LONDON Wood fuel, one of the oldest energy sources on the planet, could become the newest commodity market if it can overcome supply limits and green concerns as demand grows for renewable energy.
Supply constraints are starting to put wood fuel into competition with the paper industry, experts say, in an uneasy reminder of existing tension between the food industry and companies making biofuels from food crops.
In theory burning wood and crop waste emits less carbon than fossil fuels because it simply returns to the air carbon accumulated by plants as they grow, but that balance breaks down if stock is not replanted, or natural forests are logged.
In the meantime, utilities are burning biomass in ever greater amounts and now want price certainty and derivatives to manage their cost exposure in forward power sales, although European policymakers are mulling limits on subsidies for burning wood fuel given concerns about deforestation.
"It's coming very fast," said John Bingham, a director at consultants Hawkins Wright, referring to the development of an open market, and citing Eurostat data showing EU imports of wood pellets up 42 percent last year.
He saw increasing evidence of a larger scale market including big producers of wood pellets in Europe and North America and big intermediaries, such as Cargill and Gazprom, to balance large utility buyers.
Shaped wood pellets are made for the energy sector, while raw wood chips are used mostly by the paper industry.
The energy exchange APX-Endex is working with the Port of Rotterdam to supply an exchange-traded pellet product this year, while index provider FOEX has joined up with specialists Wood Resources International WRI.L for a global wood chip index.
Those developments herald a gradual shift to a more transparent market beyond bilateral deals between suppliers and users, such as timber companies and utilities.
Indicating the size of appetite, Britain's biggest coal-fired power plant, Drax (DRX.L), burned nearly 1 million tonnes of biomass last year, more than double previous years, while burning ten times that amount of coal.
Drax says biomass expansion depends on clearer UK support, under power market reforms to be announced before the summer. Its sources include straw and energy crops such as miscanthus.
Wood pellets have about 70 percent of the calorific value of coal, experts say.
The British arm of German utility RWE (RWEG.DE), RWE npower will this year convert a coal plant near London to burn biomass.
The ageing plant will burn 2 million tonnes through 2015, when it is due to close, said a spokesman who added the facility would be a test bed for the alternative fuel.
That compares with domestic UK wood fuel production, excluding recycled or waste wood, of about 1.5 million tonnes annually, according to Forestry Commission data, underlining a need for a global trade.
It is an open question whether there is enough volume for an open market, however, given utilities have already tied up large volumes in long contracts, or produce pellets for themselves, said WRI's Hakan Ekstrom.
If EU wood fuel subsidies were more predictable and reliable -- for example the UK support to be announced in the next few weeks -- then utilities would commit to buy bigger volumes, and so motivate more supply, traders say.
But new utility demand for wood fuel, subsidised by EU low-carbon incentives, may also impact the paper and even construction industries, Ekstrom added.
"The concern is that the energy industry is starting to compete with pulp in particular but even MDF or particle board plants. They don't like to see that the energy sector is subsidised so that they can pay more for chips and pulp logs.
"That's starting to be a problem or an issue in Europe, in North America, Latin America."
And that supply issue drives concerns whether a burgeoning wood fuel market may damage natural forests.
"It's a completely crazy idea that we can burn our way out of climate change," said Robert Palgrave from the green group Biofuelwatch UK, who preferred wind power or energy efficiency.
Palgrave was among two dozen or so protesters outside an Environmental Finance biomass conference in London last week.
Such concerns are reflected in a European Commission study of the environmental impact of biomass incentives.
The Commission will decide this year whether to propose new eligibility rules, called sustainability criteria, for biomass subsidies.
"The Commission intends to publish the next report by the end of the year, as requested," said a spokeswoman. The biomass industry says it is working on its own green standards, and that plantation forests and waste will be the main sources of supply.
(Editing by Keiron Henderson)
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