Ever since I was a small boy, I've always wondered at the mystical and magical.
Merlin's Wand . . . The Star Trek Transporter . . . The Back to the future Time Machine and Crystal Balls that could see into the future.
Now, as a scientist, I know that "future vision" is currently an impossibility (and if I had figured it out - my first stop would have been the lottery office) however we have experts in this world, that look at past and trends and present events to help them to predict future events.
This isn't such a difficult thing. For example - this morning I accidentally knocked over my cup of coffee. LONG before it hit the floor - I KNEW that it would shatter into a thousand pieces, and leave a big SPLAT on the hardwood. (I was right!) That bit of "future presence" however was simply based on my knowledge of inertia, potential energy, kinetic energy and material science. (And the fact that I've seen it happen many times before! ;-)
Predicting the future for something as complicated as a commodity price is somewhat more complicated and problematic. My older brother, who describes himself as "macroeconomic and geopolitical strategist, disguised as a bond salesman" has made fortunes, (he was once described as a man who made Billionaires, millions more) both for his clients and himself, seems to have a pretty good crystal ball. He once told me that the entire economic system relies on gambling. Those speculators who are betting that a commodity will rise in value versus those who are betting it will fall. In the end . . . it would seem that fortunes are won and lost on the throw of a dice, and us simple mortals have little to no control or impact on the outcome.
The outcome however, is predicated on a whole lot of knowledge and understanding. Facts and figures only go so far (Which is why scientists like me are lousy stock market speculators), and there is an element of "gut feeling" that is the key.
So . . . What does all this have to do with the future cost of Pellets? I'm glad you asked.
I'm no economist, and other than taxes and death, there are no certainties in life, but I do understand the biomass business pretty well, and can "read" trends. I am also a trained observer - (all scientists are taught this). To that end - I have formulated a number of predictions on the future of pellet prices in the UK:
PREDICTION #1
Pellet prices will fall, and then fall lower.
PREDICTION #2
There will be a significant change in pellet composition and standards.
PREDICTION #3
"Smokeless pellets" will be introduced and become mandatory.
There you have it.
Wait! - you want an explanation of the above? OK . . . . . .
#1
Right now, pellet prices are about as high as they will ever be. The reason is simple - the overall cost of operating a Biomass Heating system is very close to £115.00 per MWh. As gas is significantly less expensive than this, Biomass ONLY makes sense with high Government subsidies. Very few people would convert to it without these subsidies. As the subsidies degrade over time, it follows that the Op-cost will need to do the same. Money won't become any less expensive, equipment will drop slightly, but the cost of the fuel will see a dramatic drop leading up to 2020.
As more and more manufacturers come online, the supply area gets pretty crowded. Now, few manufacturers are basing their operations on the fickle Consumer market - and focusing far more on the Industrial (Utility) market, which is significantly less valuable (in terms of price per tonne). It is inevitable that producers will look at the Residential and Commercial market as a "value added" sector - and will undercut current "retail" suppliers by dumping a portion of their Utility production into the Commercial market for the additional gains.
One of the first changes will be technological. Boiler Manufacturers will start creating combustion systems that don't need the expensive DIN+ and EN+ pellets, (we already use this 3rd generation boiler in our Bio-GEN Systems) which drops the fuel cost by over 35% right out of the gate. Right now, there is a significant amount of research going on, that addresses these "sensitivities" in smaller boilers, and seeks to overcome them. This will happen in the next 2 years.
Pellet producers that based their business model on the High Consumer Values are now dropping like fly's. Of course - there are those that step in, and pick up the pieces of these production facilities at a fraction of their original cost, making it much cheaper for them to produce pellets, which ultimately results in lower-cost product being made available to the market.
Another aspect is the levelisation of the Euro against the Pound. Now - this is stretching it for me a bit - but I predicted 1-1/2 years ago, that the pound would strengthen significantly against the Euro. Not to the Pre-Crash level of €1.50 : £1.00, but somewhere around €1.30 : £1.00. So far - it has reached €1.22, and although quite volatile - will settle back down again. This will have an impact on the Canadian $ exchange rate (I can recall not too long ago when it was $2.50 : £1.00) which will make cheap, imported pellets the norm.
Sea Shipping prices will rise, as demand increases, but this is a small portion of the overall cost, and likely won't materially affect total sales value. I am already seeing competition amongst Ports for this business, and in fact, here in beautiful downtown Liverpool, there is a major Biomass Fuel facility being built to accommodate the expected dramatic rise in business. (And these guys DON'T spend millions of pounds to create infrastructure that won't be used.)
In the end, the greater downward pressure will come from a rather unusual source - #2 below.
#2
Once boiler Manufacturers have figured out how to combust just about anything efficiently and cleanly, producers of "alternative" fuels will start to appear on the horizon. These include Energy Crops (Miscanthus, Elephant Grass, Arundo, etc.); recycled wood (Pallets, Construction demolition timber, etc.) pellets and agricultural residues (PKS, PKE, Straw, etc.). There are already a couple of Recycled pellet producers in the UK, (and a failed on as well) and this trend will continue to grow in a slow and steady manner.
On the other hand - The new "Agri-pellets" will take the industry by storm. Parallel to this will be the development of smaller, transportable pellet manufacturing systems, that can effectively go straight to the farmers field and convert the residues into revenues. (I know of at least 2 of these systems in operation today).
Of course - these "Johnny come lately" players will initially have a significant impact on the majors. Production costs will be lower, logistics much better, and overall sales values more competitive. I am reminded of the revolution in the sawmill industry that was brought about by a company called "Woodmizer" in the States. They manufactured a basic, transportable Bandsaw Mill that could go to the trees, and convert them into timber and lumber right in the forest. It is a design that was conceptualised around a kitchen table - and now is sold in over 100 Countries. While the first machines were rudimentary, technical evolution produced a system that could make a good living for the operator. Over a 20 year period, I saw almost exponential growth in their sales, and a virtual decentralisation of the specialty lumber industry. The same will happen with pellet fuels. This industry however will be short-lived, because of #3 below.
#3
As the UK has a strong mandate to convert from a carbon to a low-carbon economy, there are some drawbacks. The major one is that burning wood, any wood, creates smoke and other particulate emissions that are not particularly good for us air-breathing humans. There is a theoretical process called "torrefaction", that removes most of the smoke causing volatiles in raw wood, and converts it into a cleaner, greener fuel with much better combustion characteristics. This third generation fuel will make old fashioned raw pellets obsolete, and create another revolution in the fuel industry.
Now, I am not aware of a single Local Council that would prefer to have higher Emissions and More Smoke belching from tens of thousands of biomass boiler flue's. So - once this fuel is a reality (and I was the Scientist that had the privilege of developing a Commercial machine to produce this fuel) on a commercial basis, it will become part of the planning consent process. We have already undertaken several trials with our new fuel, and they exhibit MUCH lower (30% in some ares) emissions. It is a natural evolution; much like the evolution from leaded to unleaded fuel, and from coal to smokeless coal.
That's about as far as my crystal ball can see.
RW
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