Certification and Sustainability, Impact on the Woodpellet ...biomass-sp.net/wp-content/uploads/2012/05/B2-RWE.pdf · Supply & Demand of Woodpellets 5. Impact on the Woodpellet Trade

RWE Supply & Trading 01/05/2012 PAGE 1

Certification and Sustainability, Impact on the Woodpellet Trade

RWE Supply & Trading


PRESENTATION SUMMARY

1. Introduction to RWE

2. Europe - Key Market Drivers; Sustainability

3. Certification - RWE’s Green Gold Label Standard

4. Supply & Demand of Woodpellets

5. Impact on the Woodpellet Trade



1. Introduction to RWE



RWE is a successful and fully integrated utility …

> RWE serves 22 million electricity customers and 13 million gas customers in Europe*

> RWE has leading market positions in Germany, UK, Czech Republic, Netherlands and Hungary

> RWE had € 58 bn revenues, € 9 bn earnings and € 6 bn investment in 2008

> RWE has 51,200 MW electricity generation capacity (gas, coal, nuclear, renewables)

> RWE employs 77,000 people in 13 countries worldwide

* All figures are inclusive Essent which became part of the RWE Group in October 2009.


RWE Downstream, Midstream, Upstream

> RWE Power Plants: RWE has been co-firing biomass since 2002

> Amer (2 X 650 MW)

– Europe’s largest co-firing plant, feedstock mainly wood pellets

– 1 million tons biomass/year

> Aberthaw (3 x 500 MW)

– Capability up to 40te/hr across 2 units (i.e. up to 4% by energy)

– Direct injection: Combination of pre-processed and part processed solid fuels. (Sawdust, PKE, Shea Meal, Woodchip)

> Didcot (4 x 500 MW)

– Current capability approx 3% by energy. Fuel Diet restricted to pre processed biofuels including PKE, Sawdust, PKE, Shea Meal,

Olive Residues etc

– Main Scheme operational Q3 2006 – co-milled

> Tilbury (3 x 335MW)

– Plant was converted to burn biomass - over 2 mil tons per year, started up end 2011

– Capable of firing solid and liquid biofuels

> RWE Supply & Trading: Procures international biomass

> RWE Georgia Biomass: Produces 750,000 mt/year of pellets


Our view is that our integrated supply chain ensures reliable supply

Local

storageFreight

Centralised

storage

Own use

Third

parties

Sourcing

Fuel

production

Initial core business

Current expanded core business

> Further vertical integration will increase security of supply and better supply chain

optimization. It will also provide more flexibility for trading and allow secured supply to 3rd parties.


RWE Essent owns Amer, Europe’s largest co-firing power plant

Amer 9 (600 MWe, 350 MW heat)

600kT biomass co-firing /y ≈ 1150 GWh

Amer 8 (645 MWe, 250MW heat)

300kT biomass co-firing /y ≈ 525 GWhBiomass unloading and temporary storage

Wood gasifier (≈ 33 MWe)

90kT biomass /y ≈ 130 GWh


Georgia Biomass

> RWE Innogy upstream investment

> Capacity 750,000 tonnes a year

> Commissioning Q2 2011

> 100% RWE owned

Georgia Biomass – Waycross

750kt wood pellet plant, Waycross, GA

Storage - Savannah

> Shipped out of Savannah, GA

> 50,000 tonnes of dedicated wood pellet storage

> RWE Supply & Trading manage all sales and marketing


RWE Supply & Trading (RWEST)

> RWEST

> RWEST is the interface to the market for biomass commodities

> Integrated Freight & Logistics team to manage and optimise delivery

schedules to power plants

> Risk and credit management systems to ensure consistent deliveries

> Innovative deal structures to hedge commodity risks

> Consistently seeks to improve product designs and efficiencies.

RWE supply & Trading will be the first to use Bio Coal on a

commercial scale. The first quantities will be used in the power

plants at the beginning of 2011

> Principal Investments, with a focus on investment where RWE has

deep knowledge of the commodity and or ability to bring physical

trading capability and reduce risk for the asset

> BIOFUEL DESK

> RWE Supply & Trading manages a portfolio of around 2.0 million mt

> Support and develop projects within RWE

> Start to develop third party business and trades

> Risk manage commodity project risks:

– Freight, FX

– Fuel supply contracts, credit


Security of supply can be achieved - RWE experience

> Guaranteed supply:

– RWE Supply & Trading is able to offer its customers mid to long term (5 year) fixed price wood pellet contracts

– Contracts will be structured to suit the customer’s specific needs, for example delivery point, tolerance on volume, specification, off-site storage

