North American Woody Biomass Market

March 22, 2012

Demand in 2012 & Beyond

As 2012 begins, we are witnessing a worldwide resurgence of interest in renewable woody biomass as a coal substitute or supplement for power generation, with North America serving as an important global supplier of sustainable biomass. “Woody biomass” refers to whole trees, forest residues (including the residue for lumber production) and waste wood that can be combusted to generate power.

Biomass offers significant advantages over other renewable resources such as solar, wind and hydropower because it is a baseload resource. As more intermittent resources come on line, biomass affords utilities and ISOs a reliable option, making it one of the only renewable fuels offering a viable alternative to coal-based generation.

Woody Biomass as a Green Fuel

Trees and other woody plants absorb and sequester CO2 from the atmosphere as they grow and then return it to the atmosphere during Karbone Research & Advisory combustion, leading to essentially zero net emissions once carbon Coverage: North America Energy Year: 2012 “leakage” from harvesting, processing and transport is properly accounted for. This is particularly the case in “closed loop” Alex Anich applications, where trees and other biomass crops are planted Director of Research specifically to create biomass fuel and then replanted following (646) 291 2900 harvest. Prominent supporters of sustainable biomass as a carbon

Jonathan Burnston neutral feedstock include the United Nations Framework Convention on Environmental Markets Climate Change, the European Union, the Regional Greenhouse Gas (646) 666 7353 Initiative and the State of California, the latter two being the only US

jurisdictions with mandatory greenhouse gas limits. Co-Authored by: Martin Gitlin Despite this general consensus, the carbon neutrality of biomass power (203) 557 3894 has been questioned. In 2010 the US Environmental Protection Agency

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sought to regulate CO2 emissions from biomass pellets have been exported from the US to Europe, power plants through a “tailoring rule”, but then where feed-in tariffs and other incentives make the backtracked in 2011, deferring such regulations for trade more profitable, despite the added cost of three years by citing the need for “further study”. pelletization. Also in 2010, the Manomet Center for Conservation Torrefaction, which is the further densification of Sciences issued a controversial report commissioned woody biomass by “cooking” it to form a type of bio- by the State of Massachusetts, questioning the coal with a similar energy density to lower quality carbon neutrality of increased biomass use from coal, promises to narrow the cost gap between existing managed forests in Massachusetts. biomass and coal even further. As of yet, however, However, because the Manomet study was torrefaction has not been implemented at intended to focus on a single narrow scenario, commercial scale. Manomet itself argues that it should not be used to argue more generally against woody biomass from Security of Supply sustainable sources. Lenders financing the high capital cost of a biomass power plant will require the project to demonstrate a Constraints on Woody Biomass for Power Generation consistent supply of feedstock over the typical 20-25 Historically, high transportation costs, concerns year period of financing. This has posed a challenge about long-term security of supply, and consistency in many wood baskets, where landowners and of feedstock quality have limited the market for foresters are accustomed to the short-term biomass as a fuel source for electricity generation. contracting practices of the pulp and paper industry. Further, the lack of uniform, long-term price curves for Transportation Cost biomass has hindered its commoditization outside of Woody biomass is significantly less energy dense very specifically defined markets, such as the market than coal, making transportation costs for raw for US-sourced wood pellets for delivery to Western biomass prohibitive at prevailing power prices, Europe. Still, we are beginning to see more long-term except where transport distances are minimized by supply agreements and lenders getting more proximity to the relevant wood basket. Typically, US comfortable where there are diverse supply options. biomass plants draw feedstock from a 50-100 mile radius. This, in turn, limits the size of generating plants Consistency of Supply Quality based on the amount of sustainable feedstock Many factors, including the tree species, water available. Further, since heavily wooded areas tend content, and presence of soil and other impurities in to be located far from large electric load centers, the biomass stream can adversely affect the biomass power plants often require additional, performance of a biomass power facility. Different costly investment in transmission. species have different chemical compositions, some of which may have corrosive or abrasive effects on Pelletization of biomass increases the fuel’s energy equipment, shortening its life, and may alter the density, rendering it less costly to transport. Over the composition of the ash remaining after combustion, past several years, increasing quantities of wood leading to potential disposal problems. For this

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reason, woody biomass from plantations or actively presenting increased demand to replace the lost

managed forests affords a consistent supply of fuel fuel once the plant is operational again in July 2012. with known properties and quality parameters. Main Exporters to EU-27 of Wood Pellets (1,000 mt)

Market Environment & Opportunities Total Imports Calendar Year 2009 2010 Resurgence of Opportunities in Europe Canada 520 927 A number of countries in Europe support biomass fuel United States 535 736 Russia 379 396 for power generation with incentives ranging from a Croatia 72 95 feed-in tariff (e.g. Germany, Netherlands, Austria) to Belarus 75 90 tradable certificates (e.g. the U.K.). Import demand Australia 9 63 from Europe has driven the recent resurgence of Ukraine 30 57 Bosnia & Herz. 54 44 biomass markets in North America. According to the Other 58 153 USDA’s Global Agricultural Information Network Total EU-27 1,732 2,561 (“GAIN”) 2010 Annual Report, total annual Source: GAIN 2010 consumption of wood pellets in the EU was 11 million Asia Stakes Its Claim in the Biomass Market metric tons (mmt) (see table below). GAIN projects In Asia, governments have begun promoting this consumption to grow to 100 mmt by 2020. biomass as a renewable fuel for energy production,

