Forest Product Companies Have Distinct Advantages in Bioenergy

 

A recent report by McKinsey & Company, New York City, N.Y., USA, indicates forest products players could benefit from increasing biomass demand. At first sight, the development of bioenergy markets seems a legitimate concern for the forest products industry. In the past some in the industry has taken a stance against the use of wood for alternative energy. 

The long-term impact on the availability of fiber and the short-to medium-term impact on feedstock prices are as yet unknown. Some of the only negative evidence on price relations has been the rise of wood prices for competing pulp and paper interests in Canada and in some parts of the U.S. But new developments could significantly affect the economics of the forest industry.

Forest products companies have several capabilities that could make them equally or more successful than traditional energy players in bio-power markets:

• Optimizing multi-fuel plant operations. We often hear energy companies complain that they don’t have enough experience or in-house capabilities to operate their multi-fuel boilers optimally, adjusting for varying fuel qualities and non-homogeneous fuels. But many forest products companies have years of such experience through operating CHPs at their pulp mills powered, for instance, by black liquor and hog fuel, and their saw mills fueled by wood and wood processing residues. Similarly, the biggest single challenge, and sometimes surprise, that energy utilities face when making bioenergy conversions is the relatively larger space they require for fuel logistics, storage, and handling. For forest industry players, in contrast, the bulkiness of different types of biomass is a familiar problem: achieving efficient fiber logistics has been central to success in the industry for decades. Energy companies starting out in this field could well be open to a partner or supplier with such multi-fuel plant expertise. This expertise may not always be fully appreciated within forest products companies. Forest products companies could be more successful than traditional energy players in bio-power markets themselves but, if packaged right, could be turned to significant advantage in the broader bioenergy sector.

• Securing large and stable volumes of fiber. As described earlier, another area of concern for energy players is how to secure stable supplies of fiber cost-efficiently in large volumes: some 400,000 - 500,000 tons a year are needed to fuel a 100 MW bioenergy plant. Forest products companies have long histories of managing the complex fiber supply chain to deliver regular, large volumes for their mills. Indeed, no other players in the market today can match their track record for achieving long term, continuous and cost efficient supply agreements for larger volumes. There are already some examples of partnerships between energy and forest product players based on this experience. 

• Managing forests and plantations for sustainability and productivity. Energy and forestry players have a common interest in ensuring sustainable biomass supply. However, for energy players, forest and plantation management is a new skill. Some forest products players are already leveraging their extensive forest management experience to help companies entering bioenergy integrate upstream and set-up feedstock operations that are both productive and sustainable. But there is much more they could do to increase efficiency in forests that are already harvested. Forest products companies could also play a larger role in introducing new sources of supply.

Capabilities in the three areas mentioned above have a direct impact on the profitability of bioenergy. Fuel costs often comprise 50% to 60% of the total cost of bio-electricity, that is, including capital and operational expenditures. Simply by exercising their expertise in fuel sourcing, forest products companies could be as successful in the bioenergy market as established energy players.

They could enter selected parts of the bioenergy value chain alone or with a partner, or compete as fully integrated players against integrated energy companies.

Even if forest product companies are not keen to enter the bioenergy market with a "stand-alone" business, there may be other ways they can benefit from the renewable trend using existing assets both to increase and broaden revenues. Several "green" business alternatives exist that are economically at least as attractive—and, in some cases, more so—than making paper, which is no longer necessarily the highest value product that can be produced from fiber. Certainly, producing pellets for energy instead of pulp will destroy value at today’s prices. However, due to the renewable subsidy schemes in Europe, running a CHP on those same pellets will give the same or higher absolute EBITDA margin per cubic meter of wood used as producing fine paper. 

As well as becoming net producers of bioelectricity in this way, forest products companies might consider broadening their portfolio to adjacent bio-based products such as transport fuels, chemicals, textiles, or other bio-materials. Forest products companies with privileged access to fiber will benefit directly from increasing demand for biomass for energy. Obviously, having access to captive wood gives a company a cost advantage, but it may also choose to sell fiber to the highest bidder rather than using it for its own production, when such a deal would yield a higher gain.

This window of opportunity to enter the bioenergy game won’t stay open forever. For now, forestry and forest products companies may have a competitive edge in multi-fuel operational excellence, supply chain management, and managing forests and plantations based on their experience. But as energy players fail to find offerings in the market that meet their biomass supply needs, they are increasingly taking matters into their own hands and developing new supply chains. This could mean a lot of inefficiencies and "re-inventing of the wheel" for them, and a big lost opportunity for the forest products industry, unless it moves as swiftly.