How will biofuels affect the European wood market?

Using wood to generate renewable energy could herald a number of major challenges, but there is potential for the industry to turn this to its advantage.

Renewable energy tends to be a bit like mom's apple pie--pretty much everyone agrees it is "a good thing." Clearly, it offers a number of attractive features in terms of reducing the world's reliance on fossil fuels, offering greater diversification across energy sources and utilizing "cleaner" technologies. As a result, renewable energy sources--solar, wind, wave, biomass, etc.--have all been in the spotlight in a big way.

Europe has been as busy as anyone in trying to promote new energy sources, especially as oil prices have climbed around the globe. However, recent political concerns over the reliability of natural gas supplies from Russia have served to focus minds in high places even further and, inevitably, energy security has moved higher up Europe's political agenda.

Since wood is already one of the largest sources of renewable energy in Europe, it is no surprise that the potential for using more wood as a biofuel has come under even greater scrutiny in recent months.

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The only problem is that many players in the pulp and paper industry can see the whole scheme driving raw material prices for fiber through the roof along with energy costs.

HARD CASE

To get to grips with why this might be the case is rather complex. Part of the problem is to be found within the Emissions Trading Scheme established across Europe as part of the Kyoto Protocol. Under this system, power users can trade "carbon credits"--buying them when they need to expand and increase their carbon emissions, or selling them when reduced energy needs, greater efficiency, or a switch to a non-fossil fuel allows.

Since the pulp and paper industry is already the largest single source of renewable energy in Europe (discounting nuclear), you might think that the industry would benefit from its greener environmental profile. But the fact is that many plants, in particular those built before 1990, do not qualify for additional credits.

This means that power plants that previously used fossil fuels can not only benefit from any tax breaks or subsidies on offer for going green, they will also secure valuable carbon credits for switching to a renewable energy source. And since these credits are today trading in the range of EUR 20-30/metric ton, this obviously makes a massive financial contribution to the economic viability of making the switch.

According to liquid packaging board manager at AssiDoman Frovi, Anders Eliasson, "Ultimately we're talking about an increased cost of fuels for everyone, including those already using biofuels."

Eliasson points out that wood has been used as a subsidized energy source in Sweden for many years now. Up until now, he says, it has had little impact on the price of wood for pulp, but he believes this could change. "We've not really seen any major conflict between other uses and wood pulp, but I think we might be getting to that point soon. For example, I know of at least one district heating centre that is now prepared to pay higher prices for residuals than it was before [since oil prices have helped drive up the cost of alternatives], even if those same residuals might have in the past been used to power the pulp mill. We may see more conflict between one energy user and another rather than between wood for energy and wood used for making pulp."

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In fact, there has been a vast upsurge in applications to build district heating schemes in Sweden and while there is no evidence yet that the quality wood needed to make pulp is set to be burned instead, no one can be certain that this will remain the case indefinitely.

As one highly respected industry consultant pointed out, "It will definitely hit raw material prices anyway, because the price-paying capabilities of these new companies are high. I believe we're at the borderline point just now and you could end up with the crazy situation that pulp and paper companies will be penalized for using renewable power already, while power plants can reduce costs by switching to wood and get the extra carbon credits to sell at the same time. It looks very dangerous to me and could lead to a serious situation."

SUDDENLY SUBSIDIES

Another part of the problem stems from suggestions that subsidies and tax breaks could be offered to try and promote greater usage of wood and other biomass materials. In this scenario, political backing for renewable energy from biomass could invite a host of new financial incentives that will distort the market not just for wood, but also for recovered paper.

However, some commentators argue that such fears are overblown. Indeed, one of the prime advocates of increased wood use believes that there are currently massive volumes of wood that are completely underutilized across the region.

As "rapporteur," to use the Brussels jargon, Seppo Kallio is the prime mover behind a report entitled "Wood as an Energy Source in the Enlarging Europe." The so-called "draft opinion" submitted by the section for agriculture, rural development and the environment within the European Economic and Social Committee has attracted a great deal of attention since it was published in February and calls for a massive expansion in the use of wood as an energy source.

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Kallio's report indicates that some 30% of the region's forest growth is currently unexploited, much of it low-grade timber that is only useful for energy purposes. And as for concerns that subsidies will skew the market, he is adamant that such fears are groundless.

"Many people have commented on this [subsidies] aspect, but I'm speaking mainly in favor of starting up the systems and setting up the markets for bioenergy. My feeling is that if we continue to use so much fossil fuel it will be catastrophic, so now we have to get rid of the barriers to setting up a market for bioenergy. Not a system like the EU's Common Agricultural Policy (CAP) or anything close to that--in fact, my own country [Finland] would be very much against anything like that--but creating an effective market for bioenergy."

Indeed, Kallio believes that any incentives generated by bioenergy schemes could well drive even greater increases in forest coverage as Europe benefits from higher self-sufficiency in energy, reduced climate change impacts and improved forest management, improving things like fire risk along the way. In this way, the pulp and paper industry can benefit from greater available volumes and the opportunity to secure political backing to make greater use of the forest.

Whether this becomes a reality or not, one thing is certain: biofuels are attracting close attention in today's political climate. As Kallio says, "Three commissioners have already asked the committee for our opinions, so obviously there is a lot of interest. I think there will be a whole bioenergy policy in the future, but it's difficult to say much about when things will happen other than that there is a situation now where people are saying that we must have more bioenergy from forest materials as well as other sources."

