By Andrew Snook
July 28, 2016 - With the United Kingdom (U.K.) voting to leave the European Union (EU), this decision has likely raised a few eyebrows of wood pellet producers this side of the North Atlantic.
The U.K. is by-and-large the current world leader in the use of biomass for energy production and the home for the majority of Canada’s wood pellet export market.
By early July, the pound had decreased in value by more than 10 per cent since the U.K. voted to leave the EU, making it more expensive for companies to purchase wood pellets in North America. Will the U.K.’s currency decline significantly impact existing business in Canada? Not likely. Could it hurt Canadian companies’ abilities to secure supply contracts in the U.K. in the future? Maybe.
This is a particularly important factor to consider in British Columbia, where there are 12 wood pellet factories currently producing approximately 1.7 million wood pellets annually. About 70 per cent of those pellets are currently destined for the U.K.
Another factor to consider is the impact that leaving the EU could have on the country’s wood pellet demands in the future – if the country does go ahead with leaving the EU (the Brexit referendum is not necessarily legally binding). The U.K.’s biomass industry is very dependent on government subsidies for growth and there are major projects coming up the pipes: Drax’s full conversion of its 645MW Unit 1 co-firing power plant, EPH’s 420MW Lynemouth coal-to-biomass conversion and MGT Power’s 299MW Teeside combined heat and power plant. Combined, the three projects could increase the U.K.’s industrial wood pellet demand by about
3 million tonnes per year by 2020.
The Lynemouth project owned by EPH, a Czech-based energy company, is a particularly interesting case to watch. While the project did obtain EU state-aid approval last year, it will be interesting to see how EPH responds if the U.K. decides to exit the EU, since the country would no longer necessarily need to follow EU regulations and the potential for increased fuel supply costs exists due to fluctuating currencies.
On a positive note, EPH has secured contracts for half of its expected wood pellet demand from U.S. producer Enviva (MGT has secured its expected wood pellet demand from the same producer).
Drax is currently awaiting a decision from an EU state aid investigation for the CFD subsidy it was granted back in 2014 for its Unit 1 conversion. Media are questioning whether the referendum results will create delays in the process. That said, the unit is already co-firing at 85 per cent, so I don’t see the decision on full conversion creating a big impact on its operations either way. The bottom line is that the U.K.’s appetite for North American wood pellets isn’t likely to dry up anytime in the near future – current demand for Drax’s two full unit conversion power plants is about 6.8 million tonnes annually.
For now, we will have to watch and see if the U.K. decides to leave the EU. Either way, there are interesting times ahead.