EU Wood Pellets Trade (1,000 mt) including both FITs and RPS in Japan, new initiatives Year 2006 2007 2008 2009 2010 2011 2012 Production 3,520 5,800 6,300 8,500 9,300 9,650 10,500 in Korea and a commitment by China to increase Imports n/a n/a n/a 1,765 2,523 3,250 4,650 Exports n/a n/a n/a 57 54 100 150 biomass power production significantly. Consumption 4,700 6,100 7,100 9,800 11,000 13,000 15,000 Source: GAIN 2010 South Korea has implemented a Renewable

The largest exporters to the EU-27 are Canada and Portfolio Standard with a target of 10% by 2022. the U.S., comprising 65% of the market collectively. According to one report, demand there could hit 2 Russia covers the majority of the remainder, supplying mmt by 2015 and 10 mmt by 2022. In 2010 South 396 mmt or 15.5% (see exports table below). With Korea imported well over 100,000 mt of biomass limited EU production capacity for biomass, demand (see chart below).

growth in Europe offers incremental export opportunities of 2.127 mmt this year alone.

Most of this expansion will come from the United Kingdom, which has recently implemented new Renewable Obligation Credit banding for biomass. According to Argus Media, the main UK project is the 750 MW Tilbury coal power plant converted to wood pellets, completed in January 2012. In February, Tilbury had a major setback when fire destroyed a portion of the fuel storage facilities, potentially

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Potential US Demand – California the Likely Choice NAT GAS BIOMASS In the United States, twenty-nine states have Carbon Price (Cal13 CCA) $14.50 - REC Price (CA RPS Bucket 1) - $37.50 established Renewable Portfolio Standards (RPS), Power Price (Cal13 NP15 ATC) $33.75 $33.75 requiring a percentage of their state’s energy load to Gas Price (Cal13 PGE City Gate) $3.75 - Fuel Price (CIF North California) - $3.20 come from renewable sources. In many of these Heat Rate 7.20 14.00 jurisdictions, biomass-generated electricity is eligible Emissions Intensity 0.3828 0.00 Clean Spark Spread $1.20/MWh - for crediting of Renewable Energy Certificates (RECs). Bark Spread - $26.45/MWh

In California, the combination of a robust RPS looking at the numbers. First, for comparative purposes program and the implementation of the AB32 cap- we assume that the CCGT resource would run and-trade program offers dual incentives for biomass baseload. In reality, this may not always be the power generation, making California a likely growth economically optimal strategy, since the market for biomass as a commodity. dispatchability of gas generation is often more suitable for more profitable on-peak generation. Second, the California Spark vs. Bark Spread depicted profitability of a biomass facility does not

The competiveness of biomass as a resource in capture the much higher operations and California when competing in the stack with fossil fuels maintenance costs associated with running a biomass is a function of the lack of carbon liability and the facility versus a CCGT plant. addition of a REC premium above the baseload Nevertheless, from this simplified analysis the power price. With in-state coal largely phased out economics of running a biomass facility in California from the California market, and with out-of-state coal appear very compelling. Assuming the market catches representing a much more complicated and up to this opportunity for biomass power generation, programmatically sensitive question, our analysis California could represent a significant future demand focuses on comparing in-state biomass and natural center for woody biomass fuelstock. gas under an AB32 carbon-constrained market, with REC incentives for sustainable biomass credited under Conclusion SBX 1-2’s RPS mandate. This analysis has examined the market prospects for

We use an example of a combined-cycle gas turbine North American woody biomass as a power (CCGT) facility with a heat rate of 7200 mmbtu/MWh, generation fuelstock commodity. Our findings are that and we assume a 14,000 mmbtu/MWh heat rate for a market prospects are strong, as reflected in the biomass facility. In a carbon constrained environment, growing international biomass trading market and using the commercial parameters outlined below, our promising domestic growth drivers on the horizon.

DISCLAIMER NOTICE: This report is solely for the use of the recipient. This research example CCGT facility will yield a clean spark spread is being provided to you for informational purposes only. The content has been prepared by third parties not affiliated with Karbone Inc. or any of its affiliates of $1.20 per MWh, while the biomass facility will yield a Karbone Inc. is not responsible for its content. These reports, and any information contained therein, do not constitute a recommendation by bark spread of $26.45 per MWh. Karbone Inc. to buy, sell or hold any security, financial product or instrument referenced in such report. This information neither is, nor should be construed as an offer, or a solicitation of an offer, to buy or sell SRECs, RECs, Carbon Credits or any similar product. Karbone Inc. does not offer or provide any opinion While these economics seemingly favor biomass as a regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any fuel, there are a few key factors to bear in mind when investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.

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Karbone Company Background

Karbone is a full service firm specializing in renewable energy and environmental markets. We offer integrated brokerage, project finance, research and advisory services to a wide range of market participants. Our mission is to provide our clients with the necessary intelligence, capital, and access to markets to help them succeed in the new energy economy.

We differentiate ourselves through our integrated service approach, which allows us to add value along each segment of the project value chain. Our supply-demand analyses and price forecasts inform our clients' strategic decisions; our capital raising and investment advisory services enable our clients to get their projects off the ground; and our credit and commodity brokerage capabilities ensure that our clients maximize their revenue streams.

Karbone's expertise in the environmental marketplace is derived from our team’s extensive experience in power marketing, finance, carbon consulting, and environmental asset brokerage. From our offices in New York, London, and Istanbul, and strategic partnerships in California, Canada, South America, and the Asia Pacific region, this range of project experience spans across nearly every relevant environmental market around the globe.

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