Taking a closer look at the UK wood pellet market – as part of a study we carried out for BEIS earlier this year.
Overall status of the UK wood pellet market
The UK biomass wood pellet market has recently experienced levels of oversupply but we think that the depressed pellet prices will increase slightly over the next year or so. Why does this matter? Because biomass heating has the potential to play a significant role in decarbonising some sectors of UK domestic and commercial heating (you can read more about this in one of my previous posts). Small and large customers need to understand prices and sensitivities to make investment decisions. The heating industry needs insight into the role for biomass pellets and the future expected fuel costs, both as an opportunity and threat to their business.
So how good was this analysis? Do you actually know what is going on?
In our study for BEIS we spoke to a large number of UK wood pellet manufacturers, importers, wholesalers and retailers, as well as end use customers. On the commercial side, we estimate in this short study we covered approximately 60% of the UK residential and commercial wood pellet market by total weight of pellets consumed. Therefore, we think we obtained a decent overview of the market.
Please tell me more about what impacts the price of my pellets
There are a number of factors which affect the UK pellet price. The most significant, perhaps unsurprisingly, is the cost of the feedstock used to produce the pellets. The good news is that there is plenty of feedstock available not only in the UK, but huge amounts of woody biomass (think plantations and saw mill residues) in the Baltics, Russia and the US. The biggest source of UK produced pellets, which makes up 60% of the current market, is small round wood. For those of you not fluent in wood market speak, this is the name given to forestry thinnings from plantation management.
The other factors that influence the pellet price are:
- The cost of energy (it can take a lot of energy to dry the wood and press it into pellets)
- The cost of fuel for shipping and distribution
- Exchange rates (a weaker pound means imported pellets are more expensive)
- Seasonal variation (pellets are cheaper in summer as supply capability exceeds demand)
- Imported vs locally produced pellets (production costs are lower in the Baltics/Russia than the UK)
What about bagged versus bulk blown pellets?
We looked at the difference between bagged and blown wood pellets. The prices for bagged pellets, primarily used by smaller domestic users (using less than ~7tonnes per year), are more transparent than for bulk blown pellets. This is thanks to a price premium for the convenient packaging combined with an online market place allowing customers to compare suppliers from the comfort of their own home. The prices quoted for bagged pellets, usually in the 215-260 £/tonne range, include delivery to main UK mainland areas.
The price for bulk blown pellets is much more variable, anywhere from 175-260£/tonne, and largely depend on the order size and delivery distance. The frequency of ordering will also provide further bargaining power over the pellet price paid.
Are all pellets created equal?
No, they are not. The UK residential and small commercial market is dominated by ENPlus A1 pellets – the highest quality pellet standard out there. However, even within ENPLus A1, pellet quality can differ as the standard is measured at the factory gate. Increased handling of pellets (which could be 20 times or more for internationally sourced pellets) can cause the pellet to break down. This means that customers may simply be paying for glorified saw dust rather than a pellet, which can clog up pellet feed mechanisms and boilers, and result in less efficient burning.
Before I get into too much trouble it is worth mentioning that imported pellets can be of equal quality to local pellets - if the importer takes the time to remove fines that were created during shipping.
Okay, that’s all great. Now cut to the chase, give me some figures - what should pellets cost and how will this change?
Based on conversations with pellet manufactures, importers, wholesalers and retailers, end use customers and additional market research, we generated a simple model to predict the price of pellets going forward till 2021. We also included historical pellet prices going back to 2015.
In the graph below a wide range of outputs is covered in a fan type chart which gives the range of model outputs for the low, medium and high scenarios we developed.
Model output fan chart showing model results for extremes of low, medium and high scenarios, 2015 – 2021. Note the non-zero price axis. Note: £/tonne values can be converted to MWh by dividing the given values by the energy density of wood pellets; 4.8 MWh / tonne.
How accurate are these figures?
It is important to note that the graph above covers a wide range of delivery sizes and distances which results in the graph spanning a wide range of different pellet prices. Prices can also be higher for outlying / remote areas, and will take into account local offloading arrangements.
I want to know more about the pellet supply chain and why pellets cost as much as they do.
Well through our work we came up with a rough overview of the wood pellet supply chain and how the cost builds up across this supply chain – see the diagram below.
Wood pellet supply chain diagram. Prices are all indicative.
Our overall findings
Delta-ee’s findings have provided valuable insight for BEIS, and demonstrate that a range of factors can impact on pellet prices.
Wood pellet prices are currently around £200/tonne (4.2p/kWh) for larger users (bulk blown pellets) and £230/tonne (4.8p/kwh) for smaller (domestic users).
- The pellet price is expected to rise slightly or remain stable
- Pellet prices have decreased ~10% over the past two years (2015 - 2017) due to oversupply arising from policy uncertainty
- There is little overall long-term volatility in the wood pellet price (+/- 13% relative to 7 year average price). This is a (much) lower volatility than the oil price.
- The wood pellet market is set up to be high volume, low-margin: high utilisation of pellet manufacture and distribution infrastructure is important for the industry
- Increasing storage volumes at customers sites would provide a more stable demand, reduce costs to suppliers and end-users (maybe)
If you have any questions with regards to the above or want to chat about the UK wood pellets market more generally, please feel free to get in contact with me, [email protected].