Using wood to generate energy is not a new concept. Man has used wood for heat and light since the beginning of time. Forest products manufacturers have also been using wood fibre to generate heat and electricity for many decades.

So, why have proposed projects to use biomass to generate electricity proved to be so challenging?

Historic Value Relationships Changing

Traditionally, combined heat and power generation — cogeneration — at forest products manufacturing plants has relied on an economic balance that has prevailed for most of the past century. As an outcome of the harvesting and processing of trees into lumber or other wood products, into wood chips that become pulp furnish or roundwood that also becomes pulp furnish, bark and other residuals become feedstock for energy generation.

The key to viability is that the overall balance of total use and conversion of harvested material into some combination of wood, pulp and paper products and energy was maintained.

The economic reality of this relationship has been that most of the cost of harvesting and processing has been absorbed by higher value products – lumber, pulp, paper – with the result that remaining residuals became low cost feedstock for heat and power production, also mostly used in process. But even in situations in which surplus heat and power could be sold to other users or the grid, the low cost of the residual feedstock created a viable economic relationship for the energy producing facility.

Financial Markets Crash and US Recession Have Changed Value Relationship

Most important have been changes in US demand for housing:

  • Household formations in the US at historically low levels —
    A recent US Census Bureau Report[1] notes that between March 2009 and March 2010, the number of households rose by 357,000, the smallest increase since 1947. The previous year, households increased by only 398,000, the third smallest increase on record. These are steep drops from the 2002–07 period, when household increases averaged 1.3 million a year. This drop largely explains why the housing glut remains stubbornly high, despite decreases in housing starts.
  • Housing starts remain at historic lows —
    US Census Bureau data[2] shows that housing starts in February, 2011 in the US were at a seasonally adjusted annual rate of 479,000, down more than 20% from February, 2010.
  • Housing starts outpaced household formations for more than a decade —
    US Census Bureau and Department of Commerce data show that new housing starts have exceeded the rate of household formations for more than ten years.Over the thirteen year period shown in the graph, the number of homes built by the US housing industry exceeded the number of households formed during the period by more than 3 million. Even after allowing for purchases of second vacation homes, replacement of destroyed and dilapidated housing and other normal replacement factors, it is clear that the US overbuilt housing by a significant margin. That excess inventory remains in the marketplace, much of it held by financial institutions through foreclosure activity.
  • Declining home ownership lowers demand for wood products —
    As reported in Random Lengths Yardstick publication, (September 2010), owner-occupied housing declined to 66.9% of the US housing mix, the third consecutive quarterly decline and well below the historical peak of 69.2% reached during the fourth quarter of 2004. This decline is linked directly to reduced demand for single family housing.
  • Inventory of unsold homes in US continues to depress new home sales —
    Economists at California’s Chapman University point out that with two million houses either on lender balance sheets or predicted to be headed there, it will take five years to absorb the inventory under normal economic conditions. High unemployment and consumer debt may extend that to eight to 10 years.[3]
  • Home foreclosures in US continue to dampen real estate demand —
    According to a Congressional Oversight Panel report[4], approximately 250,000 new foreclosures are started every month, while 100,000 are completed. This has widespread impact, experts say, because foreclosures negatively affect neighbourhoods and drive down local real estate values, resulting in more cautious and less free spending consumers, further depressing the economy. The Panel estimates that up to 13 million foreclosures will have occurred by 2012 since its formation in 2008.

Changing Patterns of Demand for Paper Further Upset Industry Balance

The paper industry side of the value balance has also experienced disruptions.

North American demand for newsprint has decline by more than 60% since 2005 and close to seven million tonnes of production capacity has been permanently shut down or idled. Recent analysts reports indicate that even with recent price increases, most newsprint producers cannot achieve financial breakeven. Industry statements predict additional capacity reductions.

Demand for other printing papers has also declined, though more a result of reductions in economic activity rather than structural change.

Paper producers have also been affected by reductions in lumber demand, because closed sawmills don’t produce wood chips needed as pulp furnish. The result is that some mills have had to resort to whole tree chipping and face increased costs.

More Fundamental Changes Underway

Together, these changes in product demand have resulted in a 44% – 45% decline in softwood lumber production across North America since 2005. While that decline has been somewhat offset by recent increased sales to China and India by west coast producers, current levels of forest harvesting and lumber production in Central and Eastern Canada remain 50% – 60% below peak levels of 2005-06.

Additional downward pressure on demand for wood products may become permanent, as increasing energy costs appear to be driving other shifts US housing demand.

There is evidence of reductions in average home size for both single family and multi-unit dwellings, and of multi-unit buildings representing an increased share of total housing starts[5]. It is premature to conclude these changes represent permanent shifts in demand, but if these trends become the norm, the result will be further reductions in demand for wood building products.

Bioenergy Production Requires New Value Relationship

Conventional forest products manufacturing and cogeneration has been viable because costs of harvesting, transport and processing were absorbed primarily by the higher valued products – wood products and pulp and paper. However, with the structural shifts in demand for those
products a new value balance is needed.

But, the question remains, what is the new, sustainable value relationship?

Possible Future Relationship?

Single product streams such as wood pellets are unlikely to be viable. Electricity generation costs from pellets at current (May 2011) market prices are about 15 percent higher than costs of generating electricity from heavy fuel oil. Pellet prices need to be reduced by 30%, or heavy fuel oil increased by a similar amount, for conventional pellets to be competitive as an energy fuel.

What Might Be The New Value Relationship?

A sustainable economic relationship for biomass to bioenergy will likely be found in a combination of processing technologies and product streams that capture value from the widest possible range of properties of the feedstock, including in particular biochemical extraction. For example, extraction and processing of the hemicelluloses (sugars) in woody biomass facilitates production of five and six carbon sugars which can be fermented and processed into advanced biofuels, biopolymers and other products. The remaining cellulose fibre and lignin exhibit increased unit energy values and additional advantageous properties, such as becoming more hydrophobic than conventional pellets.

Purpose-grown bioenergy crops, (eg. willow, miscanthus, reed canarygrass, switchgrass), are also likely to become part of the long term sustainable feedstock mix. Cultivation of such crops offers the agriculture sector potential new cash crops; and, applicability of completely mechanised planting and harvesting processes can ensure predictable and lower costs than conventional forest harvesting.

Biomass technologies and projects for which proposed economics are based on naïve assumptions of conventional forest industries producing vast piles of unused waste materials will prove to be unviable – primarily because the ‘waste’ simply doesn’t exist. And, it certainly doesn’t exist at the close to zero cost frequently incorporated into such venture proposals.

What will prove viable and sustainable will be a combination of outputs that generate sufficient value to ensure reasonable feedstock costs for each product stream. As the cost of oil rises, achieving that new value relationship for biomass becomes easier. But, proponents seeking to develop new projects, whether greenfield or repurposing idled forest products facilities, should include multiple partners and technologies needed for a sustainable value relationship.

[1] “Income, Poverty, and Health Insurance Coverage in the United States: 2009”, US Census Bureau, September, 2010, as reported by Global Insight

[2] As reported in Random Lengths Yardstick, March 2011 issue.

[3] Milstead, David, “No easy way for investors to bet on U.S. housing recovery”, The Globe and Mail, December 23rd, 2010

[4] Morgenson, Gretchen, “A Mortgage Nightmare’s Happy Ending”, New York Time, December 25th, 2010

[5] News release from the California Building Industry Association, December 22, 2010, as reported by RISI

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