> Benefit to biomass generator:

– With the RWE contract, providing guaranteed supply to the customer, generators can make commitments about their future renewable generation

> Other solid biomass fuels can be used too:

– RWE normally recommends the contract is structured to also allow for sourcing of alternative solid and liquid biomass fuels

– Local agricultural co-products, for example olive husks and fruit shells/bunches are used in biomass generation globally

– These products are not available in the same quantities as wood pellets, are often seasonal and have chemical and physical properties to manage. However, they should be seen as potentially lower cost, and interesting for fuel mix optimization


2. EUROPE: Key Market Drivers; Sustainability



Key Market Drivers for European Buyers

Risks associated to import & use

Sustainability criteria

> Price & quality risk > Target: saving CO2

multi sourcing policy, 5 years term contract and binding contract specifications

External competition

> US/Asian demand


Key Market Drivers: Price and Quality Risks

PRICE RISKS

~35% of pellet cost can be hedged

> Shipping costs

> FX risks

> Fuel costs

~45% of pellet cost cannot be hedged

> Raw material

QUALITY RISKS

Logistics

> Temperature

> Emergency

storage exit

Maintenance

> Dust and ash

specifications

> Boiler requirements

Five year supply contract to limit

price exposure

Contract specifications for pellets

must be binding, quality of suppliers


Key Market Drivers: Sustainability The Biomass perspective on its importance

The concepts The actions

Combustion of biomass should be good for the planet

Forests should not be negatively impacted by use of biomass as a fuel

Carbon emissions should be lower due to combustion of biomass

Develop sustainability policies that validate the whole supply

chain

Source biomass from counterparties and regions that have

established and trusted standards

Go to the forest and validate wood sourcing plans and

deliveries

Confirm that forests are re-grown / replanted

Review if suppliers meet globally acceptable standards like

FSC sourcing

Calculate all of the carbon and GHG emissions from the

wood sourcing to the combustion facility

Compare the emitted carbon from biomass sourcing to the replaced emissions (e.g. in the UK a combination of coal,

gas, oil and other fuels in the electricity balance)

RWE’s biomass sourcing team continuously challenges itself to understand the implications of sourcing biomass and uses sustainability to hold itself and its suppliers to be best in class


Key Market Drivers: External Competition US South, Asia - potential competitors for Europe in future

By 2015, US South & Canada should represent 76% of the EU suppliers

A sudden change in developments in the

US South or Asian demand would push

upward the pellet price in Europe, which

could lead to:

Multi sourcing

policy of

European utilities Secure 5 years

term supply

contracts

Share of US South in European demand

40%

54%

0%

10%

20%

30%

40%

50%

60%

2012 2015

Share of Canada in European demand

33%

22%

0%

5%

10%

15%

20%

25%

30%

35%

2012 2015


3. Certification: RWE’s Green Gold Label Standard



Green Gold Label (GGL)

> Green Gold Label is a certificate system for sustainable biomass

> GGL covers production, processing, transport, final energy transformation

> GGL offers standards for specific parts of the supply chain as well as

standards for track and trace

> GGL is owned by the independent Green Gold Label Foundation, established by RWE/Essent and Control Union in 2001


GGL process

Ex

tern

al

ce

rtifica

tes

Who:Raw material

supplier

Who:Fuel

producer/Trader

Who:Fuel

supplier/Trader

GG

L2

:A

gri

GG

L5

:W

ood

GG

L7

:C

on

se

rva

tion

GG

L6

:Who:

Power Company

GGL1: Source + Process

GGL4: Source + Process + Transport

GGL8: Greenhouse Gas Balance

Raw material source

Fuel production TransportPower

production

GGL process for solid biomass

Who:Producer,

Trader, Power Company

Ex

tern

al

ce

rtifica

tes

Who:Raw material

supplier

Who:Fuel

producer/Trader

Who:Fuel

supplier/Trader

GG

L2

:A

gri

GG

L5

:W

ood

GG

L7

:C

on

se

rva

tion

GG

L6

:Who:

Power Company




Raw material source


production


Who:Producer,


Ex

tern

al

ce

rtifica

tes

Who:Raw material

supplier

Who:Fuel

producer/Trader

Who:Fuel

supplier/Trader

GG

L2

:A

gri

GG

L5

:W

ood

GG

L7

:C

on

se

rva

tion

GG

L6

:Who:

Power Company




Raw material source


production


Who:Producer,



Challenges we encounter with certification

> Some suppliers have many small raw

material suppliers and tracking

tracing not always possible to

ultimate source

> As we continuously add new

suppliers, we will always have some

suppliers “under certification”

