Energy and the Wood Fiber Supply Chain

Published in: Forests & People Magazine 2009Q1 from the Lousiana Forestry Association

By: Pete Stewart

The vocabulary of energy production is as familiar to the ear of the Louisiana timberland owner as the language of land management. In fact, there are very few places in which landowners need to know as much about oil and gas, mineral, and hunting leases as they do about harvest schedules.

In much of the South, this vocabulary is expanding once again. Emerging wood-to-energy industries will very likely change the way we think and talk about the wood fiber supply chain.

The Bioenergy Trend
While Louisiana has yet to see significant bioenergy influx, much of the South has. Take, for instance, two of Louisiana’s neighbors. In 2008, four companies announced plans for independent power plants (IPPs) in the eastern part of Texas.

These plants, if they are successful, will produce 260 MW of electricity and use approximately 2.6 million tons of wood fiber per year. Mississippi, though lagging Texas, is starting to see movement as well, with Indeck Energy announcing a new pellet fuel plant and Raven Biofuels and Price BIOstock announcing a joint venture to build an ethanol biorefinery that uses wood and wood waste in the Gulf Opportunity (GO) Zone.
With all this activity sweeping across the South, Louisiana cannot be far behind.

As bioenergy capacity grows, the supply and demand paradigm will shift. Bioenergy companies will begin by sourcing raw materials with low demand as a way of reducing their risk of fluctuations. As a result, they will begin by looking for woody biomass (wood fuel or hogfuel), construction and demolition (C&D) debris and sawmill residuals.

These methods are unlikely to generate either the quantity or quality of raw materials that they need to fuel their operations. For instance, virtually all mill residuals are under supply agreements already. Woody biomass will continue to be difficult and costly to remove from forests, partly because loggers—undercapitalized to begin with—will not be able to finance the equipment needed to harvest this material. With the housing market struggling, there is a dwindling supply of C&D debris. When housing recovers, however, plants will need to be sited closer to urban areas to take advantage of this debris.

Bioenergy Feedstock
In a recent study, Forest2Market quantified sources of bioenergy feedstock through 2020. Table 1 shows total demand and the amount and type of wood fiber that will be pulled through the system to meet the demand.

As Table 1 indicates, pine pulpwood and chips (both secondary and primary) will provide the vast majority of bioenergy feedstock through 2020. Part of this demand will be driven by availability.

As production processes are being fine tuned, quality will also play a part. In order to perfect these processes, companies will need consistency in their feedstock (including type, size, degree of dryness, and cleanliness). Some bioenergy companies in production (pellet mills, electricity generators who co-fire wood with coal and cellulosic ethanol demonstration facilities) are already using pulpwood as their main feedstock. We believe they will continue to do so.

Bioenergy's Future
In general, uncertainty causes market volatility. Because there is such uncertainty surrounding bioenergy, few know how the wood fiber markets will react and how to plan. The fact that a significant number of outside forces will determine whether announced facilities will open and thrive heightens the uncertainty. What effects will the pace and success of technological advancements, oil prices and the need for energy independence, the general economy and funding sources, and governmental policies and incentives have on the growth of the market?

The processes and technology for wood pellet and wood-to-electricity production are mature. Cellulosic ethanol technology remains experimental, however. In December, the Energy Information Agency (EIA) announced that the United States would fall short of its goal to produce 36 billion gallons per year (BGY) of alternative fuels by 2022 because of the “rate of development of cellulosic biofuels technology.”

Commercial production of second-generation biofuels is estimated to be five to six years away. The most advanced wood-to-ethanol production facility—Range Fuels in Soperton, Ga., is currently on track to open at the end of 2010. Until the technology for cellulosic ethanol production has been proven to be viable and cost-effective, a huge drain on the supply chain is unlikely.

Oil prices represent a motivating factor for the bioenergy race. In the summer of 2008, when oil prices were above $140 per gallon, incentives, funding sources and entrepreneurial zeal were abundant.

Forest2Market tracks announcements of new plants. During this period, we would add several facilities to our Southwide bioenergy map every week.

This explosion continued through much of the third quarter of 2008, but after the credit bubble burst in September, plans came to a screeching halt. Since then, both independent power companies and cellulosic ethanol plants have struggled to put together capitalization costs. Our macroeconomic models suggest that oil prices have hit bottom, and that prices will rise to near $90 by the fourth quarter of 2010. As oil prices start this climb midyear 2009, interest in and commitment to bioenergy should climb as well. For when oil prices climb, the energy value of wood will garner the interest of investors once more. (See Chart 1 for the relative cost of energy per BTU of various sources of energy when oil prices were at their peak.)

Public policy will also play a role in the pace of bioenergy advancement. In 2008, the Farm Bill provided loan guarantees for biorefineries. On his last day in office, Ed Schafer, U.S. Secretary of Agriculture under President Bush, announced that Range Fuels would receive the first of these guarantees for its commercial cellulosic ethanol facility in Soperton, Ga.

About the $80 million loan guarantee, Secretary Schafer said, “If that investment is made and that facility gets up and running, it will jump, I believe, by two years the goal of producing on a commercialized basis ethanol from non-corn sources or non-food based sources.”

The Department of Energy has also announced a new initiative that will provide $200 million in grants to help build pilot and demonstration-scale cellulosic ethanol facilities. In addition to these latest announcements, scores of incentives exist for clean and renewable energy production.

Currently, public policy is more like a patchwork quilt than a comprehensive plan. As the wood fiber supply chain shifts to accommodate bioenergy, a consolidation of energy and environmental policy may be the answer to market stability.

Weaving all policies for energy and the environment into a coherent strategic plan with a clear and consistent direction would produce significant benefits.

A consistent vision would produce a consistent vocabulary, one that would help us define and discuss the changes on the horizon.

It would induce stability in bioenergy markets and spur both commitment to, and investment in, wood-to-energy facilities. And as bioenergy emerges as an established supply chain participant, forest and wood products companies will be able to develop long-term procurement strategies, and wood fiber markets will find equilibrium once more.