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Global Wood Pellet Market Analysis - part 3 (Results)

Date: 07/03/2020 08:37:51 From: Clicks:

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Price development for residential consumers

Pellet prices for residential consumers (in Europe) are in general between 200 EUR Mg−1 and 300 EUR Mg−1 with the exception of Switzerland and France where pellet prices before value added tax are higher. Prices peaked in 2013 in Austria, Germany, Sweden, and Italy, and they kept increasing until 2014 for Swiss, French, and Spanish consumers. A certain integration between oil prices, gross domestic product and wood pellet prices can be outlined for these price growths at least for Germany and Austria.17 In 2015 a strongly devaluing Swiss franc led to increasing prices for Switzerland in Euro. Prices dropped in all countries during 2016 due to an oversupply in small, medium, and industrial pellet markets. Regarding the heating market there have been three years of soft winters, which also caused dropping prices from 2014 in most of the countries, and in 2016 they were as low as around 2008 to 2010 (Fig. 5).

Comparison of wood pellet prices for small‐scale consumers, delivered either in bulk or in bags

Comparison of wood pellet prices for small‐scale consumers, delivered either in bulk or in bags

Prices in EUR Mg−1 are, in general, higher in Sweden and Switzerland, due to higher production costs but also due to exchange rates of Swedish krona and Swiss franc to the euro. The consumption of wood pellets in France is still low (see Fig. 1) but it is rapidly expanding. Switzerland shows the largest price span between 2006 and 2016. Italy is mainly dependent on imports from Austria and Germany but also in large quantities via shipping routes from the USA. Its price development is thus exposed to external shocks including (dollar) exchange and shipping rate developments. To cover the risks, especially also the rapidly increasing demand of consumers with relatively small stocking opportunities (stoves without dedicated storages), Italian wood pellet traders have invested in storage in recent years.25

Pellet price analysis with data on a monthly basis can give further insights into the seasonality of wood pellet prices for residential heating: the highest prices occur in the winter months and the lowest in the spring months. Furthermore, special offers by pellet traders in Germany and Austria called storage prices (‘Einlagerungspreise’ – Wild M, private communication) are used to ensure that consumers fill up their storages between April and June.

Trade between small‐scale heating markets but also in small‐, medium‐ and industrial heating markets increased significantly in the recent years but showed no equilibrating effect for end‐user prices between the small‐scale heating countries.25

Price development for industrial consumers

Industrial wood pellet markets are characterized by a few central factors, crucial for price developments.

First , the industrial pellet market is demand driven, as bio‐heat and power‐generation levels depend on policy schemes including underlying remuneration levels and related regulations (e.g., sustainability criteria and reporting requirements). These policy schemes can take different forms such as carbon taxes, price guarantees or tradable renewable energy certificates. The purpose of these incentives is to enable wood pellets to be a viable alternative to fossil fuels. This policy dependence, however, has led to uncertainty in markets during phases of, for instance, policy renegotiations or administrative changes in the main European demand regions over the last decade.

Second , despite its growth, the industrial wood pellet market is still small compared to other biomass or energy markets such as grains or fossil fuels. In particular, it lacks the liquidity of true commodity markets, being dominated by a few market actors.26 Individual companies or supply‐chain events can affect global markets and hence spot market prices. Examples are fires at RWE's Tilbury power station in February 2012 and at Drax in December 2017, both resulting in general price decreases in Europe.

Third , international trade is a central element in the industrial market, as none of the largest consumers (the UK, Denmark, Benelux, Japan and South Korea) have any substantial production capacity of their own. Exchange‐rate fluctuations can therefore influence economics of industrial pellet consumers who often purchase pellets in United States Dollar (USD) but receive their revenue (from electricity sales) in their respective local currencies.

The average spot market pellet price between 2009 and 2015 was around 169 USD Mg−1, which resembled pricing in a growing global market with overall balanced demand‐supply volumes. Following a peak in mid 2014 at 185 USD Mg−1, spot prices dropped almost continuously due to policy uncertainty, for instance in the Dutch market, and a resulting global oversupply particularly throughout the second half of 2015 and 2016. This caused a historic minimum price in December 2016 of just under 113 USD Mg−1 (Fig. 6). As outlined in Thrän et al.,11 viable prices for producers in the industrial market are usually above 150 USD Mg−1.

Industrial wood pellet prices 2009–2017 in the Baltic Sea region (upper pane) and the Amsterdam‐Rotterdam‐Antwerp (ARA) region (lower pane).