> For single (spot) cargoes, full

certification is relative large effort and

counterparty is not always keen to do

their share

> Certified Sustainable under GGL*

80%

* Percentage = tonnes certified / tonnes purchased by Essent in 2010

49%2007

33%2006

Recent years % certified

Certified

Under certification

To be certified

73%2009

68%2008

80%2010


Sustainability and Certification: Practical application today – the role of the auditor

Monitor the processTrace the physical flow of product from the forest to sale point (e.g. port)

Focus on incoming products, quality, safety and contamination control at the processing facility and outbound logistics

Focus on wood sourcingAssess if the raw material is sustainably cultivated and harvested

Compliance with one of the existing forestry or agricultural standards accepted under GGL is obligatory (e.g. FSC, PEFC, CAS-SFM, SFI)

Use independent auditorsControl Union, SGS or Inspectorate are all used to validate and verify that suppliers are conforming to the required sustainability standards

Calculate CO2 footprintCalculate the CO2 emissions from each facility to the power station

Detailed calculation based on actual fuel and power invoices at each site (including port), confirmed distances and fuel used for all transportation

Focus on type of wood used and differentiate between residues and round wood, as in forest emissions are greater for round wood


4. Supply and Demand of Wood pellets



Expected world trade flow – 2015

2.0 mt 2015

<0.1 mt 2015

1.0 mt2015

15.0 mt 2015

2015 0.98 mt

2015 0.88 mt

2015 8.2 mt

From Canada East

From the US

Total European demand served

From Baltics

From West Africa

From Australia

From Brazil

Total Asian demand served

2015 2.0 mt

2015 0.65 mt

2.1 mt 2015

From Canada West

1.0 mt 2015 From Portugal


Present State of the Wood pellet Trade

> World wood pellet trade is currently driven by European demand

– Stimulated by adequate subsidy system in UK, The Netherlands, Belgium,

Sweden and Denmark

> Many biomass power plant projects are expected to develop in TheUK and The Netherlands in the coming years but

– Market participants watching for 2013, as subsidy will be reviewed

– Security of supply on other biomass types is still an issue

> Wood pellets now offer security of supply unlike other types of biomass


EUROPE - Demand Environment

> Demand in 2012 is less than 6 Mil tonnes and yearly growth is above 20%, depending on subsidies

> The UK experiences the strongest expected growth between 2012-2015

� + ~ 9 Mtonnes expected

EUROPE demand will grow ~ 9 Mt by 2015

Expected Wood pellet European demand

-

2

4

6

8

10

12

14

16

18

20

2012 2013 2014 2015 2016 2017 2018 2019 2020

Millions


FAR EAST – Demand Environment

> Korea - significant demand potential due to RPS; has to import to meet demand

– RPS Policy will drive demand in Korea from 2012 onwards

– Wood pellets likely to represent significant share of total renewable fuels used to reach the target, several million tons of imports in coming years possible

– Timing of demand not completely clear; RPS policy favours standalone biomass plants over co-firing

– Sustainable supplies possible from Canada to meet demand

> Japan - situation is unclear post tsunami

– Some end users have already been using wood pellets to co-fire with coal

– Import volume is still relatively small

– Japan nuclear policy and renewable policy may be the catalyst to drive demand, once it is clear

> Asia - demand will grow quickly if policies support renewable

– biomass plants of various sizes will be built in China, Korea, Japan, Malaysia, Vietnam etc

– demand can be met primarily by domestic feedstock supply, which is cheap


WORLD - Supply Environment

> Supply capacity in the largest sustainable wood baskets will

develop significantly over the next 5 years

– Canada will add more than 2 M tonnes US South: +5 M tonnes

– New entrant Brazil will add an extra 2 Mt on pellets from the energy crop Eucalyptus

– Australian/Asian additional supply contribution is unclear (750 Ktons)

> The American continent is expected to be the dominant supplier to the European market

About ~11 Mt new production capacity is forecasted by 2015

Supply production capacity

-

5

10

15

20

25

2012 2013 2014 2015 2016 2017 2018 2019 2020

Millions

Russia

Australia

US

Brazil

West Africa

Europe

CA


ASIA – Immediate Supply Environment Uncertain;

> South East Asia

– Feedstock cost, cost of production and freight relatively low compared to Canada supply

– Small scale pelletizer plants have been/are being built

– Potentially large source of feed stocks

– Sustainability is the key question

> China

– Feedstock and cost of production in China is expected to be relatively low

– China is building biomass plants fed by local supply

– Will China become an exporter of cheap pellets? Sustainability?

