The Tipping Point: A More Complex Look at Wood Supply Sheds

From the December 2010 Forest2Fuel newsletter.

Two and a half years ago, in the summer of 2008, oil prices topped $145 per barrel. Many companies searching for ways to replace this high-risk, high-price energy source with a less expensive, renewable source of energy approached Forest2Market with requests to help them understand how wood might be a strong alternative.

Today, as the price of a barrel of oil approaches $100, we’re seeing a much broader range of requests. When we first started a bioenergy practice, many misconceptions about wood basins and markets prevailed. Many contemplating entrance into bioenergy markets lacked knowledge of market dynamics, logistical constraints and logging practices. Today, that gap has closed. Few people still believe, for instance, that there are unlimited supplies of biomass available for energy production.

One of the most interesting changes in the types of requests we receive from customers seeking to enter or understand bioenergy markets is the desire not only to understand ideal locations for a particular size plant or what size plant would be feasible in a particular wood basin, but the desire to take a more complex look at supply chain dynamics, one that takes competition for wood fuel into consideration. For instance, some companies want to know:

• How much feedstock a plant could use before it would eclipse a feedstock cost cap.
• How large a plant could be before it put other wood-consumers out of business.
• How large a plant could be, even if competitors increased capacity at the annual market average, without leading to a negative growth to harvest ratio for the forest.

In order to answer these questions and others like them, Forest2Market has developed a proprietary analytic, called Tipping Point Analysis, that allows us to illuminate the competitive nature of markets. "The tipping point is the point at which too much competition for wood fuel causes prices to eclipse sustainable levels and where harvest levels exceed forest growth. Knowing this point is a key piece of data for our resource study and wood fuel assessment customers," said Pete Stewart, President and CEO of Forest2Market.

Tipping point analysis is particularly important for utility companies. In an effort to meet renewable electricity standards or goals, they are looking at co-firing wood with coal or developing their own wood-powered facilities. Risks associated with these conversions include uncertainty over electricity prices and the long-term availability of the biomass/wood fiber supply. Tipping point analysis allows utilities to plan both the site locations and the size of proposed facilities to avoid unsustainably high electricity prices and the depletion of forests.

Utilities are also sensitive to the fact that switching from fossil fuels to wood means that they will sometimes be competing directly with their customers. In addition to producing some of their own electricity, for instance, wood-consuming pulp and paper mills are also utility customers. In order to avoid adversely affecting these and other wood-consuming customers, utilities use Forest2Market’s tipping point analysis. The insight they gain allows them to adjust their plans and ensure the long-term sustainability of the wood basin for all market participants.

"It's well documented that pulp and paper facilities employ more workers than bioenergy plants," said Stewart. "Our goal in developing and perfecting this tipping point tool has been to ensure the long-term viability of both the traditional and the emerging industries. At Forest2Market, we believe that additional markets are good for the long-term health of all wood-consuming industries. As a neutral third-party, one that doesn’t buy or sell wood fiber, our focus is on providing market price data and supply chain analysis to our customers. Our sole mission is to help those in the industry be more competitive by increasing their understanding of the market."

Tipping point analysis is also an ideal tool for regional, state and local economic development commissions, who must make certain they support projects that lead to additional jobs without endangering jobs in existing industries.

"A traditional resource study looks at one or more fiber consumption scenarios and determines which scenarios are feasible from a price and forest health perspective," said Stewart. "Tipping point analysis goes one step further."

"First, we develop a market price threshold—either the maximum weighted per ton average price that the company will pay or a proxy for a price that won’t put other facilities out of business. Then, using a marginal cost curve based on the load-by-load data available in our delivered price database, we can determine the maximum number of tons of biomass and wood fiber demand a wood basin can absorb without negative ramifications. This represents the tipping point, not just for price, but for the health of the forest and the economic health of local communities as well."

To complete wood fuel assessments and tipping point analyses, Forest2Market uses its proprietary delivered price database, which collects volume and pricing data from more than 80 percent of all transactions in the US South and is solidly established in the Pacific Northwest, and well-tested proprietary econometric models and cost curve projections.

For more information, call Suzanne Hearn at 704.540.1440 x17.

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