Market Report Policies will drive demand for industrial wood pellets By William Strauss Pellets in Japan 2016 aggregate demand for industrial pellets used to replace coal in power generation is estimated to be about 14.2 million metric tons. That is the equivalent of a bulk carrier ship carrying 40,000 tonnes about every day. The majority of demand growth for industrial wood pellets after 2019 is expected to come from Japan and South Korea. JAPAN VERSUS SOUTH KOREA Both the Japanese and S. Korean markets for industrial wood pellets are driven by policies that are quite different. However, both policies result in creating a demand for industrial wood pellets as a coal replacement in power plants. How the supply for those wood pellets is secured in each country is also quite different. Japanese buyers, supported by a long-term feed-in-tariff (FIT), prefer long-term offtake contracts with set terms for prices. The basis for the policies in Japan is the decarbonization of the power sector, which requires suppliers to show that the pellet supply chain meets sustainability criteria. Japanese buyers therefore prefer to engage with counterparties from countries with strong rule of law (for comfort with the durability, con-sistency, and security of the supply agreement), strong forest management practices, and stable macroeconomic conditions. S. Korean buyers, incentivized by the need to comply with the S. Korean renewable portfolio standards (RPS) supported by renewable energy certificates (RECs), and to a lesser degree from carbon trading in the Korean Emissions Trading scheme (KETs), are currently seeking the lowest cost pathway to compliance. Some of the RPS compliance for generating a proportion of power from renewable sources has been from wind and solar generation. But some compliance has been via co-firing pellets. S. Korea, to date, has procured pellet fuel under a short-term tendering strategy that has producers competing several times per year to win supply bids to the individual utility buyers. S. Korean buyers prefer short-term supply contracts from low-cost producers. JAPANESE POLICY The majority of demand growth for industrial wood pellets after 2019 is expected to come from Japan and South Korea. Japan is guiding its power generation industry with four inter-linked areas of policy: carbon reduction, the “best energy mix for 2030,” required efficiencies for power generation, and the FIT. The only policy instrument that provides a monetary incentive is the FIT. Carbon emissions targets Japan has already implemented a target reduction of CO2 emissions that requires all power companies to reduce CO2 per kWh by 35 per cent from 2013 levels by 2030. This is a reduction from 0.57kg of CO2/kWh to 0.37kg of CO2/kWh. It is currently a voluntary target but a few major utilities are already co-firing wood pellets at modest one to three per cent ratios. There are a few pulverized coal (PC) power stations currently co-firing wood pellets in Japan, and there are some having discus-sions for pellet fuel supply with major producers. Those stations that are either currently co-firing or in discussions about fuel supply add up to about 18,700 MWs. Graphic 1 shows the pellet NOVEMBER/DECEMBER 2017 18 Canadian BIOMASS
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