> Australia and New Zealand

– Developing sustainable supply markets

– Pricing can be competitive

– Able to meet sustainability criteria

– Can they survive the wait for significant demand to surface?


5. Impact on The Pellet Trade



IMPACT ON WOODPELLET DEMAND

Possible Scenarios

Asia: High Demand Low Supply Case (Asia has high demand, Asian supplies small)

Asian Demand: Canadian pellets will meet initial Asian demand (secure supply source, certified, sustainable)

Price Impact: a) Competition from Asia for Canadian pellets may drive European prices higher in short/mid term

b) Korean prices possibly determined by: Europe price netback to Canada plus freight to

Japan/Korea

Sustainability: No impact on price as supply is small

Wildcard: Australia/New Zealand Supply


IMPACT ON WOODPELLET DEMAND

Possible Scenarios

Asia: High Demand High Supply Case (Asia has high demand, Asian supplies plentiful)

(Sustainability is not important)

Asian Demand: a) Canadian pellets will meet initial Asian demand (short term); could be replaced by cheaper Asian

production as it comes on-stream

b) Asian buyers will initially have difficulties balancing issues of security of supply from reliable

sources, against potential lower cost supplies from Asian producers with little track record

Price Impact: a) Competition from Asia may drive European prices higher in the short term only

b) Over the mid term Korean prices will ease as more Asian supplies come on to the market

c) If low cost Asian supplies exceed demand, Korean price will fall further

d) Korean prices possibly determined by: Asian cost + freight

Without meeting sustainability criteria, Asian pellets will remain in Asia; Canadian pellets will move to Europe


IMPACT ON WOOD PELLET DEMANDPossible Scenarios

Asia: High Demand High Supply Case (Asia has high demand, Asian supplies plentiful)

(Sustainability is important)

Asian Demand: a) Canadian pellets will meet initial Asian demand (short term); will be replaced by cheaper Asian

production, but only if certified and sustainable

b) Asian buyers will have difficulties balancing issues of security of supply from reliable

sustainable sources, against Asian supplies which need to prove sustainability

c) There will be a greater reliance on Canadian supplies for a longer time

Price Impact: a) Competition from Asian demand will drive European prices higher in short term

b) Over the mid term may ease only if sustainable Asian supplies come to the market

c) If low cost sustainable Asian supplies exceed demand, European prices will ease

d) Price in Korea (and Europe) will be determined by Asian cost + freight

If sustainable, Asian pellets will compete for European markets (supplies exceed demand), and may impact prices worldwide


Sustainability - Key Messages

Sustainability is big in Europe, not big yet in Asia

It is inevitable that sustainability becomes important in Asia in time

Europe is already studying possibility for Standard pellet trade contracts: Specifications,

Terms and Sustainability

Many companies in Asia are already aware of their carbon footprint; they have to prepare

for certification and sustainability standards when contracting pellets

Ignoring sustainability in order to save cost, is primarily morally wrong in our view, but also

has big reputational risks as European players found out in the early 2000’s. Public opinion

changed within months from:

“Wow, sustainable energy” to “Those guys from the power plants are destroying rainforests”

NGO’s play a huge role in public awareness of sustainability, and cannot be ignored either

We are happy to share our experiences on the Green Gold Label and Sustainability as Asia

embarks on this new path


Some Uncertainties may make things interesting!

POTENTIAL GAME CHANGERS

Policies for Korea have been outlined, but what are the uncertainties in implementation?

- Timing? Volumes? Compliance?

- 2012 will tell the story…..

What role will biomass play in Japans industry?

- Japan’s nuclear policy going forwards?

- LNG has taken off in a big way. Will biomass be given a larger role or will it be solar next?

South East Asia is the logical supply point for Japan/Korea, but only small scale plants built so far

- Will investments in large scale plants take place before or after demand appears?

- What role will Sustainability play? How much importance attached to sustainability by

the regulators and industry?

Larger Asian Pellet plants will start being built once demand kicks surfaces:

- Such projects need time to reach production

- What will the lag be between demand and supply?

How will the industry continue develop and progress in Australia and New Zealand and and China?


Thank you for your attention!

Thank you for your attention!

[email protected]

singapore mobile: + 65 96617177

Documents

Certification and Sustainability, Impact on the Woodpellet ...biomass-sp.net/wp-content/uploads/2012/05/B2-RWE.pdf · Supply & Demand of Woodpellets 5. Impact on the Woodpellet Trade