Winter is Coming – Part 1
State of the Market – A perspective on what’s happening with Wood Fuel Autumn 2018
By Julian Morgan-Jones | 13th October 2018
Anyone interested in wood heating and the wood fuel market, either as a supplier or a customer, will know that there are cold winds blowing across the market at the moment and we’re not just talking time of year. The warmer climate of boom years of boiler installs and growing markets, with steady supplies and equally steady pricing, is over. We are entering uncharted territory with almost no installations of new boilers accredited under the RHI (Renewable Heat Incentive), dramatic reductions in the number of suppliers of both equipment and fuel, wood fuel prices going up and there is more talk of shortages this winter in both chip and pellet after the shortages of pellet that were experienced last year. While not connected, this needs to be set against 30% increases in wholesale gas prices this season and a 38% increase in heating oil since October 2017.
While customers may be aware of some of this, they may not know why nor what they can do to mitigate it or why this is not all bad news.
The dramatic reduction in the installation of RHI accredited boilers is due to one thing: the governments change of incentive tariffs. While the new tariffs are still attractive to the bigger boilers that the government wants to promote, there are far fewer opportunities for these boilers and the sales, design, planning and finance processes are much longer and more complicated.
This reduction has had a serious impact on the installation and service side of the market which has seen the flight of installers and many going out of business. Customers have suddenly found themselves without support for annual boiler services or trouble shooting. Some installers have reacted by offering servicing for makes of boilers outside their expertise in an attempt to make up for fewer boiler sales with a larger share of the servicing market, with mixed results. Fuel suppliers are sometimes finding that the only way to keep their customers running is to offer servicing as well as fuel supply.
The reduction in new boilers has also created a flat market for wood fuel with fuel suppliers needing find new ways to cut costs and to improve service levels while at the same time becoming more aggressive in the market place to increase or simply maintain market share. This has led to a “rationalisation” of suppliers with the pellet market particularly affected. At least one major UK pellet manufacturer has gone out of business and the number of ‘big player’ pellet distributors has been reduced, to from 5-6 this time last year, to 2 this year.
These developments might ordinarily suggest a “buyers’ market” for wood fuel, however the reverse is true with fuel price rises and shortages in both wood chip and wood pellet.
For wood chip this has been driven by the implementation of 3 major new biomass Combined Heat and Power plant in the UK coming on-stream within the last 12 months, without a supply chain in place to support them, leading to price hikes and wood shortages across the country. The Kent Renewable Energy Plant in Sandwich is a case in point. It takes 240,000 tonnes p.a. from woodlands around the South East. In theory, with 30 million tonnes of wood which could be harvested right now, the region should be able to supply all of this with ease. In practice, the supply chain which has been growing slowly to meet a demand of about 60,000 tonnes to date for the region, simply does not have the infrastructure; available woodlands, cutters, equipment and delivery vehicles to meet this 400% growth demand. This bottleneck is creating wood shortages and price spikes with average prices for raw material averaging 25-30% more than this year than last. Chip suppliers who invested in wood chip drying plant and moved to a just-in-time source-dry-supply model will be particularly badly hit if they have not sourced sufficient stocks for this winter and may need to raise prices dramatically, if they can find the wood.
For wood pellet the reasons for shortages and higher prices remain the broadly the same as last year. There is increased demand across Europe from larger new industrial and premium players on the one hand and reduced production on other. At least one major producer in the UK has gone out of business. Higher average climate temperatures have led to forest fires and blights in Spain and cutters have not been able to access forests in the Baltic states due to the ground not re-freezing over winter. New production is developing in Russia to meet the demand but not quickly enough. Overall this has led to average price increases of 12-15% in the UK and the possibility of more shortages later in the season.
While this may make sober reading, it’s not all bad news. Our next article will explore why this is the case and what customers can do about it.
Julian Morgan-Jones is Managing Director of South East Wood Fuels, vice-chair of the Wood Heat Association and chair-person for the Biomass Suppliers List Advisory Panel .