In comparison to mainstream forestry, Canada’s pellet sector is booming. Sure, maintaining a fibre supply with so many sawmills down can be a challenge, and this winter was not as cold as many had hoped.
By Scott Jamieson
In comparison to mainstream forestry, Canada’s pellet sector is booming. Sure, maintaining a fibre supply with so many sawmills down can be a challenge, and this winter was not as cold as many had hoped. Yet export markets are reliable and, given Europe’s aggressive renewable energy targets for 2020, should be growing. Shipping costs are under control compared to years past, and Ontario Power Generation (OPG) looms large on the horizon as a potential mega-client. The sector’s growth seems certain, with new plants and expansions announced monthly (see our map of pellet plants and projects distributed with this issue). Don’t worry, be happy, right?
|The country has seen success in boosting its domestic pellet market by targeting public buildings for conversion from fossil fuels.
Photos: Bruce McCallum
Despite all the signs of a vibrant industry, there are some danger signs. Principal among these is the astounding lack of market diversity. In fact, the market distribution model of Canadian wood pellets bears a striking resemblance to the Canadian lumber business that came crashing down in 2007 and has yet to recover. Like lumber and its obsession with the U.S. market, Canadian pellets are over-exposed to a single large market. Canadian domestic pellet consumption sits at just 5 to 7% of production while, thanks largely to a burgeoning northeastern market, we now send as much as 10% of our production into the United States. The rest – a staggering 85% or so – still goes to Western Europe, a hungry but increasingly problematic market.
Europe’s bulk pellet sector has been a solid market for well over a decade now, helping to establish our pellet industry despite the vast shipping distances. With each passing year, however, this market looks increasingly fragile. It is a market based on the politics of global warming. Should the Europeans back off their commitment and heavy subsidies for reducing carbon emissions, this market would quickly evaporate. Beyond that political uncertainty lies a more traditional and even harsher reality: the threat of growing local competition.
|A delivery agent blows pellets into the storage bin of a small industrial client in Finland.
“Presently, the Netherlands, Denmark, and Belgium are the only three European countries consuming more pellets than they produce,” says Gordon Murray, longtime forest industry consultant and financial advisor, and currently the acting executive director of the Wood Pellet Association of Canada (WPAC). “All of the other European countries are at least neutral or produce more than they consume.”
The bottom line is that the health of our massive and growing pellet industry depends on three coastal countries. As Murray notes, we are not the only producers looking at these markets.
“Norway is building an additional 450,000-tonne plant, and Russia is building a 1-million-tonne plant. Georgia [state] has announced a 750,000-tonne plant, and Green Circle is building another 500,000-tonne plant [in Florida or Georgia]. It looks like the European market is very fragile; prices are declining, and utilities are reluctant to take on new volumes.”
Much of this new volume may be consumed domestically, but it would be naive to hope that none of it will find its way to Western Europe, further destabilizing what has been a very comfortable market for Canadian pellet makers.
The home front
One solution to Canada’s unhealthy reliance on Europe’s bulk pellet market may lie right under our noses, with domestic demand for Canadian wood pellets. The market is currently restricted to some small industrial users of lower-grade pellets and homeowners dragging bags of pellets home from the hardware store, but, given our climate and wood supply, it’s easy to argue that the domestic market for pellets should be much more. Certainly, looking to countries like Austria, Germany, Sweden, and Italy, there is a case to be made that if we offer modern, automated central heating appliances and bulk delivery methods, consumers in many markets in Canada will embrace this carbon-lean option.
Growth in these European countries has been rapid and impressive. In Sweden, domestic delivery of wood pellets climbed from less than 40,000 tonnes in 1997 to almost 700,000 tonnes in 2008. Total domestic pellet consumption grew during the same period from 500,000 tonnes to almost 1.8 million tonnes. The demand for pellets in the residential heating market in Sweden is expected to grow by another 200,000 tonnes to 900,000 tonnes by 2012.
|Even in Europe, where bulk domestic heating deliveries are the norm, pellet mills still maintain the flexibility to bag some product for niche markets or stove markets like Italy.
Similar trends can be seen elsewhere in Europe, where a combination of government incentives, public education, and investment in appliance and pellet delivery infrastructure has paid off in strong growth trends. In Germany, for example, the market has increased exponentially since 1999, when a grand total of just 800 domestic pellet boilers were installed nationwide. By 2008, that had climbed to over 100,000, a 100-fold increase that was mirrored by the demand for pellets.
So what’s missing from the Canadian scene to make this happen? Looking overseas for inspiration, longtime biomass advocate and current pellet appliance supplier Bruce McCallum feels we are missing only the political will on this side of the Atlantic.
