In 2016, the wood pellet market in Europe reached a size of 19 million tons per annum (Mtpa), while production capacity stood at 23.5 Mtpa, and consists of two largely independent sectors with only limited interaction. The industrial market is focused on large-scale bioenergy generation, while the premium market is focused on small-scale residential and commercial heat generation. Industrial Markets The use of pellets for industrial-scale energy generation has not been widely adopted across Europe, with the U.K., Denmark, Belgium and the Netherlands leading the market. Nevertheless, this sector accounted for 51 percent (9.7 Mtpa) of total pellet demand in Europe in 2016, and P&ouml;yry expects further growth in this sector. Demand is likely to reach levels of between 12.4 Mtpa and 20.2 Mtpa by 2025, depending on some outstanding political decisions.
However, governments often do not regard large-scale biopower generation as a long-term option, and in the U.K. and the Netherlands support for these plants will begin to end in 2027 and 2028 as things stand currently. Governments should start recognizing the importance of this industry sector that is able to provide baseload power to electricity networks, compensating for an increasing share of intermittent energy sources. Support schemes should be extended at appropriate levels to avoid having most of these large-scale biopower plants become uneconomical.
Supply of pellets to the industrial market from directly within Europe is limited, with only the Baltics and Portugal playing a relevant role. In total, this European production capacity amounts to just 2.6 Mtpa, covering only a small portion of the demand in the industrial market. Future growth of the European industrial pellet capacity is limited, as raw material competition is often high for new large-scale pellet mills. For the foreseeable future, the majority of industrial pellets will continue to be imported from the U.S. Southeast and Western Canada. New supply regions such as Brazil could become prevalent if demand grows beyond a certain level. Premium Markets European premium pellet markets usually have a strong regional character with highly seasonal demand patterns. The recent succession of warm winters has presented suppliers with an overall challenging business environment.
Nevertheless, total demand in Europe has grown steadily and reached around 9.4 Mtpa in 2016. This market segment is expected to continue growing as EU member states work toward achieving their heating and cooling targets under the European Commission&rsquo;s Renewable Energy Directive. We expect demand for premium pellets to reach levels of between 10.1 Mtpa and 16.4 Mtpa by 2020 and 2021 as a result. We anticipate this demand growth to be focused in the U.K., France, Italy and also Austria, while demand in countries such as Germany and Sweden is now stagnating, and may even decline as the focus of the renewable heating industry switches to alternative technologies.
Currently, most EU member states still have not yet formalized their renewable heat strategies out past 2020 and any demand predictions beyond then would be speculative in nature. It is clear, though, that biomass heating will continue to play a key role in meeting any future renewable heating targets.
To date, European premium pellet markets have been supplied by small- and medium-scale pellet mills (average 55,000 tpa), often through traders, wholesalers and distributors. This market segment has to cope with considerable overcapacity and low utilization rates across an estimated 20.9 Mtpa of capacity. Exposure to raw material price fluctuations is also of concern for many producers, especially those who are independent, with sawmills increasingly establishing their own pellet production capacity. Stark evidence of this challenging market environment has been the insolvency of Europe&rsquo;s largest pellet producer, German Pellets, in early 2016.
Some producers are also concerned about the threat of pellet imports from overseas, as mills in regions such as the U.S. Southeast and Russia can supply at competitive price levels and, in many cases, have already gained ENPlus certification. Russian mills, for example, supplied upwards of 450,000 tons into Europe in 2016 through independent traders who provided market access. Opportunities for North American Producers The European pellet sector needs to be followed closely over the coming few years as it holds both threats and opportunities for North American producers. Besides further growth potential in the industrial market out to 2025, the likely further expansion of the premium sector post-2020 offers an opportunity for North American producers to soften the impact that the currently expected decline in industrial pellet demand post-2027 could have on their business. One of the key market entry barriers is gaining access to already well-established distribution networks and end customers within these European markets. Some producers, such as the Drax Group, have already made the first steps toward overcoming this challenge by acquiring a local supplier and distributor (Billington Bioenergy in the U.K.), and such convergence between the industrial and premium sectors could become more common. Author: Dr. Hannes Lechner Senior Principal, P&ouml;yry Management Consulting +44 7876 348 262 hannes.lechner@poyry.com Co-Author: John Dawson-Nowak Consultant, P&ouml;yry

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Besides more growth potential in the industrial market to 2025, the likely expansion of the premium sector post-2020 offers an opportunity for North American producers to soften the impact of predicted demand decline for industrial pellets post-2027.

European Wood Pellet Market Potential

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