By Bob Flynn, Director, International Timber, RISI
SEATTLE, WA, Aug. 21, 2008 - Recent government efforts to promote renewable energy and biofuels production may have given some timberland owners visions of windfall profits: they thought they had invested in trees, only to wake up one morning and find that they really owned oil wells, or at least some type of "energy factories." The surge in oil prices in 2008 may appear to have set the stage for a huge new demand for wood for energy, leading to soaring prices for timber and obscene profits for anyone shrewd enough to have acquired timber.
RISI has been examining the likely impacts of the potential "biomass bonanza" on demand for wood and wood prices, and the full results of the study will be published in September 2008. Preliminary results indicate that, despite a great deal of over-hype, the expansion of biomass energy markets is likely to benefit timberland owners, although the pot of gold at the end of this renewable rainbow may not be quite a large as many have hoped.
Government regulations; Set in stone, or "shifting sands"?
Much of the exuberance about the potential impacts of bioenergy markets rests on the assumption that government mandates will force certain changes regardless of the cost or market impacts. At least 27 states and the District of Columbia have enacted binding Renewable Portfolio Standards (RPS), which require electricity suppliers to produce a specified minimum percentage of their electricity from renewable sources by a certain date. Efforts have been made to enact a national RPS, and such legislation may come into effect in 2009, with many analysts expecting a national standard in the 15% range.
In addition, the Energy Independence and Security Act of 2007 requires that transportation fuel in the US include a minimum of 36 billion gallons of biofuel by 2022, including 21 billion gallons of cellulosic ethanol. Since biomass is the most common form of renewable energy in the US, and wood is by far the largest biomass feedstock, the outlook for much greater use of wood for energy production seems assured.
In fact, it appears that these targets may have set the stage for an increase in wood demand that greatly exceeds realistically sustainable levels. Based on the US Energy Information Agency's (EIA) estimate of the increased generation of biomass electricity needed in order to meet an anticipated 15% target, we calculate that a 15% RPS could mean an increase in wood demand of up to 44% of current total timber harvest levels, depending on the assumed share of woody biomass. And if wood-based cellulosic ethanol accounts for just one-third of the mandated target on non-corn ethanol by 2023, this would require roughly another 75 million tons of wood fiber, or about 17% of current total wood fiber consumption.
Since any expansion in wood fiber supplies is limited by current inventories of mature and near-mature timber, and since almost all mill residues ("waste wood") are currently being utilized, a surge in woody biomass demand for energy seems to have the potential to sharply drive up wood prices. But government mandates for renewable energy and biofuels do NOT necessarily mean that energy and fuel producers will have to buy wood at any price just to meet the targeted volumes.
If targets for renewable energy or biofuels prove to be too expensive, or too inconvenient for certain constituent groups, governments can always delay implementation or even reverse themselves.
This is an excerpt from a full story that is available in RISI's Wood & Timber News Service.
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