“I have been saying for some time that I can see us using all of our growing pellet production internally, but it will take at least five years to get there, and even that assumes some significant support in all areas – marketing, lobbying, subsidies along the lines of those offered for geothermal or solar energy, the creation of an infrastructure for both appliances and bulk pellet delivery. But we’ve seen it all happen in European countries that set their minds to it, so we know it’s possible. Right now, we’re seeing a capacity growth rate faster than any other country – we were recently at two million tonnes, are now closer to three million tonnes, and could go to four million and beyond with all the projects and expansions being discussed in Quebec, Ontario, and Atlantic Canada. So we have the local product, our need for heat is easily as great as any country save Russia, and now we have the added incentive of high oil prices and public concern over fossil fuels. The conditions are right.”
WPAC’s Murray also agrees that, given a little political will, pellets could play a much larger role in Canada’s energy mix. That support can range from incentives, greenhouse gas reduction plans, and marketing, to something as simple (and free) as changing boiler standards to make smaller district heating projects viable.
“For Canada’s market to grow, we need to adopt renewable portfolio standards similar to the EU’s 20-20-20 program. In Canada, there is no commitment to reduced greenhouse gas emissions. There are 19 coal plants that could easily consume all of Canada’s wood pellets, but little incentive for them to take on wood pellets when coal is so cheap. Ontario is planning to convert four coal plants to 100% pellets, but a final commitment has not been given by government to proceed. It will take a serious commitment by governments to reduce greenhouse gas coupled with substantial marketing efforts to promote pellet use in Canada,” says Murray.
Like others in the field, McCallum sees a domestic pellet market developing on three fronts: peak power generation to replace fossil fuels along the proposed OPG model, small industrial or public clients such as greenhouses or schools, and residential heating. Although the OPG model is attractive for the vast sum of pellets it can consume in one fell swoop, it is also a politically charged market that could fall as easily as a provincial government. Creating a residential heating market, on the other hand, will require a greater investment in time and money, but it will also create a more stable, reliable market over the long term. Judging from the European experience, that investment will require a mix of government and industry funding to tackle a long list of priorities (see the full checklist below).
This list may seem daunting to an industry so young and relatively unorganized. Many European nations have proven, however, that the growth curve can be steep once the ball gets rolling. In fact, you needn’t look too far afield for an example of a functioning system. Just over the border in Maine, a group of entrepreneurs have taken matters into their own hands and are building the residential heating market one home at a time.
The Maine Example
It’s a typically frosty morning in south central Maine as the fuel delivery truck pulls up to an old wood cottage. It’s just like any other house on any other winter day in the rugged state, except this truck is carrying wood pellets, not heating oil. This happy scene is the brainchild of three almost-retired Maine entrepreneurs who came together to help their region’s economy and the environment. They concluded that the northeastern United States’ insane dependence on number two heating oil was both a problem and an opportunity. One of those partners is Harry “Dutch” Dresser.
|One of three Maine Energy Systems bulk delivery trucks, adapted from grain trucks to provide gentler handling. The company started targeting residential heating clients, but has also seen interest in converting public buildings.
“We started by looking at all the energy alternatives out there, wind, solar, etc., and felt that there was one area where we could have the largest impact in a short period of time. Almost 80% of the number two oil burned in the United States is in the northeast, and 80% of Maine homes are heated using it. There are a lot better uses for that limited resource than home heating, especially here with all our wood.”
Following exploratory trips to Sweden and Austria, where residential pellet heating was entrenched, the trio decided that for “both environmental and economic reasons, it made a lot of sense to import some of those systems here,” Dresser recalls. They also decided early on that the solution lay in automated central heating systems and bulk delivery, not in bag-fed pellet stoves. At this point, Maine Energy Systems (MESys) was born. At the same time, the company faced much the same “to do” checklist as discussed above. Rather than wait for more favourable government incentives, however, the investors charged ahead on their own.
“The next step was actually a lot of steps that all have to happen at once. It’s not the chicken or the egg syndrome – it’s the chicken and the egg, as it all has to happen simultaneously or it won’t happen at all,” Dresser says. Using private funds, the company had to source high-quality pellets; develop a storage system using local depots; create a bulk delivery system that could deliver pellets without damaging them; pursue a public education and marketing campaign; establish and educate a network of dealers/installers; win over regulators and insurance providers to what was a foreign technology in every sense; and pursue all the other mundane realities facing new businesses, like staffing and obtaining financing.
“You’ve got five or six dendrites to handle all at once,” says the former biology professor. “So what you need to make this work is patient investment. You’ve got to put all these aspects in place before you build a client base.”
|Home heating clients in Sweden never touch their wood pellets, as bulk delivery trucks like this fill storage bins that are automatically fed to thermostat-controlled boilers.
For pellets, MESys relies on two Maine plants plus Energex, a large supplier just over the border in Quebec. The first step was to prepare these suppliers for the demands of central heating and automated pellet handling systems. MESys worked with all three to improve pellet durability along with other quality parameters. “They’ve responded very well, with improvements from 90–94% durable to well over 98% durable,” Dresser says. “They have also worked well with us to adapt to the particular burning environment of the boilers, which burn hotter than the stoves they had been supplying. They’re working with us to avoid slagging and clinkers. It has been a positive relationship.”
