F2M Market Watch
Posted on April 12, 2012 by Suz-Anne Kinney
Early in February, industrial wood pellet consumers were having some difficulty securing a sufficient supply of pellets. Demand--propelled upward by the entry of RWE’s 750 MW biomass-fired power plant in Tilbury, England into the market—prompted price increases. According to a weekly biomass market report by Montel, a Norwegian news and data provider for European power and fuels markets, the front month contract (the shortest duration contract available on the market) price for pellets was US $178.35, $0.41 higher than the previous week. At the time, RWE was buying approximately 3,000-6,000 tonnes of pellets per month on the spot market.
On February 27, however, less than one month after the entire facility started generating power, a fire in the plant’s pellet storage facility burned anywhere from 4,000-6,000 tonnes of pellets, causing the shutdown of all three units. Within a week, pellet market dynamics changed dramatically. RWE’s withdrawal from the market not only eased shortages but created excess supply.
Tilbury’s consumption volume has been estimated at 200,000 tonnes of wood pellets monthly. An estimate of the volume of wood pellets that will be added to the market during the five months that Tilbury is scheduled to be down is approximately 1 million tonnes. In the immediate aftermath of the fire, Electrobel and Dong snapped up some of RWE’s diverted shipments.
Industrial Wood Pellet Prices
Immediately, pellet prices began to drop. On March 4, Montel reported that prices fell by US $1.31/tonne to US $176.93/tonne. On March 20, when RWE delayed the restart date for the first of the three units (the 250 MW #8 unit) from April 1 to April 30, prices for front month contracts fell to US $175.72/tonne. Prices were still falling at the beginning of April; front month May contracts were pegged at US $172.49, down US $5.86 since the week before the fire. The APX-Endex May price is listed at US $171.20, a drop of approximately 4 percent from the February price.
In light of the fire, and the resulting changes in demand and supply, these drops in price are par for the course. At the beginning of April, Montel reported that continued depressed demand from RWE's shutdown and mild winter weather was pushing prices lower still. Buyers may have fulfilled their obligations through the end of the year. This is likely to mean that prices will trend lower going forward, at least until RWE is back up and running. Exactly how long the other two units at the Tilbury facility will be out of commission is uncertain at this point, though RWE has said the restart dates for both units is July 30.
Cost to RWE
In both the short and the long-term, the cost of the fire for RWE is likely to be significant. First, it will need to repair the damage done by the fire. According to RWE’s CEO, Juergen Grossmann, the damage estimate is in the “low 2-digit million euro” range (roughly US $15 million).
In addition, the opportunity costs of the shutdown are likely to have a sizable effect as well. The Tilbury plant is expected to run either until 2015 or until its remaining permitted operating hours are used, whichever comes first. The UK’s Environment Agency reports that Tilbury had approximately 7,000 hours of permitted operation remaining as of January 2012.
According to Hawkins Wright’s Forest Energy Monitor, because of the downtime, Tilbury is “unlikely to use up all its permitted hours before April 2013 when the allocation of Renewable Obligation Credits (ROCs) for a converted coal-fired plant drops from 1.5 to 1.0 ROC/MWh. Each month that the plant receives 1 ROC/MWh as opposed to 1.5 ROC/MWh amounts to an opportunity cost" of roughly US $17 million based on the Ofgem 2012-2013 ROC buy-out price of EUR 40.71 (US $53.33).
For the broader biomass power industry, the ramifications of the Tilbury fire will not be known until the investigation is complete. One possible outcome is that best practices or plant insurance requirements may dictate that the industry adopt storage technology that is better adept at preventing or dealing with fuel fires.
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