How a Truckload of BC Logs Became a “Green Energy Scandal” in the UK
Renewable energy subsidies in the UK have stoked the North American wood pellet industry. What does this imply for the future of bio-based materials?
On October 3, 2022, the BBC documentary program Panorama released “The Green Energy Scandal Exposed,” a 30-minute exposé of UK power generator Drax’s BC wood pellet operations. Reporters travelled from the UK to a Drax-owned pellet mill near Quesnel, BC. After tracking a load of logs from large clearcut to the mill, they concluded Drax was decimating old growth forests in BC to feed a power plant in the UK.
Why Such an Interest in One Load of Logs?
The shallowness and inaccuracy of the reporters’ claims were shocking, but even more surprising was the fact that the BBC bothered to cover the topic in the first place. What could make a power station’s fuel sourcing so interesting to UK viewers to justify sending a documentary team to a remote logging operation in central BC?
The debate over whether wood biomass is carbon neutral is indeed worthy of discussion, as is the eco-friendliness of BC’s wood pellet industry. However, I suspect neither issue would have attracted the interest of the UK media had Drax not been receiving substantial subsidies for renewable energy production.
A Primer on Renewable Energy Subsidy Programs
Renewable energy subsidy programs took off in Europe in 2008, in response to the EU’s pledge to produce 20% of its energy from renewable sources by the year 2020. Producing energy from renewable sources is often more costly than doing so with fossil fuels. Subsidies cover the cost of the difference, making renewable energy competitive and encouraging further investment.
Different subsidy programs serve different purposes. Drax has tapped into two UK programs designed to support the construction or conversion of large power plants:
Contract for Difference (CfD) programs pay renewable power generators the difference between the market price for electricity (which can fluctuate) and a pre-set “strike” price. This provides generators with the stability required to make large-scale investments, while the government absorbs the risk.
Renewable Obligation Certificates (ROCs) are designed to encourage energy suppliers (i.e., local utilities) to source renewable power. Each year, the UK Office of Gas and Electricity Markets (Ofgem) awards a number of ROCs to renewable energy generators (such as Drax) based on their production levels. The generators can sell their ROCs to energy suppliers, whom Ofgen requires to either purchase a predetermined number of such ROCs or pay a set penalty. Thus, ROC programs effectively oblige energy suppliers to subsidize renewable energy generation.
Drax Now Earns Much Its Revenue From Subsidies
While the BBC’s claim that Drax receives “billions of pounds” from the UK taxpayer could best be described as journalistic hyperbole, it is true that the company would not exist in its current form without hefty subsidies.
According to the company’s annual report, in 2021 Drax earned £539 million in Renewable Obligation Certificate (ROC) sales, plus an additional £234 million in Contract for Difference (CfD) payments. Consequently, subsidies accounted for roughly 15% of Drax’s £5.1 billion in revenues. Without these subsidies, Drax’s net profit1 of £398 million would instead have been a net loss.
With its subsidies set to expire in 2027, Drax will need to cut its production costs by roughly 30% to remain profitable. To do so, it has invested heavily in its supply chain, reducing its pellet costs from $166/tonne in 2018 to $143/tonne in 2021, and aiming to achieve $100/tonne by 2027. However, it is questionable whether these changes will be enough to enable the company to break even.
Drax therefore needs a new source of revenue. One potential source could be its proposed bioenergy with carbon capture and storage (BECCS) plant, the world’s first. BECCS technology is part of the UK government’s emissions reduction strategy, and Drax’s proposed facility could play an important role in this. However, according to the environmental think tank Ember, this project would require a subsidy of £31.7 billion to come to fruition.
A Bioenergy Industry Without Subsidies Would Look Very Different
What Drax’s subsidy situation means for UK taxpayers is that they have spent several billion pounds on a facility that may require even more subsidies to remain operational. While the enormously ambitious BECCS project could go a long way to making the UK a “net zero” emitter, it could also become a very expensive white elephant.
What this all means for wood producing regions like Canada and the US is that the wood pellet industry would look very different today without Drax and its subsidy-driven business model.
Drax consumed 7.7 billion tonnes of biomass in 2021, over 99% of which was imported. (To visualize this volume, consider that in 2018 the company received 72 trainloads of pellets per week.) Drax’s import volumes equated to over 25% of the global wood pellet exports of roughly 29 million tonnes2. Furthermore, Drax’s pellet imports from Canada and the US represented 38% and 67% of these countries’ exports, respectively.
Without Drax, therefore, the global industrial pellet industry would likely have grown to its current size much more slowly. Some of the low-grade fibre that is currently going into wood pellets would be used in other products (such as wood panels) or not used at all.
In a Climate-Concerned World, Government Policy Be a New Market Wildcard
Drax is an example of how government policies (in this case, UK renewable energy subsidy programs) can drive a company’s entire business model, feeding the growth of a new industry subsector (industrial fuel pellets) in the process. As concern over climate change grows, governments will likely look for additional ways to nudge industries and consumers away from fossil fuels. As the Drax case demonstrates, such policies can have both widespread and unexpected results.
While marketing personnel in mature natural resource industries (many of which are cyclical) are accustomed to watching for signs of changing demand, government policies add an additional layer of complexity and unpredictability. For example, the future of global pellet markets will partly depend on whether or not the UK decides to support Drax’s proposed BECCS project. Likewise, global pellet demand will also be affected by climate policies in the EU, Japan, and South Korea.
The rise of policy-influenced demand for bio-based natural resources (including forest products) likely won’t stop at bioenergy. Fossil fuels are the base for many different products, including plastics, synthetic rubber, asphalt, fertilizers, detergents, and artificial fibres. Replacing these with bio-based materials, as is currently being discussed in the EU, would result in surging demand for wood and agricultural products.
In conclusion, then, our job as natural resource professionals is getting more complicated. More and more factors are driving demand for our products, and these emerging demand drivers are even more fickle and unpredictable than traditional economic markers. So get ready. We’re in for an exciting ride.
EBITDA – earnings before income taxes, depreciation, and amortization
FAOStat Forest Products Trade Database data currently only go up to 2020.
Always enjoy reading your articles Alice. Well-researched, objective, and well-written for a wide audience. Keep up the great work!
Excellent research Alice. So refreshing compared to the bogus BBC/CBC nonsense about Drax operations and BCs forests