Industrial wood pellet prices 2009–2017 in the Baltic Sea region (upper pane) and the Amsterdam‐Rotterdam‐Antwerp (ARA) region (lower pane). Note the effects on ARA prices of the February 2012 Tilbury fire, as well the dampened prices in 2015–mid 2016 as policy uncertainty coincided with significant capacity increase. (The Baltic Sea prices have been converted from EUR MWh−1 to USD Mg−1 using an energy density of 4.7222 MWh Mg−1 and monthly EUR/USD exchange rates from the Swedish Riksbank.)

In addition to global price influencing factors, regional aspects come into play. One example is the interaction between the industrial market (mainly for electricity generation) and the heating market, characterized by a large number of residential stoves or community‐sized boilers. In the Baltic Sea region this interaction is quite strong, as industrial purchasers in both Denmark and Sweden are combined heat and power (CHP) plants that produce both electricity and district heating.

Regional particularities notwithstanding, a comparison of the two price graphs in Fig. 6 indicate that price fluctuations in the Baltic Sea region appear to be rather similar to those in the Amsterdam‐Rotterdam‐Antwerp (ARA) region. This could imply that the two markets are integrated. As the price data collection methodologies differ between the two price series, this assumption needs to be substantiated by further research.

Data sources

Baltic Sea prices are provided by FOEX Indexes Ltd.13 The ARA price graph shows the Argus Wood Pellets 90 Day Index (CIF‐ARA balance per week).12

Development of trade flows with proof of sustainability

Throughout the EU, binding sustainability criteria are only required for liquid biofuels (used in the transport sector) as laid down in the Renewable Energy Directive (RED) but not for solid biomass (used in the heat and power sector).27 Given the lack of EU wide sustainability requirements for solid biomass, Belgium, the UK, the Netherlands, and Denmark, the main importing countries of wood pellets for industrial use, have established sustainability criteria under national support and voluntary schemes. In the UK, sustainability criteria for small scale users and production of heat apply.28 The vast majority of wood pellets with (at least in part) verified/certified sustainability are destined for these four markets. Typically, these criteria set thresholds for Greenhouse Gas (GHG) emissions emitted in the supply chain, and so‐called ‘land’ criteria, which address issues related to land use (change), mainly relating to sustainable forest management (SFM).

Belgium was the first EU country to initiate support mechanisms, called Green Certificates (GCs), in 2002. Under the GC mechanism, the main sustainability requirement is the GHG emissions reduction and each region provides its own calculation method to verify this. Compliance with SFM criteria is not mandatory but it can be voluntarily demonstrated using existing SFM certification schemes.

The UK has established, under the Renewable Obligation (RO), that solid biomass plants must report and meet land and GHG sustainability criteria. To demonstrate sustainability compliance, electricity generators need to provide annual sustainability reports approved by independent auditors. Compliance can also be demonstrated by using existing certification schemes recognized by the UK government.

The Netherlands Enterprise Agency (RVO) issued the ‘Energy Accord for Sustainable Growth’ (SDE+) stating that biomass used for co‐firing and heat production must meet the most comprehensive criteria in the EU, including criteria on GHG emissions, carbon stock and other land use change, SFM, and chain of custody.

Denmark requires no binding sustainability requirements for the production of renewable energy. However, to ensure the sustainable use of wood pellets and wood chips, the Danish District Heating Association and the Danish Energy Association established a voluntary Industry Agreement, which was implemented in 2016. The sustainable requirements under the Industry Agreement were developed mainly based on the UK's RO mechanism. The combined heat and power producers are themselves responsible to document and demonstrate sustainability requirements through third‐party certification.

Sustainable wood pellets are verified by national verification bodies established in Belgium, the UK and the Netherlands, or by certification schemes in the four countries. Popular certification schemes recognized are Forest Stewardship Council (FSC), Programme for the Endorsement of Forest Certification (PEFC) and Sustainable Biomass Program (SBP) for land use and SFM criteria. For GHG emission reductions calculation according to the method developed in the Biograce II project29 is often applied.

Belgium recorded the first biomass data under the GC mechanisms in 2003 but details of the certified wood pellet imports were not published before 2010. The UK published the first statistics regarding sustainable wood pellets in 2011, the Netherlands in 2013, and Denmark in 2016. As shown in Fig. 7 , the USA is by far the largest exporter of certified wood pellets to the EU (Canada, not shown separately, also supplies certified wood pellets, but lower amounts than the USA). Other European regions, especially the Baltic countries, also supply these four markets, but with a smaller quantity.28, 35 Figure 7 also shows a record of wood pellets with sustainability claims in 2016 with 6.5 Tg imported to the UK, 2.6 Tg to Belgium and 0.7 Tg to Denmark. In the Netherlands, the import decreased in 2014 and was negligible in 2015 and 2016 due to lack of a Stimulation of Sustainable Energy Production budget. The import in the Netherlands has increased again in 2017 and up to annually 3.5 Tg by 2020.

