Forces driving European wood pellet demand

Demand for wood pellets in Europe has surged over the last 18 months due to the energy crisis and soaring prices for gas and power. This has made wood pellets even more cost-competitive for residential heating and commercial power generation. Meanwhile, the EU continues to ramp up its ambitions for greenhouse gas reductions and renewable energy supply, with longer-term implications for wood pellet demand.

In this blog, we explore the factors driving demand growth, ranging from EU renewable energy policy to the cost position of pellets and their advantages over alternative energy sources.

New Report: We released this week a 100-page report on the outlook for European wood pellet markets, including demand forecasts to 2030 by segment, the outlook for pellet imports from other regions, as well as the potential for European supply based on raw material availability and cost. For more information, please contact us or follow this link.

Value Proposition of Wood Pellets

Pellets offer distinctive advantages over alternative energy sources in all key applications (Exhibit 1). Firstly, pellets are a form of renewable energy, as the carbon contained in wood was recently pulled (sequestered) from the atmosphere, and sustainable forestry systems involve regeneration and renewed carbon sequestration. Furthermore, most of the raw materials used in European pellets are byproducts from lumber production (sawdust).

Pellets also have important advantages in cost, convenience, and energy security.

Exhibit 1

In residential heating, pellet heating systems are more convenient for homeowners than firewood boilers due to the ability to incorporate automatic feeding systems. Heating with gas and oil tends to be more expensive, especially with recent price spikes. The main renewable alternative to pellets is heat pumps, which are growing in popularity but require electricity to run.

In the energy sector, pellets are not only renewable but also enable the production of baseload power generation. This is advantageous compared to wind and solar, where generation is highly variable. Capital costs are lower for retrofitting legacy coal power plants to co-fire with pellets than for new wind, solar, and nuclear generation.

Combined heat and power (CHP) plants are typically built with large flexibility to accommodate the use of low-value biomass, such as municipal waste, recycled wood, and residues from logging and landscape care. Even here, pellets play a role as a supplementary fuel with high energy content and a reliable supply.

Cost Advantages of Pellets

The cost advantages of pellets are a primary concern for both residential and energy sector buyers. For households, pellets have long been one of the most cost-effective ways to heat a home, cheaper than gas and oil and similar to chips and firewood. This trend is observed throughout Europe, from Austria to Ireland, not only in terms of the input fuel cost but also the cost of delivered heat. The advantages of pellets became even clearer in 2022 following the war in Ukraine and restrictions on the import of Russian gas to Europe. The resulting spike in gas and heating oil prices drove many households to switch to pellets, although the subsequent rise in pellet prices negated much of the potential savings.

For new power capacity, pellets and other bioenergy installations are not as cheap as solar or wind. The Levelized Cost of Electricity (LCOE), a measure of the full cost of electricity generation over an installation’s lifetime, has fallen rapidly for both wind and solar PV over the last decade, reaching a point well below bioenergy (see Irena, 2022) .  

The situation is different for existing coal power plants, a sector central to the demand growth for wood pellets. As momentum grew for the decarbonization of power generation in Europe in the 2000s, coal power plants quickly became a focus area. Legacy coal power plants could quickly become “greener” with relatively modest capital expenditure by partly or fully converting to pellets. Countries such as the UK, Netherlands, and Belgium saw several large and high-profile conversions that had a massive impact on pellet demand and drove much of the pellet capacity expansion in the US South for export to Europe. However, it cost the operators of these installations more to burn pellets than coal, and governments had to close the gap with green electricity premiums and feed-in tariffs. That has now changed; higher prices for coal and carbon emissions mean that pellets are now cost-competitive without subsidies (Exhibit 2).

Exhibit 2

This cost advantage is expected to drive renewed projects to convert existing coal power plants to using pellets, from France to Finland and Romania. In our just-released report, “European Wood Pellets,” we identify projects that in total could require up to 10 million tonnes of wood pellets. While coal power generation is in decline in Europe, falling by more than 50% since 2000 (Exhibit 3), there is still plenty of capacity remaining in countries like Germany, Poland, and the Czech Republic. In fact, the amount of coal used in the energy sector is still about 15 times higher than the amount of pellets.

Exhibit 3

EU Renewable Energy Policy

Looking ahead to 2030, an important underlying driver of wood pellet demand will be EU policy to reduce greenhouse gas emissions through increased renewable energy supply. This is already reflected in the pricing of carbon emissions through the European emissions trading system, and financial support for households to replace gas or oil boilers with pellet boilers. These and other economic instruments will be necessary in coming years to achieve the EU’s ever more ambitious targets for renewable energy (Exhibit 4).

The EU recently set a new target for 42.5% of energy supply from renewable sources by 2030 (up from about 22% in 2022). Even with no increase in total energy demand, for example, through improved energy efficiency, this will require almost a doubling in renewable energy generation. Biomass and pellets will be key to achieving this target.

Biomass currently represents approximately 40% of renewable energy supply in Europe, larger than wind, solar, and biogas combined. It also represented 33% of the growth in renewable energy supply from 2000 to 2021. Even if biomass only contributes 20% of the growth to 2030, it would require 45% more biomass than used today (1.2 PWh). Pellets, due to many of the advantages mentioned above, represent a large and growing share of biomass demand. Assuming the pellet’s share of biomass remains unchanged, it implies an additional 14 million tonnes of pellets by 2030.

While this is not our forecast for pellet demand in 2030, as provided in the study, it is illustrative of the significant growth in pellet supply required, with important implications for pellet imports from North America, as well as European pellet production and raw material supply.

Exhibit 4

This was the second blog in a series about the future of European pellet markets, based on our recently released report, “European Pellet Market – Fueling Europe’s Energy Transition.” In our next blog, we will explore the implications for raw material supply.