Pellets are taking off in Europe and starting to encroach elsewhere

Pellets have become an economically interesting alternative fuel since 2004, when the oil price started to increase sharply. The Austrian-originated technology is spreading to neighbouring countries, with sales of pellet heating systems increasing up to 300% in some European countries.

How Europeans heat their homes

There is a wide disparity in the extent to which pellets have penetrated different European markets. Sweden, the largest producer and consumer of pellets in Europe, has probably the longest tradition in using that fuel. The interest grew as a result of the oil crises in the Seventies, and by the first half of the Eighties the industry had already achieved a first 'peak' with a pellet production of 50.000 tonnes per year. Due to favourable legislation in Sweden, above all the tax on fossil fuel carbon dioxide emissions. production expanded to 1.500,000 tonnes in 2006.

In Finland and Norway, countries which could provide similar resources, economic incentives are missing and the use of pellets is significant lower.

The Danish market experienced rapid growth in the late Nineties, but a new government and with it the end of generous subsidies resulted in a decline of the market. Whereas in Sweden. Belgium and the Netherlands pellets are mainly fired in power stations, in central European countries they are used in household central heating systems below 25kW (see Figure 3).

Domestic heating systems

National legislation plays an important role in spreading the use of renewable fuels. In Austria, federal states have been subsidising wood heating systems up to ?†3.000 since the Eighties, beginning with wood log and chips installations. These systems had some acceptance in rural areas, where the feedstock was produced by consumers. Only the emergence of much more comfortable pellet-burning systems led to a boost and strong development of the market. Strict emission limits and the competitive situation have forced companies to develop high-tech systems, which also allow easy handling. It is estimated that two thirds of all new domestic heating furnaces are pellet burners.

The first company addressing the small-scale market was OkoFEN, who introduced its accredited pellet heating system in 1997 and has sold more than 20,000 up to now. Another success story is the one of KWB. who will launch their combined heat and power system of 1kW electricity and 15kW heat capacity this year. In Austria, the country in which the technology originated, there are about 10 manufacturers, whereas there are just two in Germany.

The result is that the most important export target country is Germany, followed by France and Italy. The biggest German boiler producers, Viessmann and Buderus. buy and sell Austrian technology. Pellet boiler sales doubled in 2005 compared to 2004 and have seen almost the same rate of increase in 2006 (see Figure 1). In the second half of 2006. however, sales slowed down as Germany freezed subsidies for boiler installations and the price for wood pellets increased.

In France, boiler sales increased by 300% in 2006. helped by the fact that the country subsidises 50% of the installation costs. Italy is another fast growing market, where pellet stoves in particular, rather than central heating systems, are very popular. Because of their mild climate similar developments are expected in the United Kingdom and Ireland, with the latter introducing subsidies in the last year. Many other European countries like the Czech Republic, Switzerland and Spain have shown interest and installed the first systems. Some manufacturers are taking a look at overseas business opportunities, although the high demand in Europe promises very good revenues for the coming years.



Figure 1. Pellet boiler sales in Austria, Germany and France, 1999 - 2006: number per year

What are wood pellets?

Pellets are small, cylindrical pieces, generally made from sawdust. High density and low humidity content allows them to be burned with very high combustion efficiency. Further, their regular geometry and small size allow automatic feeding with very fine calibration. They can be fed to a burner by auger feeding or by pneumatic conveying. Compact storage, rational transport and convenient distribution - they can be blown from a tanker to a storage bunker- plus their environmental advantages have made pellets a popular renewable fuel.



Fuel & Price

The main issue for pellet producers is the accessibility of raw material. Sawdust is tied to the production of timber by the wood industry and its availability cannot be increased at request. The enormous increase in the number of new facilities and a cold winter in 2005-06 caused shortages in the timber supply to saw mills and to pellet supply difficulties. After mid 2005 prices rose continuously and reached a peak in December 2006, at which point the prices per GJ of pellets and heating oil were almost identical (see Figure 2). Since then prices have dropped again. In the years before the market had shown an oversupply of pellets and a fall in prices. Supply difficulties in the last two years were mainly a result of logistics problems: insufficient reserve stock was produced as storage capacities were missing. Moreover, pellet producers have recently increased their flexibility to use other raw materials such as wood chips or low value round wood thus improving their security of supply considerably.

Production and combustion of wood pellets is technically fully developed; with current research focussed on making pellets from annual plants and agricultural residues. Challenges to overcome for those producing pellets from agricultural residues are higher emission values, operational problems and high amounts of ash.


Figure 2. German commodity prices, January 2004 -February 2007

The Americas

Although raw material could be a limiting factor in Europe, it should not be so much of a threat as the pellets trade becomes international. Many countries with a prominent sawmill industry still treat sawdust as a waste that is simply burnt. South American countries, and also South Africa, offer great potential as pellets producers. The pellet itself was actually invented in the US, but never thrived. There has never been any political support for the development of the pellet industry, but rising energy prices more recently have triggered the sale of pellet chimney stoves.

Canada's production increased from 400.000 tonnes in 2001 to over 1,000.000 in 2006. However, a domestic market hardly exists (see Figure 3). Most of the fuel is exported to European power stations, with significant quantities also being delivered to Japan from 2007 onwards. UK-listed Libra Natural Resources (AIM: LNR) was aware of this growing business and invested in two Canadian pellets manufacturers. Since February 2006 it has held a 75% stake in Westwood Fibre Products and two months ago it invested S3.5m in Princeton Co-Generation Corporation.

Eastern Europe

A natural evolution of the market would be the entry of Russia, the Baltic States and Poland. Their cheaper production is an advantage as long as pellets can be transported via ship. While transport from America to Europe costs approximately S40 per tonne, the same price has to be paid for 500km of road transport. On a related note, Rotterdam harbour is becoming the premier trans-shipment centre for biofuels, and is targetting it to represent 10% of its business within 10 years. The market volume for pellets is likely to reach 142m tonnes by 2020.


Figure 3. Pellets consumption, 2006: tonnes per year

Central Europe

In Europe, pellets production capacity will see a considerable expansion in the coming months. Austria, still a net exporter of pellets, will double its production to 1.1m tonnes per year in 2007. One of the leading pellets manufacturers is Pfeifer. with several subsidiaries in Germany and one in the Czech Republic. It produces 125.000 tonnes per year. Leitinger has announced it will build a pellets factory in the Czech Republic and another in Russia, next to its timber processing subsidiary. German Pellets GmbH commissioned its third pellets factory in Ettenheim in December 2006, producing 130,000 tonnes per year. Germany will increase its production capacity to approximately 1.4m tonnes this year.

Outlook & Opportunities

There is every likelihood of further growth as the pellets industry enters new countries. With the announced capacity expansions, the pellets price will be considerably lower than fossil fuel and should remain on a stable level. This situation combined with constant availability will help to strengthen the reputation of the industry, which suffered in 2005-06 due to supply difficulties. Typically family controlled enterprises are 'growing up' and are entering the international market. Interest by financial investors could considerably improve the chances of new markets developing rapidly. There have been rumours that some companies may be considering IPOs on the public market.

In order to meet Kyoto targets, most Western European countries have set financial incentives for consumers. Political support would also be essential in Eastern Europe, to make the relatively expensive heating systems (more than S13,000) affordable. Some additional financing could be gained through the sale of carbon credits issued from emissions savings if Joint Implementation projects were implemented.

Companies Mentioned in this Article


Author: Irmgard Herold
Senior Analyst Biomass & Waste
New Energy Finance