Meanwhile, climate change initiatives around the world are calling for greenhouse gas (GHG) reductions. Demand for clean-burning biomass for heat and power generation is increasing.
Government programs in the United States and Europe are funding projects to develop a more streamlined, far-reaching system of trade for biomass. Could biomass become a commodity that is bought and sold on a trading floor?
Global coal markets are tightening and the United States is exporting more coal. The average price of exported coal in the second quarter of 2008 was $97.24 per short ton, its highest value in history and an increase of more than 50 percent year-over-year, according to the Energy Information Administration, a service of the U.S. DOE.
Meanwhile, the European Union and its member states, which more than six years ago ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change, have committed to reducing their collective GHG emissions by at least 8 percent by 2012. The EUÂ’s Biomass Action Plan includes a directive to promote renewable electricity generation by increasing production in member states from 14 percent in 1997 up to 21 percent by 2010. In the United States, 28 states have individually established renewable portfolio standards, specifying that electric utilities must generate a certain amount of electricity from renewable resources by specific dates, according to the Pew Center on Global Climate Change.
This market environment has led electric utilities in the United States and around the world to use woody biomass from timber harvesting and sawmill operations, as well as waste wood destined for landfills, for power generation.
For example in the United States, Xcel Energy plans to spend $55 million to $70 million to convert the last remaining coal-fired unit at its Bay Front Power Plant in Ashland, Wis., to a biomass gasification system. The plant has been burning waste wood to generate electricity since 1979 and currently uses just over 200,000 tons of waste wood each year. When the project is complete, the plant will use an additional 185,000 to 250,000 tons per year.
In Europe, Prenergy Power Ltd. of Switzerland is building a $788 million wood-burning power station capable of generating 350 megawatts of electricity in deep-water Port Talbot on the western side of Wales. Approximately 3 million tons of wood chips will be imported by cargo ship for the plant annually. In addition, Drax Group Plc in the U.K. is planning to build three 300-megawatt biomass-fed plants at the deep water ports of Immingham and Kingston upon Hull; the third location is to be determined.
During the past five years, global trade of woody biomass has almost doubled, especially trade for wood pellets for energy generation, according to Håkan Ekström of Wood Resources International LLC.
Global trade of woody biomass was just over 11 million tons in 2007, up from 5.6 million tons in 2003, Ekström says, and a record of more than 3 million tons of wood pellets was traded globally in 2007. Most of the trade has been between European countries or exports from Canada to Europe. Germany exported 1.4 million tons of biomass to neighboring countries in 2007. Canada exported 1.3 million tons of biomass last year, including an estimated 600,000 tons of wood pellets for the European market.
In response to increased demand for wood pellets, Mitsubishi Corp., JapanÂ’s largest general trading company with offices in 80 countries, has acquired a 45 percent stake in Vis Nova Trading GmbH, a manufacturer in Bremen, Germany, that produces wood pellets from waste wood. Mitsubishi invested $8.2 million in VNT, which supplies 180,000 metric tons of wood pellets per year to electric power companies in the EU. VNT plans to build additional factories and achieve 500,000 metric tons in wood pellet sales by 2010.
As global trade in woody biomass increases, is it possible that woody biomass will someday be traded as a commodity?
The U.S. Forest Service Technology Marketing Unit, located at the Forest Products Laboratory in Madison, Wis., has awarded a $75,000 grant to CleanTech Partners Inc. of Middleton, Wis., to develop a plan for implementing a commodity exchange program for biomass in the United States, specifically to increase the efficiency of the existing woody biomass fuel supply chain and to support emerging biorefineries through the future trade of energy crops, such as switchgrass.
Coordinated by Heartland Business Consultants, the Biomass Commodity Exchange (BCEX) should be operational by late 2009, according to Stephen Dinehart, a principal for the consultancy. Dinehart says his experience working for the U.S. Commodity Futures Trading Commission, as well as the Chicago Board of Trade — where he looked at developing nontraditional markets — and his experience in investment banking have been helpful in developing the plan for the exchange.
The project began in November 2007, Dinehart says, and the first step was to survey the marketplace to understand what large biomass users are currently doing in terms of contracting and pricing. He says the biomass industry is changing dramatically with the implementation of portfolio standards for electric utilities, continued growth in the wood pellet industry, renewable fuels standard volume requirements, and an increased push to develop cellulosic ethanol. Demand for biomass, as well as the number of market players, will increase dramatically in the near future, therefore, “rather than just doing a study, what we determined to do is actually put together a business plan for an exchange that will address the woody biomass market,” he says. “But more broadly, it will incorporate nonwoody products, such as corn stover, switchgrass, wheat straw and so on. The bottom line is to encompass the biomass market on an exchange platform.”