HIGH POTENTIAL

Kallio puts the EU's sustainable energy wood potential as high as 267 million cubic meters, representing a vast energy source for the region. However, he is cautious about getting too specific at this stage. "I think there's a lot of spare capacity, but nobody has very precise figures on this and the situation will vary quite a lot across the member states," he explains.

Even without precise figures, it would seem that with so much untapped potential there is no reason for the pulp and paper industry to worry. Nevertheless, companies across the sector are already feeling the strain and more believe that increased incineration will undoubtedly have an impact on fiber prices.

As Bjorn Lyngfelt at SCA points out, "With green certificates and carbon caps, we are seeing a dramatic expansion of heating plants that use biomass getting approved [in Sweden]. While there is still the potential to use more logging waste and residues, when they are in place they will have the opportunity to pay more attractive rates for commercial wood volumes. If the number of subsidized heating plants increases a lot, then I think this could be a problem."

In Germany meanwhile, wood prices are already on the up and several sources are starting to point the finger at renewable energy schemes along with other factors. As Andreas Geiger, spokesman for the German paper industry association VDP, explains, "Wood prices are rising and there are several reasons for this. The increase in use of firewood is one reason, but here in Germany there is also increasing demand for viscose for clothing and they are willing to pay very high prices now, so that also pushes up wood prices."

Within the EU establishment, some of the key players involved are playing down any potentially negative impacts of increasing biomass use. Indeed, the response from European Parliament Member, Heinz Kindermann, illustrated the view of many.

"Policy shouldn't interfere with the markets. Of course I acknowledge your concern that competition for the wood resource will increase. But as most of the paper and packaging products can be used for energy afterwards, producers should be able to pay more for the wood resource than producers of bioenergy. In addition, paper and packaging requires a different wood quality than bioenergy. In the end, there's enough resource for all kind of wood products as we use only 60% of the yearly growth of European forests. That's why mobilization of the wood resource is a key issue for industry, forest owners and society," he said.

Even here though, there is the recognition that competition for resources will heat up. And of course, in the great game of supply and demand, anything that increases demand is likely to lead to price increases if supply does not keep pace.

GOING GREEN

This is not simply an argument about economics, though. Environmental issues play just as strong a role in this debate--if not stronger in many ways. Here, the paper industry wants to make its voice heard.

Marco Mensink is the energy and environment director at CEPI (the Confederation of European Paper Industries) and as he points out, the issue of wood energy covers a whole host of complex, interrelated factors. "In my opinion, it's a waste for society if you start burning material instead of making full use of it," he says.

Mensink points out that the pulp and paper industry is already the biggest producer and user of renewable energy in Europe and that regulators and other stakeholders should be helping the industry to achieve as much of the full potential of the region's forests as possible.

"In general, I'd say there are three main things to consider," Mensink explains. "First, any raw material should be used to get the most added value out of it. For example, in this case paper or wood for construction is better than using it directly for bioenergy. Plus, you also have to look at the whole "cascade" where you look at the residuals as bioenergy sources. Secondly, if you talk about bioenergy, please look at increased mobilization of wood out of the forest. At the moment, not all of the annual growth in Europe is harvested, so if there's more demand then please try to assist us in getting more wood out of the forest. The last thing is subsidies. Economics are economics and the markets will rule on how that can best work, but when subsidies are involved it can have a strong influence and distort the market substantially."

ON THE UPSIDE

The idea of creating the most added value from the forest is a theme that is strongly echoed by Mensink's colleague at the Swedish Forest Industry Federation, forest director, Stefan Wirten.

"My view is that the fiber in the forest should be used in the most efficient way possible and that the forest should be treated in the most appropriate way. I think it is possible to increase the delivery of fiber as biofuel as well as meeting the needs of the paper industry, but of course I would be hesitant if people wanted to use the fiber directly for fuel," he said.

However, Wirten appears to be more confident than some of his colleagues that the rising profile of bioenergy can be turned to the advantage of the industry.

Indeed, he argues that as long as the biofuel sector is not subsidized to such an extent that it affects fiber availability for mainstream wood products, then not only can paper compete quite well, but the industry can benefit from new revenue streams.

"If there are going to be subsidies then that could lead to some frustration in the ability of mills to purchase wood. You have to be careful when you give out subsidies or permits for these plants, because they will be there for a long time. Having said that, the forest sector can provide the biofuel sector with a lot more wood than it does today. Our analysis is that we can more than double the amount of fuel compared to what we deliver in Sweden now, from around 7 TWh to 15 TWh," Wirten explains.

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Given current energy prices, that represents a significant new line of precious cashflow for pulp and paper companies that are seeing margins and profits squeezed across the board.

Quite how the situation plays out in the coming months and years remains to be seen. It will be up to the industry to plead its case against subsidies, but it appears as though the increased attention given to renewable power could theoretically end up in the credit of column of paper companies' accounts. However, this will only happen if they manage to make the most of the opportunities available.

ABOUT THE AUTHOR

Jim Kenny is international editor for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].

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JIM KENNY, INTERNATIONAL EDITOR

WHAT YOU WILL LEARN:

* How renewable energy could drive fiber prices higher

* How incentives are being driven by carbon credits

* How the industry could end up benefiting IF it can head off unfair subsidies

ADDITIONAL RESOURCES:

* "A sweet future for bio-fuels?," by Alan Rooks, Solutions! magazine, February 2006, p. 4.

* "Biofuels get a big push from Bush," by Alan Rooks, Solutions! magazine, March 2006, p. 4