The state of the Latvian wood pellet industry
a study on production conditions and international competitiveness
In the last decade, member states of the European Union have adopted a range of measures to decrease the dependency on fossil fuels. This has led to an increased use of biomass in heat and power production. In some countries, the lack of forest resource has led to large scale power producers importing their biomass needs. Due to high energy content and homogeneity, wood pellets have become an internationally traded commodity used for large scale power production.
The Baltic States have emerged as one of the largest wood pellet exporting regions in Europe. This study focused on the case of Latvia, the country with the largest wood pellet production in the region. The purpose was to investigate the production conditions and the competitiveness of the Latvian wood pellet industry. The study was limited to industrial wood pellets for large scale utilities. Three import countries; Belgium, the Netherlands and the UK were identified as large industrial pellet importers for further research. Coal was seen as the major competing alternative energy source on these markets.
The global wood pellet industry, the wood pellet value chain and Latvian conditions for pellet production was first researched through a literature study. Coupled with theories on competition, it formed the framework for the empiric data gathering through qualitative semi-structured interviews with actors in the Latvian wood pellet industry.
The study revealed that raw material costs were a weakness for the pellet industry. Pellets contracts were made for 1-3 years and there was no way to hedge against increases in raw material. The result further suggests that the current size of the Latvian wood pellet industry might not be sustainable, based on future raw material availability and increased raw material competition. Changes in freight rates could also affect the competitiveness of Latvian pellet producers as the currently low rates are thought to increase. However, the industry is doing well at the moment experiencing a steady demand and good FOB (free on board) prices at the ports of export.
Calculations showed that wood pellet mills under Latvian conditions had a total cost of 103-110 ?/tonne FOB Riga and 117-124 ?/tonne CIF ARA (cost, insurance and freight to Antwerp-Rotterdam-Amsterdam), which suggests they could compete based on the average spot price of 125 ?/tonne CIF ARA. Calculations also revealed that the cost of producing and transporting Latvian pellets was competitive with the coal price under the current market situations and the existing support schemes for biomass in biomass dedicated energy producing utilities. The result further showed that Latvian pellet producers were able to compete at profit against the coal price in co-firing utilities in Belgium and the UK. However, the power plants profitability of co-firing wood pellets was proportional to the share of biomass used.
Latvian pellet producers had an advantage on Scandinavian markets, large storage abilities to handle demand fluctuations and some had the possibility to switch between residential and industrial pellets. The geographical location coupled with their storage options also resulted in a possible niche towards the large scale industrial consumers in flexibility and delivery speed. However, the energy producers on the selected markets required large volumes of wood pellets and had infrastructure capable of handling the large North American bulk shipments of 40.000 tonnes. Based on the scale of operations and price, the pellet producers in the US and Canada will probably continue to be the main suppliers for the large scale consumers on these markets.