The bioenergy market in Asia
Pacific is still fairly immature compared to the European market.
However, recent developments have led to expectations of significant
By Pedro Campilho | November 30, 2017
The bioenergy market in Asia Pacific
is still fairly immature compared to the European market. However,
recent developments have led to expectations of significant demand
that could lead to this region quickly surpassing the European
market in terms of traded volumes. As of March 2017, the amount of
certified capacity under “general wood and agriculture waste” has,
with 11.4 GW, already far surpassed the bioenergy targets initially
defined by the Japanese government (2.7 to 4.0 GWe). If all the
projects awarded feed-in tariff (FIT) contracts under this category
go ahead, biomass demand could reach 47 million oven dry metric tons
(ODMT) by 2021. Announced bioenergy projects in South Korea are also
expected to increase current wood biomass import demand from 2
million ODMT to up to 12 million ODMT by 2024.
Biomass Sourcing Strategies
Bioenergy projects in Asia Pacific are mainly targeting industrial wood pellets, woodchips and palm kernel shells (PKS) as biomass fuel. As these feedstocks all have different characteristics, the technical design of each bioenergy plant will need to be tailored according to the biomass feedstock mix, in order to maximize efficiencies and minimize operating costs. Detailed trade-off analysis, covering different biomass supply chains and technical designs, will afford developers and their investors a better understanding of expected returns and underlying risks, and help define risk mitigation strategies. Even though some project developers have already formulated biomass sourcing strategies, the actual implementation of these strategies may yet change in reaction to future market conditions and requirements brought forward by investors. The Japanese market is especially characterized by a high level of uncertainty regarding preferred biomass fuel assortments, and stakeholders will have to develop in-depth market knowledge and prepare strategies covering a range of potential future market scenarios.
Despite a theoretical potential of approximately 15 million metric tons of PKS in Indonesia and Malaysia, only a limited share of these volumes will be available in the long run to meet demand from Japan and South Korea. The PKS market will experience considerable changes going forward; increased mobilization efforts from international buyers in combination with often challenging inland logistics, and further increasing domestic demand for PKS as biomass fuel, are likely to result in considerable price increases.
The majority of biomass fuel imports into Japan and South Korea will need to come in the form of industrial wood pellets or wood chips, both of which largely come from the same fiber resource base. Thus, before defining long-term biomass sourcing strategies, a detailed understanding of current and future wood fiber availability in potential supply regions is required, in order to develop a clear understanding of the risk of upcoming fiber shortages and price increases. Such assessments will also need to consider competing demand from and market expectations of other wood consuming industries, such as pulp and paper, and wood products. For example, the Japanese and Chinese pulp and paper industries, both of which are currently importing around 10 million ODMT of wood chips per year, might be wary of the increasing demand pressure, and its effect on international wood chip markets.
Supply Chain Opportunity
Additional challenges come from the short timelines for developing and implementing sourcing strategies, as projects in Japan have a window of only three years from receiving a FIT contract to the start of operations. This does not allow for the development of significant additional forest plantation resources, and buyers will have to contend for the existing resource base in the short- to medium-term. Competition for existing supply opportunities will be intense, and buyers will have to mobilize resources from further afield, with associated higher transport costs. Not only could this increase supply costs, at least initially, it could also lead to less favorable carbon footprints, negating some of the positive impact bioenergy can have on net carbon emissions in the power sector. Project cancellations can also be expected, as developers are likely to struggle to secure long-term supply contracts for the required biomass assortments at affordable price levels.
The expectation of significant demand increases in Japan and South Korea offers interesting opportunities for a range of stakeholders across wood pellet and wood chip supply chains. Indonesia, Malaysia, Thailand and Vietnam are attractive supply sources where production capacity can be expanded, drawing on a mixture of roundwood from fast-growing forestry plantations, residues from wood processing industries, and other residue sources such as rubber wood plantations. Other regions, such as the Russian Far East, western Canada, Brazil and Australia are also expected to play important roles as potential supply regions, due to an existing biomass surplus and the potential for establishment of new plantations.
Several developers of bioenergy projects in Japan and South Korea have also shown intent to invest upstream, by acquiring or co-investing in existing biomass supply projects, or by developing their own greenfield projects. However, any upstream integration strategy that does not cover the full supply chain still leaves the risk of increasing biomass raw material prices, or even supply shortages, potentially increasing investors’ exposure to risk. Only full upstream integration strategies, similar to strategies employed by Japanese pulp and paper producers, can provide a high level of supply and price security. In any case, such ventures will require comprehensive project due diligence covering all aspects of the supply chain, followed by a sound implementation strategy to successfully secure financing.
The Japanese and South Korean biopower sectors are set to be the driving force behind substantial changes in dynamics for international biomass markets, and stakeholders will have to tackle considerable uncertainties. Resource owners, biomass suppliers, and bioenergy producers need to develop a sound understanding of short-, medium- and long-term price trends for each biomass assortment to avoid entering into unfavorable or unsustainable long-term fuel supply agreements.
Authors: Pedro Campilho
Pöyry Management Consultancy