced with wood pellets. The government has also set minimum efficiency standards that low-efficiency power stations can meet by co-firing.

Based on those power stations that are likely to use pellets to meet minimum efficiency requirements and expectations that pellets will be part of the strategy for compliance for CO 2 emissions goals, FutureMetrics expects an additional five million tonnes per year of demand by 2027 (see Figure 3). This pushes new demand in 2027 to 11.9 million tonnes per year.

But, there is another likely “evolving policy” that includes the U.S., Germany, and Canada that pushes potential demand in 2027 higher.

The U.S., under President Biden, is expected to pursue aggressive policies aimed at fighting climate change. In 2015-16, FutureMetrics analyzed the effects of the Clean Power Plan (CPP) and determined that a low-cost and reliable pathway to compliance was via co-firing pellets with coal at selected power stations. Using a similar analysis and an expectation that new policy will form a similar foundation for change, the U.S. could be using 5.2 million metric tonnes (or more) per year of industrial wood pellets in power stations by 2027. But, some work must be done to familiarize U.S. policymakers about the efficacy of a strategy that has proven to be a relatively low-cost, on-demand, quick-to-deploy, and low-carbon source of power in other areas.

Meanwhile, evolving policy in Germany (which is a major producer of wood pellets) may facilitate the substitution of industrial pellets for coal in power stations. Based on CO2 emissions goals, goals to phase out coal, and continuing policy discussions, Germany’s demand could equal or exceed 3.2 million tonnes per year by 2027.

There is also potential in Canada. The combination of a carbon tax and a mandated coal phase-out suggests that a few of the newer coal plants would benefit from using pellets. Capital Power’s Genesee #3 516 MW coal-powered unit in Alberta, commissioned in 2005, is converting to natural gas. But, Capital Power says the plant will retain “dual fuel” capabilities. The 463 MW Keephills #3 unit also in Alberta, commissioned in 2011 and owned by TransAlta, would consume about 1.8 million tonnes per year if it were fully converted to pellets.

At this time, neither Capital Power nor TransAlta have plans to use wood pellets in those stations. TransAlta has said the Keephills #3 will continue to use coal. If that plant used wood pellets produced near its location in Alberta, then, in combination with carbon capture and storage (CCS), Canada’s net CO2 emissions would be at least a negative 850 kilograms per megawatt- hour of power generated.

There are other Canadian coal stations that could make the transition with relative ease. It is possible that Canada could be using 2.1 million tonnes of industrial wood pellets per year by 2027.

There are other locations that may adopt a pellet fuel strategy for the power sector. But, with just those discussed above, as Figure 4 shows, it is feasible that industrial wood pellet demand will essentially double from 2020 to 2027. If these “evolving policy” scenarios occur, pellet demand in 2027 would be 40.8 million tonnes per year.