Future Prospects for Wood Pellet Prices and Availability | Forever Fuels

Wood pellet prices have historically been more stable than fossil fuels. There are no price indices available for the UK, but the figures for Austria and Germany are illustrative.

Austria

Austrian historic heating fuel costs

Germany

German historic heating fuel prices

Although there are no historic price indices for wood pellets in the UK, heating-oil prices have been as volatile as on the continent. On the whole, energy markets are international and similar trends will appear in all developed countries.

UK Heating Oil Prices

Wood pellet prices in the UK were unsustainably low before the Renewable Heat Incentive (RHI) was introduced in Nov 2011, because the policy vacuum meant inadequate demand even for the modest amount of supply available.

The market grew rapidly from 2012 to 2015. Demand briefly overtook supply, and prices rose strongly in 2013 and 2014. Average wood pellet prices increased by around 30% from trough to peak. By comparison, heating oil prices increased by over 100% from trough to peak, and then fell by over 50%, before increasing again by 60% in the space of 10 months in 2016.

The growth in demand attracted many new entrants. At the same time, support for small biomass heating in the RHI fell below half its initial level, and the oil price collapsed. Volumes reached a level that made imports feasible, at prices well below those charged by UK producers. These factors had a depressing effect on prices and quality. Wood pellet prices fell by around 15%.

As of late 2016, the excess capacity has reduced prices below a viable level, both in the UK and internationally. The largest pellet producer in the world, German Pellets, went into administration in 2015. The second-largest producer in the UK, Verdo Renewables, announced in October 2016 that they were closing both their factories, which eliminates around one-third of British production capacity if implemented. Prices are no more viable for other players. Further bankruptcies and closures can be expected until capacity has been reduced to the level of demand, allowing prices to rise to sustainable levels.

Another effect of the expansion of capacity at the same time as the contraction of demand was to reduce the price differential between large and small deliveries. Inadequate enforcement of standards allowed suppliers who were not equipped to make smaller deliveries to offer them nonetheless, and to get uptake from a market that had little awareness of quality. The price differentials that supported quality deliveries to smaller systems reduced to an unsustainable level. As the market begins to correct itself in 2016 and 2017, the price differential should reassert itself as suppliers and customers discover that cheap deliveries to small boilers are a false economy for both sides.

Prices have begun to rise in late 2016, and will probably continue to do so. They should recover roughly the 15% that was lost in the "gold-rush" of 2015, when dozens of new entrants tried to grab a slice of the growth of the RHI just as the growth was collapsing.

Prices for large deliveries (18-28 tonnes) are subdued and may remain so. A lot of the capacity that entered the market is not suitable for smaller deliveries, so there is increasing competition for the larger deliveries that are the only market that is suitable for many of the vehicles and suppliers. Prices for large deliveries in late 2016 are generally in the range £150 - £180 / tonne. They will probably increase only as much as wholesale prices increase.

Prices for smaller deliveries should continue to rise somewhat more strongly, as they are currently below the level required to justify investment in the technology needed to do the job properly. While some smaller customers might still have found prices in the £170s and £180s per tonne in late 2016, prices are likely to rise to a more sustainable £200 - £250 per tonne in 2017/18.

Prices for bagged wood pellets have followed a similar trajectory, although a series of new entrants aiming to buy market share prevented prices from rising as much to 2015, and a lower peak meant less of a fall thereafter. Bagged prices also remain below a sustainable level in late 2016, although to a smaller degree than for small blown deliveries. They are likely to rise gently - perhaps somewhat above the trajectory for large blown deliveries but below that for small blown deliveries.

The longer-term trend depends on international changes in the balance of supply and demand in the heat and electricity sectors. 2015/16 has seen a hiatus in growth in most countries, just as new production capacity came on stream, stimulated by the earlier rapid growth in demand.

In 2017/18, some significant new wood pellet users should come on stream, mostly in the electricity sector. This is likely to bring supply and demand more closely into alignment, and allow wholesale prices to rise somewhat. The underlying, internationally-traded prices for wood pellets may rise by 5-10% as a result, which should feed through to similar increases for large blown deliveries and bags, and to greater increases for small deliveries.

Thereafter, developments depend on the policy environment and the cost of alternatives (e.g. heating oil). Given the stresses of recent times, and bitter experience of the perverse and unreliable effects of government incentives, there is unlikely to be a rush to invest in further production and distribution capacity if demand grows beyond current capacity. Investment inertia would result in further price increases in those circumstances, perhaps of 10-20%.

That would ultimately prove self-correcting, because prices would reach a level where the investment risk was balanced by the opportunity. There is no shortage of resource (unless created artificially by irrational regulations such as the 10cm rule that "environmental" NGOs are pressurising the EU to adopt), so supply is likely to be limited mainly by lack of investment until the rewards are sufficient.

These stresses will only arise if demand growth is rekindled. As things stand in late 2016, it is not obvious that the policy environment will stimulate significant renewed growth, nor that the alternatives to wood pellets will increase in cost sufficiently to stimulate demand in the absence of credible policy instruments. If demand growth remains muted, price increases will likewise remain modest.

It is possible for governments to create anomalous surges in demand that create price-spikes and supply-difficulties. It is impossible to predict with confidence how policy in the many nations relevant to the balance of supply and demand for wood pellets will develop. But there are no fundamental constraints that would make high prices and supply shortfalls likely. And there is little to suggest in late 2016 that policy or other factors will stress the market to any significant extent.

Sustainable wood pellets, authorised by the Biomass Suppliers List (ID:BSL0037716-*) From sustainably-sourced virgin fibre, certified by the FSC (Cert.No. C130395) ENplus A1 accredited wood pellet trader (ID:UK302) Operating to ISO 9001 standard, audited by ACS Operating to ISO 14001 standard, audited by ACS Wood Heat Association member UK Pellet Council member REA Awards Winner 2015: Company of the Year