in offtake agreements that are based on a known starting $/tonne with a fixed escala-tion rate. The cost of pellets cannot go too high over the term of the offtake agreement such that the cost of generation causes the power station to have their bottom line go negative. There are many inputs to determine the “levelized cost of energy” and the expected revenues from the sale of coal generated power and the portion generated from wood pellets that does receive the FIT. FutureMetrics can provide detailed analytics on identifying and minimizing the risks in an offtake agreement for supplying pellets to Japan.) There is no upper limit restricting the size of a power plant benefiting from the FIT for new power plants. But there is a de‐facto limit due to permitting. If the power plant is less than about 110 MWs, then a full environmental assessment is not required. For a small plant the assessment takes one or two years. For proposed plants that are larger than about 110 MWs, the full assessment requires at least five years. Most of the current and planned FIT projects are smaller independent power producers (IPPs). Due to the carbon policy, the “best ener-gy mix” policy, and the required minimum efficiency requirement, some of the major power generators will be forced to co-fire pellets. The major power generators who need to co-fire pellets at their existing pow-er stations will likely be allowed to benefit from the FIT (for the MWhs generated by pellets) and co-fire at the rate of up to about 15 to 20 per cent. However, as noted above, at a 10 per cent co-firing ratio, it is possible to reach the “best energy mix” criteria. At a co-firing ratio of 10 per cent by selected major utility power plants, the demand for wood pellets is expected to exceed seven million tonnes per year. JAPANESE GROWTH Graphic 3 There are numerous projects planned and many are currently either co-firing wood pellets or running dedicated systems using pellets or low grade biomass or palm kernel shell (PKS). (For example: according to reports, U.S. wood pellet producer Enviva, and spon-sor Enviva Holdings, has signed an initial agreement with a Japanese trading house for 650,000 t/yr of supply to a dedicated biomass-fired power plant in Japan. The dollar‐denominated, 15-year contract is expected to commence in 2022, subject to documentation of the definitive agree-ment and contract particulars, and will fully cover the power plant’s needs. The dedicated plant is the largest announced in Japan to date. Enviva is in discussions with other large Japanese trading houses, utilities and independent power producers that are looking to build more than a combined 1.7GW of biomass-fired generation capac-ity. The negotiations are “well on track.” Those projects would create more than 7mn t/yr of wood pellet demand, although Enviva does not expect all the capacity to be constructed. Enviva has been eyeing the growing Japanese biomass market in recent years, but, as yet, only minimal U.S. wood pellet exports have made it to Japan, which sources most of its imports from Canada’s west coast. Japan imported 150,500t of wood pellets from Canada in the first half of this year, compared with just over 100t from U.S.) Most of the currently running dedicat-ed systems are relatively small circulating fluidized bed (CFB) boilers that do not have pulverized fuel systems. CFB boilers can burn a wide range of biomass fuels, including wood pellets. However, most will likely use palm kernel shell (PKS). PKS is not pulverizable and cannot be used in PC boilers. Actual demand though 2016 and fore-cast demand for 2017 is shown in Graphic 3. Canada continues to be the major suppli-er of wood pellets to Japan and is expected to be a major supplier into the 2020s. A significant proportion of current biomass demand in Japan is satisfied by the import of palm kernel shell (PKS). All PKS imported into Japan comes from Indonesia or Malaysia. CONCLUSION The large power stations owned by the ma-jor Japanese utilities are being guided into decarbonization with the limits on CO2 per MWh, with compliance to the “best energy mix,” and with improved efficiency that allows the wood pellet generated portion of the total power output to “improve” efficiency. The 20-year duration of the FIT, starting at very generous rates that are more than double the average spot rate in Japan, will support long-term and stable demand for industrial wood pellets. (In the summer months on very hot days the spot rate may exceed ¥25/kWh. The average over a year is under ¥10/kWh.) However, given that the FIT is fixed for 20 years, those long-term agreements with Japanese buyers will likely require known starting prices and fixed price escalators. Given a set starting price and a fixed an-nual increase in price, inflation risk will be borne by the producers. Understanding that risk and setting the terms of the agreement are critical to the financial durability of the deals. Nonetheless, there is an expected large and stable market in Japan bringing significant potential for healthy sustainable growth in industrial pellet production. FutureMetrics is a leading consultant in the wood pellet sector. William Strauss is its presi-dent and founder. Visit www.futuremetrics.com. This article originally appeared in the Octo-ber 2017 issue of Wood Bioenergy. • Canadian BIOMASS 21
Canadian Biomass November/December 2017: Page 21
