Drax displays good foresight

Demand for biomass in Europe is set to double from 2010 levels by 2020, leaving a potential supply gap equivalent to 40 million tons of oil annually. In the absence of Europe-wide legislation to govern sustainable biomass supply, securing long-term supplies of biomass feedstock will be vital. As such, Drax is showing good foresight in procuring long-term, sustainable sources of biomass feedstock.

The Department of Energy and Climate Change estimates that by 2020 at least one third of renewable electricity production in the UK could be derived from sustainable biomass feedstock. Demand for biomass pellets in the UK alone could reach 11 million to 12 million tons by 2015, but biomass supply will be reliant upon imports. RWE npower, which operates the Tilbury coal-to-biomass conversion plant that caught fire in February 2012, has stated that sawmill residues will only be able to supply around half of this demand, and a greater number of sustainably certified forests will be needed to supply wood to the industry.

Biomass wood pellets are one of the only biomass sources that are suitable for long-distance transport and international trade due to their low cost and high energy density. Wood pellets are likely to become an increasingly valuable commodity for biomass power generation across Europe, especially in the UK where there is a large proportion of generation from coal-fired power stations.

Biomass wood pellets are by-products of the unrelated sawmill and paper industries, and the reliance on imports from North America poses a large risk to investors in Europe. The changing support for biomass co-firing, as displayed by Poland, and the changing price of carbon have led to uncertainty and risk. Taking control of upstream supply chains and securing domestic sources of supply will be crucial to the success of biomass plants in Europe as international demand for biomass increases.

Drax Group will spend around GBP1bn to convert three out of six coal-fired generation units in North Yorkshire to biomass generation units. Shares in the company jumped based on news of the conversion, but without sufficient legislation and foresight, investment in biomass generation could be risky. The Drax Sustainability Policy has been developed to ensure that imported fuels are subject to the same level of scrutiny and audit as indigenous ones, and without European legislation to govern this, Drax is at the forefront of biomass generation and has shown great prudence in establishing sustainable supply chains.

The risk will come from international sources such as China and the US, which have large volumes of coal-fired generation. If demand for co-firing increases on a global scale, in an effort to reduce emissions, imports to the EU will be put under pressure, which will raise costs. An emphasis on increasing domestic supply of biomass for generation in a sustainable manner should be a priority within the EU if reliance upon foreign imports and unrelated industries is to be reduced and supply-side risks are to be minimized.

For further analysis, please see the forthcoming Datamonitor report "Biomass Power Generation in Europe."