Forest to Fuel, the State of Bioenergy and Its Raw Materials

Published in: Panel World March 2009

By: Pete Stewart

As 2009 unfolds, the state of wood-to-energy industries is uncertain. Though there have been announcements for new facilities that would bring bioenergy’s total wood fiber consumption to 30 million tons by 2015, Forest2Market’s forecasts predict that only about half of announced capacity will make it into full production. Even given this more conservative assumption, the resulting disruptions to the wood fiber supply chain will be significant, rivaling the effects brought about by the introduction of OSB in the 1990s.

Wood pellet manufacturing—the most established and stable of these markets—is important locally, as small plants produce anywhere from 10,000 to 100,000 tons of pellets to meet local demand. Increasingly, large pellet plants—built promarily to meet the demand for exports to Europe—a re producing 500,000 to 600,000 tons of pellets annually. Because of the stability of the market, wood fiber consumption by pellet manufacturers in North America could quickly become 20 million tons.

The most nebulous of the wood-to-energy industries, cellulosic ethanol, has yet to come to fruition. Significant research into the technologies needed to make the conversion of wood fiber to ethanol viable and cost-effective is under way. Multiple pilot and demonstration facilities are up and running. Even the most advanced of these plants, like Range Fuels in Soperton, Ga., call for commercial-scale production no sooner than 2010, however. Funding is an issue here as well. The risk to investors is very high in these difficult economic times.

One factor may improve the chances for cellulosic ethanol. In December, the Energy Information Agency (EIA) announced that the U.S. would not meet its targets to produce 36 billion gallons per year (BGY) of alternative fuels by 2022. According to Howard Gruenspecht, head of the EIA, the cause is the “rate of development of cellulosic biofuels technology.” In response to this news, the U.S. Dept. of Energy (DOE) announced that it would provide an additional $200 million in grants to help build pilot and demonstration-scale cellulosic ethanol facilities. By definition, a pilot facility uses up to one dry ton of feedstock per day and a demonstration scale facility uses up to 50 dry tons of feedstock per day. The DOE said it would give priority to projects scheduled to be operational within three to four years with strong chances for rapid commercialization. While this should spur the development of these facilities, the grants do require non-federal cost shares (i.e., money either from states or from private investors); pilot plants will require 30% non-federal funding, and demonstration plants will require 50% non-federal funding. Again, attaining these funds in today’s business environment may be difficult.

In addition to this new round of grants, loan guarantees provided in the 2008 Farm Bill will be made during 2009. Ed Schafer, U.S. Secretary of Agriculture under former President Bush, announced on January 9, for instance, that the first of these guarantees—$80 million—would go to Range Fuels. According to Reuters, Secretary Schafer made the following statement about the decision, “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 current estimate for commercial production of second-generation biofuels is five to six years.)

Other factors that may help speed commercial production of cellulosic ethanol are the policies and appointments of President Obama. First, is the appointment of Dr. Steven Chu as Secretary of Energy and head of the Dept. of Energy. Chu is a strong supporter of alternative energy, including second generation or cellulosic ethanol. At his confirmation hearing in January, Chu acknowledged that the science of cellulosic ethanol lags the need. As a life-long experimental scientist with strong management skills, he is an ideal leader for the research and development initiatives necessary to advance the process quickly.

All of these variables suggest that the future of bioenergy will continue to be uncertain for some time. What is certain, however, is that bioenergy holds the promise of two things that are high on the list of priorities for the U.S.: energy diversity and energy independence. Both of these are critical paths for U.S. national security. Other benefits include a reduction in price risk for energy consumers (the graph indicates the relative cost of energy by source when oil prices were climbing during the second quarter of 2008, an event that will undoubtedly repeat itself), the renewability of the supply, and a smaller carbon footprint.

But this won’t come without some hardship. The success of bioenergy will create supply disruptions for manufacturers of other forest products. Competition will be especially fierce for pulpwood, as softwood pulpwood and chips will become the main feedstocks for bioenergy companies for the next 10-12 years. The table shows the amount of feedstock used by new energy facilities in million tons; it also shows the percentage of the total amount of bioenergy feedstock that will come from pine pulpwood and chips.

This additional demand will emerge into a supply chain that has seen a decline in available pulpwood supply. Over the last 10 years, land ownership has shifted from forest products companies to TIMOs. TIMOs have adopted different goals and harvesting patterns than those used by forest products companies. Their goal is to produce sawtimber, so they spur growth to sawtimber sizes by thinning stands earlier. As a result of this change in land ownership, 36 million tons of pulpwood have been removed from the system. Additional demand from bioenergy will cause further shortages, increase competition, and raise prices. Composite manufacturers will compete directly with bioenergy companies for pulpwood, and this will increase their raw material costs in many locales.

Veneer and plywood manufacturers will not be immune from bioenergy fallout. Increased competition for diminishing supplies could raise the price of pulpwood high enough that sawtimber could see some pressure as well. At a certain price point (when pulpwood prices approach about half the price of sawtimber), the math will favor harvesting for pulpwood once again, and more timber owners will manage their holdings strictly for short-rotation pulpwood. When this happens, shortages will beset the sawtimber market. The resulting competition and price increases will lead to increased raw material costs for veneer and plywood makers.

Because forest products manufacturers—whether they produce power or panels—will all operate within the same supply chain, business plans will need to be reframed to meet this shifting supply chain paradigm. Companies will benefit from an in-depth assessment of the opportunities and threats represented by new energy. Those who will compete with the new users of wood fiber will benefit from a careful examination of their relationships and agreements with suppliers and from the adoption of business tools to ensure they are procuring raw materials at fair market prices. Companies that produce residuals will profit from additional revenue generating opportunities in the bioenergy sector and from the higher residual prices that result from growing bioenergy demand.

To prepare for the future, the change that is required for those of us who have operated within the forest products supply chain for sometime is this: We must accept energy as a forest product. With the amount of capital flowing into new energy, and with utilities co-firing with wood on a significant scale, the energy value of wood is certainly equivalent to the value of other pulpwood products. Depending on future events in energy markets, there may come a day when the energy value of wood eclipses that of other forest products as well.