(left) EU import of wood pellets with sustainability claims. Data sources:29-34 (right) Origin of wood pellets produced with SBP certification in 2017

(left) EU import of wood pellets with sustainability claims. Data sources:29-34 (right) Origin of wood pellets produced with SBP certification in 2017.

Figure 7 shows that, for all other years than 2016, only fragmented data was available and no comprehensive picture can be provided. Given the variety of criteria and verification requirements, it is impossible to distinguish between all wood pellets that are certified with existing SFM schemes, and which part (and which criteria) have been verified by an independent auditor. Thus, the degree of sustainability may vary significantly. This may change in the future, as the new certification system SBP is gaining significant market share. In 2017, about 4.7 Tg of SBP‐certified pellets were produced, which – compared with the 9.3 Tg imported in 2016 by the UK, Belgium and Denmark – covers about 50% of the market.

Discussion and conclusions

The global pellet market has grown dramatically and has diversified geographically during the observed decade. Nevertheless, there are still two comparably independent markets: the residential heating market and the industry‐related power market. It is important to keep in mind that not only pellet qualities and actors but also different policies drive current and future demand:

The residential heating market is a slowly developing market, depending on the attractiveness of other heat supply systems, such as fossil fuels but also renewables, which is different for each supply case. In addition, the replacement cycles span several decades. Typically, there are only minor support mechanisms, such as special loans or grants, for investment in pellet boilers. Those markets have been further developed in central Europe.

The electricity market is mainly driven by engagement in GHG emission reduction in the energy sector. International agreements and clear national targets have led to dedicated instruments in some countries, which shifted the input in large‐scale power production from fossils to wood pellets. During the last decade the global wood pellet market gained strong momentum from those policies in certain European and Asian countries.

A professionalization of the market can be stated, with differing roles of the participating countries: North America became the major exporter and certain countries in Europe became major importers. A particular partnership has been established between the USA and the UK. With their trade relationship dominating the market for industrial pellets, it is hence susceptible to major changes inflicted by the few main market partners.

Pellet prices and their comparisons have to be treated with care. This is mainly because the substitution of fossil‐based commodities with this solid bioenergy carrier developed in different ways. Pellet prices for the largest consumers are confidential because they are part of bilateral, often long‐term contracts. Prices still depend on single producers and a dedicated political framework in single consumer countries. For international trade there is a ‘Baltic sea market’ and a ‘transatlantic market’.

The residential pellet market is less volatile but large price differences have been observed between the countries. It is therefore vital for market actors to work towards spatially equilibrated price developments (improving market efficiency), to increase access and affordability for end users in the long term. Important barriers to be tackled include (1) consumers intrinsically valuing regionality and pellet colour despite these factors being unrelated to the pellets’ quality, and (2) relatively low market transparency. For the latter, the availability of pellet prices and other related data would have to be improved significantly, starting from harmonized approaches of collection and joint publication on multilingual homepages through to the development of price benchmarks for small‐scale wood pellet heating.

Increased market maturity including higher integration of the spatial markets and higher integration between markets of different end uses (residential and industrial market) will result in lower price fluctuations and thus decreased risk for producers and consumers alike. Additional balancing options include financial support for improving storage capabilities25 as well as financial mechanisms for buffering currency exchange rate risks.

One obstacle is the current uncertainty of bioenergy support at the EU policy level. Several national governments in Europe have strengthened their support, yet are waiting for clear signals from EU level under the Renewable Energy Directive II,36 and the related targets for the renewable power and heat market.

Sustainability certification has been introduced in four consumer countries and was applied for about 9 Tg in 2016. Certification systems are still diverse, but harmonization is occurring in the market. Also here the negotiations on sustainability criteria under the Renewable Energy Directive II36 are pending. However, certification is being discussed for combustion facilities with a thermal capacity of at last 20 MW. It is fairly certain that residential wood pellets will not require any proof of sustainable production whereas industrial users will have to meet increasingly stringent criteria and thresholds (e.g. up to 80% GHG emission reduction in 2026).

New market players have been identified. The next couple of years are destined to see an increase in short‐term demand particularly from Japan and South Korea. In these emerging markets outside the EU, sustainability requirements may play an increasingly important role.

This additional demand for pellets with sustainability requirements is bound to swing the current conditions from a long (oversupply) to a short (undersupply) market. Overall, Asia is expected to provide the largest future growth opportunities in the medium‐ to long‐term. In China, Australia and Canada additional policy measures for large scale wood pellet application are in discussion.

In conclusion, the future development of production and consumption is highly uncertain. One reason is that policies will influence the markets also in the future. Coherent policies are strongly needed. Harmonization on sustainability standards is one step in this direction. The improvement of information on market volumes and price data is also strongly needed.

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