Sept. 2, 2010

By William Perritt, Executive Editor, Wood Biomass Market Report

RISI VIEWPOINT: Financing presents significant hurdle to expansion of wood biomass sector

LOST RIVER, WV, Sept. 2, 2010 (Viewpoint) - By William Perritt

The bioenergy team at RISI has busied itself in past weeks validating the development of over 200 new wood energy, wood pellet and wood-based biofuel facilities in North America through a formal set of criteria. The results of this undertaking will be fed into our upcoming multi-client study on the biomass sector, and used to refine our North American Wood Biomass Projects Database.

The validation process has been quite interesting, revealing definite trends and issues along the biomass front. In vetting the projects, the number one issue among all (whether pellet, energy or fuel) is financing. The credit crunch has hit the industry hard, and financiers are exceedingly leery of any proposal lacking certainty among components -- whether it be wood supply, grid connection or a verifiable market for end products.

In calling the various developers, many are telling us, "We've got everything but the financing," or, "We're waiting for the economics to work." Another added, "Four years ago when you needed financing for a $200 million project, you could go to one bank. Now you need to go to five, who can all only finance $40 million."

Surprisingly, most sources tell us they have no intention (at least not now) of abandoning their plans. There seems to be a certain staying power in the hope that markets will turn around.

Aside from trying to navigate a narrow financing channel, numerous wood energy developers are waiting to see what comes about with the EPA's controversial proposed Boiler Maximum Achievable Control Technology (MACT) rule. The rule could set emission limits at levels "which are barely detectable and possibly unachievable," opponents say.

A developer told RISI's Wood Biomass Market Report, "We continue with the engineering, but need a clear definition" of MACT before proceeding. An American Forest & Paper Association spokesperson commented, "MACT could cost the forest products industry alone over $6 billion in capital expenditures and hundreds of millions more in annual costs unless significant changes are made."

The Biomass Thermal Energy Council (BTEC) commented, "EPA's analysis in determining the biomass boiler emissions limits used an incomplete data set, overestimated the health impacts of biomass combustion, and underestimated the economic impacts to small businesses and communities." A comment period on the rule ended last month, so now the waiting game is on.

A contact with a major southern US biomass energy company surmised MACT would not be an issue that derails a project. "It's an issue and something that has to be dealt with, but that isn't going to be what stops a project." His view is that the current economic climate, including lower demand for energy and financing difficulties, are the real stumbling blocks.

Energy producers are also waiting to see how the mosaic of statewide renewable energy targets will settle and whether they will be able to sell into a market that rewards higher-cost sources like biomass. On the federal level, attempts to put forth any sort of cap-and-trade mechanism seem all but dead.

In the pellet realm, RISI is finding a tale of two markets. On the domestic residential "bag" side, developers looking to enter that realm are balking at the reality of a wood pellet market which became rapidly oversupplied by new mill starts and which simultaneously saw actual demand drop with a mild winter and moderate oil and gas prices.

Pellet producers are also finding that declines in lumber production make it more difficult to procure raw materials in the form of sawmill residuals. New entrants to the pellet market must now consider whether to go with expensive log chips and attached processing costs, which may, ultimately, be prohibitive.

On the other side of the coin, developers are looking to serve the emerging European wood energy market, which could consume close to 70 million green tons per year of biomass, according to RISI's European Wood Biomass Projects Database. Recent significant announcements of supply agreements between US pellet producers and European consumers suggest promise.

Look for RISI's biomass multi-client study later this year.

- William Perritt, Executive Editor, Wood Biomass Market Report, RISI, can be reached at wperritt@risi.com.