Summary
¦ Wood energy provides 58% of renewable energy generation across the EU.
¦ The UNECE forecasts an EU shortfall of 237 million m³ of wood by 2020.
¦ Supply could outstrip demand in some areas of the UK by next year.
¦ Large plants are being driven by subsidy through the Renewables Obligation.
The carbon agenda is driving increased demand for wood in traditional and new markets. For UK producers and processors this could see demand running ahead of supply. At first sight, surely a good thing? As is so often the case, it all depends.
In this case it depends on which market is accelerating and the impact that has on the availability of wood. While the construction market is still slow, the renewable energy market is taking off. This has had a number of positives: providing work for the forest contracting and harvesting sector during the recent downturn in traditional markets; bringing more forests into management and supporting beneficial thinning; and providing some mills with cheaper, renewable energy.
Energy markets
However, there are, broadly speaking, two energy markets for wood – small-scale heat generation and large-scale power (electricity). The former operates through small, local supply chains, while the latter requires comparatively huge amounts of wood and mainly relies on imports. Large plants, requiring one to three million tonnes of wood each, are out of scale with the UK wood sector, whose total production is about 10 million tonnes, and could threaten to overwhelm it.
In countries such as Sweden and Austria the wood energy market has mushroomed and across the EU it provides about 58% of total renewable energy generation, though not through large-scale electricity. With strong growth predicted as the EU seeks to meet its ambitious 2020 targets, a 2008 UN Economic Commission for Europe report forecast an EU shortfall of 237 million m³ of wood by 2020 due to the growth of wood energy.
In the past nine months in the UK there has been a rash of announcements of large-scale plants requiring up to 30-40 million tonnes of wood. While the bulk of this additional demand is expected to be imported, a recent report by John Clegg Consulting estimated that 3 million tonnes could be required from domestic sources in the short term. This would see demand exceed supply in some areas as early as 2011, with the gap rapidly accelerating across the UK in following years.
ConFor focuses on the long-term, sustainable development of the forestry and wood sector. Local heat has long-term potential, through its scale it can complement existing wood-using businesses and it promises higher returns to the wood supplier. It also provides a valuable market for under-used wood, and has a strong carbon and jobs profile.
Finances
Large plants are being driven by subsidy through the Renewables Obligation (RO) – a time limited mechanism that the Conservative party campaigned to replace with Feed-in Tariffs. Energy companies will drop wood once it has lost its competitiveness so, while there may be models for (smaller) plants that could prove enduring, that appears unlikely to be the case for large plants.
There is a question mark over the actual impact of large plants on the existing sector. It isn’t clear how much the RO subsidy will provide these plants with an ability to outbid existing wood-using businesses if they are forced into competition. However, there will be a major differential between ability to pay during the initial operation of a plant and ability to pay once the initial investment has been paid off. This switch could coincide with a need to secure new sources of wood.
A new plant could secure an imported wood supply contract of, say, 10 years, during which it could hope to recover most or all of its investment. Then, armed with the RO subsidy, unburdened by repayment costs, and against a backdrop of accelerating global demand for wood, the plant could displace domestic wood-using businesses – businesses that displace more carbon and provide more jobs. Loss of competition would leave a plant to pay the minimum required to secure supply during the remaining years of its operation.
The scale of the threat is hard to predict, though it is potentially enormous. ConFor has been pressing for action to stimulate further supplies of wood, but that in itself will not provide the volumes potentially required. A Conservative-prompted review of the RO system could provide an opportunity to promote a mechanism that better reflects the carbon benefit of wood for energy and of competing uses.
