US firms cash in as Brits embrace wood-burning power plants

US firms cash in as Brits embrace wood-burning power plants

The coal industry may be struggling, but Britain’s huge Drax power-plant is still firing on all cylinders. The Drax Group (LON:DRX) owned facility, the largest power plant in the U.K., recently spent $1 billion to convert half of its coal boilers to burn wood pellets, mostly shipped in from North America. In doing so, Drax has sparked a fierce debate about the sustainability of wood-burning power plants — and drawn attention to an energy revolution that’s already having a big impact on U.S. businesses.

Drax’s wood-burning boilers were installed to allow the plant to duck the tough taxes and regulations dogging the European coal sector, and to qualify instead for generous renewable-energy subsidies. Other European power plants have adopted similar strategies, and wood has rapidly become the EU’s most important renewable fuel source, accounting for 80 percent of renewable capacity in countries such as Poland and Finland. Even in Germany, with its huge wind and solar subsidies, wood plants now account for a startling 38 percent of clean-energy capacity.

That’s potentially bad news for the warming planet: while wood is theoretically both renewable and carbon neutral, many environmentalists say there’s little reason to believe that enough new trees will be planted to reabsorb the carbon released by Drax’s boilers. Even if every tree cut down to fuel Drax is replaced with a new sapling, critics note, the young plant will take many years to reabsorb the carbon given off by burning a mature tree. A Princeton research team found recently that wood-fired plants release 79 percent more carbon than coal over a 20-year timeframe, and only achieve carbon neutrality a full century later, once replacement trees have grown. 

Perhaps fortunately from a climate standpoint, wood-pellet energy generation hasn’t taken off in the U.S. While the country has more than 845,000 pellet-burning domestic stoves, and utilities including Xcel Energy (NYSE:XEL) have experimented with using biomass plants to process lumber from pest- or drought-damaged forests, cheap coal and subsidies for other renewable energy sources have left many biomass generation facilities struggling to keep the lights on. In total, biomass currently accounts for only about 1.7 percent of America’s electricity production, according to the EIA, with wood accounting for only a fraction of that total.

That’s unlikely to change, at least in the short term. The EPA, after hemming and hawing on the subject for months, declared last summer that not all biomass would be considered carbon neutral under the Clean Power Plan — a decision that makes EU-style pellet boilers far less appealing to utilities. While lawsuits and consultations relating to that decision are still pending, and state-level decisions could also impact the economics of wood-pellet production, it’s looking unlikely that America’s coal plants will be able to duck carbon limits or win federal assistance by firing up wood-powered generators.

But while America’s power plants aren’t clamoring for wood chips, the U.K.’s wood-energy revolution is still having a significant impact on U.S. businesses. In 2014, government data shows, up to three quarters of all U.S. wood pellet exports went to fuel U.K. power plants, with total production jumping 40 percent in order to meet increasing demand. That’s good news for American wood-pellet producers, especially Maryland-based Enviva Partners (NYSE:EVA), which since entering the sector in 2010 has grown into the world’s largest producer of utility-grade pellets. Enviva now produces about 15 percent of global capacity, and is expanding aggressively following a well-received $200 million IPO last year.

Environmentalists fear the booming wood-chip export market could lead to rapid deforestation, particularly in the southeastern U.S., where most forests are privately owned and not subject to oversight. The wood-pellet industry rejects such concerns, pointing to industry-backed research suggesting that annual pellet exports consume just 0.08 percent of America’s total forest inventory. With responsible management, trade groups argue, that demand could actually help to incentivize the preservation of America’s woodlands. “Markets are vital to keeping working forests as forests,” says Carlton Owen, CEO of the U.S. Endowment for Forestry and Communities.

While the debate rages, Enviva and other companies are rushing to cater to the burgeoning European demand for wood pellets, which is expected to grow to 30 million tons by 2020. Drax itself has invested $350 million to fire up two new pellet production plants in Mississippi and Louisiana, and numerous other export-focused plants are under construction across the southeast. The booming industry has also spawned some interesting financial products, with Euronext launching a futures contract, aimed chiefly at the residential heating sector, in November.

Investing in wood bioenergy remains a risky bet: the value proposition teed up by European clean-fuel rules could just as easily be yanked away if officials decide wood-burning plants aren’t delivering the hoped-for carbon savings. Officials say new EU biomass policies could be introduced this year or next as part of a broader clean-energy package. In the meantime, however, wood-pellet boosters believe there’s plenty of money to be made.

 

Companies to watch

*   Virginia-based generation company Dominion Resources (NYSE:D) chiefly operates coal-fired power plants, but is reportedly ramping up its wood-fired biomass-energy capacity, which currently stands at around 350 MW.

*   Los Angeles wood-fiber company Rentech (NASDAQ:RTK) is expanding its wood-pellet business, based on production infrastructure in eastern Canada. It already supplies pellets for the Drax plant, and has secured a 10-year contract to supply Ontario Power Generation — the first such agreement with a Canadian utility.

*   German Pellets is Europe’s largest wood-pellet distributor, and operates two plants in the U.S. with a combined capacity of 1.13 million tons a year. It is currently completing an expansion that will roughly double the capacity of its recently opened Louisiana facility.

 

Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.

Originally published on January 13, 2016