Delivery is done using several strategically placed depots and a fleet of three branded delivery trucks in Lewiston and Bethel, Maine, and over the border in New Hampshire. These are modified versions of the trucks the partners saw in Europe. “Essentially they look like oil trucks, but are adapted from grain trucks. The pellets are delivered using pneumatics, rather than an auger, which is easier on the pellets. Pellets, even our more durable ones, are fragile, and these trucks handle them accordingly.”
MESys is currently working with a regional tank fabricator and a truck manufacturer to create the next generation of fully pressurized delivery truck, which will deliver pellets more gently and quickly. The truck will more closely resemble European delivery trucks than North American grain trucks.
When it comes to appliance installation and service, MESys relies on established HVAC contractors, but with one caveat. “We train them on biomass heating, as well as on our residential heating systems in particular. It’s different than they’re used to, and we want to ensure quality installations.” MESys has trained 300 local reps to date, so the pipeline is in place to install and service what they sell.
As for the return on all this investment, Dresser admits that it has been slow. The company has what he calls “very few” clients, although that translates to more than 110 heating systems sold and over half of those as delivery clients. He says this pace has as much to do with the general economy as the business model.
“You have the overlay of the general U.S. economy, which does not make a good climate for investment. But if you pull that back, it’s doing OK. It has to do well ultimately if you look at our current heating mix. We’re past peak petroleum at this point by most accounts, so we’ll have to do things differently. We’re like the Saudi Arabia of wood pellets here in Maine, so it’s a natural switch.”
In other words, developing a residential pellet heating market is slow, demanding work best done at the local level. While there are strong roles for governments, wood pellet associations, pellet manufacturers, and appliance makers to play as financial partners, it is possible that this local entrepreneurial approach will be the most efficient in the short term until a critical mass is established.
The main question is whether the Canadian wood pellet sector will react in time to create alternative markets before its unhealthy dependence on a single market comes home to roost. Or, like the lumber industry, will it wait until the ceiling falls in and it lacks both the time and finances to diversify?
|Domestic market checklist
Launching a vibrant domestic market for wood pellets will take an aggressive and co-ordinated effort from federal and provincial government, private investors, pellet manufacturers, and industry advocates like the Wood Pellet Association of Canada. Here is a basic list of what must be done to add pellets to Canada’s home heating mix.
Financial incentives: Residential energy incentives are common in Canada, but not yet for pellets. On a recent visit to a geothermal-supplied housing development in southwestern Ontario, Canadian Biomass heard of provincial and federal incentives that approached $10,000 per new home. That’s the kind of money required: Pellet appliance supplier Bruce McCallum says a modern, central heating system with bulk storage and automated pellet infeed will set a homeowner back $12,000 to $16,000 installed.
Pellet and pellet appliance standards: As a new technology for Canadian homeowners and small businesses, consumers will want assurances that both the fuel and heating systems are reliable, safe, durable, and meet emissions standards. The U.S.-based Pellet Fuels Institute recently created a voluntary set of quality standards and labelling for its pellet-producing members. Appliances need similar guidelines and labelling systems.
Installer education and certification: “The systems are, for the most part, already available,” McCallum notes. Although some modifications are needed to meet the Canadian preference for hot air furnaces over boilers, the big hurdle, he says, is in creating a network of recognized installers. This is not a new challenge. The domestic geothermal sector had to build its network from scratch, and countries like Austria have done the same for wood pellets. One way to drive this forward is to link government incentives to the use of certified appliances and installers.
Marketing and promotional campaigns: These will be critical to drive the demand for wood pellet heating. As the systems and delivery methods become modernized along European lines, the industry needs to counter the image of rural customers dragging around bags of pellets.
Distribution infrastructure: The creation of a modern storage and bulk delivery infrastructure in potential market areas is a key step. In northern Europe, homeowners heating with pellets face no more work than those heating with oil or gas. A delivery truck rolls up to the curb, attaches a hose to an outlet in the wall, and fills a bulk storage silo in the basement or beside the house. When the thermostat kicks in, an automated infeed system delivers pellets. McCallum has attempted a similar system in Prince Edward Island, albeit with cruder delivery systems tied to local feed delivery contractors. Although better than bags, it was still too inefficient, and pellets were damaged. The answer lies in dedicated suppliers, McCallum says.
“Government could help in establishing bulk storage and delivery infrastructure in areas identified as key potential markets. That would help ease concerns over shortages by creating local buffers and would help get the ball rolling, as small appliance suppliers can’t do that on their own.”
Creating incentives for existing energy companies to enter the sector may also help.
Protection for the homeowner: Industry must create a delivery priority system that favours the homeowner so that, in the event of shortages, families do not go cold at the fault of the wood pellet sector. Last winter’s perceived local shortages are an example of what not to do.
Finance/insurance: Lobbying the finance and insurance sectors to accept the recent generation of wood pellet heating systems will be important.