Dinehart says the need for an exchange grew out of concerns expressed by companies that are looking at using biomass for power generation. Because there is no way to confidently report what the cost of woody biomass feedstock will be, it is difficult for those projects to obtain financing, he says. “A very important element (of the exchange) is that we will provide publicly available prices,” Dinehart says. “A major part of the problem right now is that most people don’t know what the value of biomass is. The lack of pricing means that we’re not eliciting as much supply as we can from the marketplace. If people don’t know what the value is of what they have, they’re not going to sell it.”
Initially, the exchange will provide indicative pricing on a monthly basis with plans for weekly and, ultimately, daily price reports, depending on the volume of trades, Dinehart says. Price reports will begin with prices for large categories of biomass across large geographic areas and will become more specific as the exchange matures, he says.
To be market-traded as a commodity, a product must typically be qualitatively uniform across the market. It might be suggested that the inherent diversity of woody biomass is the main barrier preventing it from becoming a commodity. The limbs, branches and twigs derived from timber harvesting and the woodchips and sawdust derived from sawmills are as diverse as the trees they come from. While wood pellets are more uniform in size and shape, they too are made from diverse materials, including switchgrass, nut hulls, and so on. An argument can be made that before biomass can be market-traded, the various categories of biomass must be standardized and there must be broad consensus concerning which biomass is acceptable for one purpose or another.
However, Dinehart says the BCEX will not pre-impose standards on the exchange. He says the BCEX will be an Internet-based electronic listing platform that will be a focal point for biomass buyers and sellers to come together and that standards will grow organically through active trading. “We are not prescribing what people can trade,” he says. “They can trade whatever they want. If they want to solicit delivery of rice hulls to Savannah, Ga., they can do so.”
Initially, how biomass will be identified on the exchange will be up to the buyers and sellers, Dinehart says. The BCEX might supply a lexicon of suggested terminology, he says, or might also list the CEN/TC 335 Solid Biofuels standards that have been described by the European Committee for Standardization under the European Commission, which he said are being proposed as an International Organization for Standardization standard.
Dinehart initially expects the largest volumes of trade on the exchange will be for forest residuals, followed by pulpwood, round wood, urban waste wood, industrial waste wood and bark. The lowest-volume trading will be for cellulosic ethanol biomass feedstocks, such as switchgrass. Whether wood pellets will be traded on the exchange is an open question, he says, because typically, wood pellet manufacturers are branding their pellets and might not be interested in commoditization.
In order to become a mature exchange with futures contracts, the BCEX will need to identify actively traded spot markets. Dinehart says because there currently are no spot markets for biomass in the United States, the spot markets, too, will have to grow organically from the exchange through active trading. He says there are areas of high wood consumption in the United States and it is logical to expect that spot markets will emerge in those areas. Currently, because of the relatively low value of biomass, the productÂ’s price is extremely transportation sensitive, which means there are relatively small markets, with most markets only 200 miles in diameter. In order for biomass markets to grow in size geographically, the base value of biomass will need to increase to push relative transportation costs down, Dinehart says.
“Right now we don’t think a futures market is viable,” Dinehart says, “but what we do think is viable is an exchange that facilitates cash market trading.” He notes that the BCEX would begin life as an exempt commercial exchange and would be free from CFTC regulation. Only if the BCEX can grow to support futures contracts will CFTC regulation be necessary, he says. “Once you allow pure speculators to go and trade on an exchange, or once it is marketed to the public, then it comes under the auspices of the CFTC as a regulated exchange,” he says. “I don’t see that occurring for a very, very long time.”
In traditional commodity exchanges, CFTC regulation protects market participants against fraud, manipulation, and abusive trading practices and ensures the financial integrity of the clearing process. Dinehart says the BCEX platform will offer trade confirmation and verification and could provide delivery notices and settlement services, as needed, as well as an audit trail. He says a beta version of the BCEX electronic listing platform will be tested in early 2009. The business plan for the exchange will be completed next year, when a decision will be made whether to move forward with BCEX.
Ultimately, if BCEX is successful, the price of biomass as a commodity will be determined by the market as a whole. Futures contracts might ultimately be possible and market participants might be able to hedge themselves against price fluctuations.