Biofuels Series - Focus on: Biomass

In this first of a series on biofuels, we examine some of the regulatory factors which are having continued impact on the trade and consumption of biomass (and particularly wood pellets) as a source of renewable energy.

A friendly regulatory and tax environment in Europe – for now

Biomass forms a huge part of Europe’s renewable energy mix, accounting for an estimated 60% of the renewable energy produced by the European Union and UK combined.

In the more commonly used form of wood pellets, biomass has obvious advantages: the pellets are stable and easily transported (although problems certainly do arise – about which more later), can be produced as a by-product of the lumber industry, and provide an alternate fuel source for coal-fired power stations (with modifications) which might otherwise become defunct.

However, perhaps the most significant economic benefit for producers and consumers of wood pellets in Europe arises out of their regulatory treatment. Under the EU Emissions Trading System (“EU ETS”), and also the new UK ETS scheme, wood pellets are treated as a carbon-neutral source of energy. This means that biomass power stations are relieved of the requirement to purchase emission allowances to offset their carbon emissions ‘at the smokestack’. There are further subsidy programmes aimed at increasing the use of biomass in countries like the UK, for instance Contracts for Difference and the Renewables Obligation.

In short, the health of the biomass industry in Europe and elsewhere owes much to a long history of favourable regulatory treatment. However, that position appears to be coming under increasing pressure.

A change of heart in the Netherlands – anomaly or a sign of things to come?

Along with the UK and Belgium, the Netherlands has long been one of the main European importers of wood pellets.  However, there are clear signs of a change in public opinion about wood pellets’ carbon-neutral status, with critics arguing that the delay between burning biomass and growing replacement trees is not properly taken into account. In the recent 2021 elections, all of the main parties adopted an anti-wood pellet stance. In February 2021, just prior to the elections, the Dutch Parliament voted overwhelmingly to stop issuing new subsidies to biomass plants.

There are other challenges: campaigners recently brought a claim to the European Court of Justice, aimed at challenging the favourable treatment of wood pellets and other ‘forest biomass’ in the important European Union Renewable Energy Directive (“RED II”). The EU Commission has also recently reconsidered the treatment of forest biomass in RED II, releasing on 14 July 2021 a proposal for amendments to that directive which will, if enacted, place more stringent sustainability obligations on users of forest biomass. In particular, the Commission proposes to forbid Member States from offering state support to electricity-only installations using forest biomass from 31 December 2026. We shall release other updates as more information becomes available.

Moving forward

The industry is not blind to the risks. Many are working proactively to ensure that the case for biomass as a carbon-neutral source of energy continues to be as strong as possible. Some industry leaders like Drax, in the UK, are pushing ahead with plans for Bioenergy with Carbon Capture and Storage (“BECCS”), commonly referred to as ‘negative emissions’ technologies.

However, the Netherlands presents an example of just how quickly policy, and the hard economics of tax and regulation, can wrongfoot commercial operators. Flexibility will continue to be a key advantage, whether that means smarter boiler design, smarter forestry management, or smarter contractual relationships.

Markets outside of Europe – better news?

Despite the potential headwinds in Europe, there is plenty of encouragement in other markets: China has long nurtured a domestic bioenergy industry based largely around crop residues derived from rice, maize and wheat,  but has discouraged and even historically banned the import of wood pellets.  With the introduction of China’s new ETS scheme this year, and a drive towards using more renewable energy in 2021, that position may well change.

The United States is one of the largest exporters of wood pellets, but biomass has not achieved the success that it has in Europe, mainly due to the relative cheapness of fossil fuels and unwillingness of administrations to provide the regulatory incentives to convert coal-fired power stations. While not an explicit supporter of biomass energy, the Biden administration has made it clear that it is serious about climate change: if incentives for the use of biomass arise (or merely disincentives for the use of coal), then domestic demand will inevitably increase.