Low Grade Wood Markets in Northeast US 2016

Charles Levesque

Innovative Natural Resource Solutions LLC

levesque@inrsllc.com

Phone 603-588-3272

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Sawlogs Pulpwood Biomass

Volume (Tons)

Value ($)

Volume and Value to Landowner of Products from a Timber HarvestNorth East State Foresters 2013

All NH, 2010

Markets for Low-Grade

Pulp and Paper

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016e

Estimated Pulpwood Consumption by Maine Pulp MillsEstimates Based Upon INRS Data

Since 1999, the Northern Forest region has lost 11 pulp mills

New York- Deferiet- Lyons Falls

New Hampshire- Groveton- Berlin

Maine- Westbrook- Bucksport- Old Town- Lincoln- Millinocket- East Millinocket- Madison (May 2016)

Pulp

an

d B

iom

ass

Clo

sure

sSi

nce

20

14

Loss of Low Grade Markets in MaineAnnual Tons (estimated), 2014-2016

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

HardwoodPulpwood

Spruce / Fir Pine / Hemlock Biomass Biomass (displacedby natural gas)

* Biomass displaced by natural gas is at a facility that can use either fuel;

a change in economics of the two fuels would likely result in the resumed use of biomass.

Pulp and Paper• Pulp and paper mills remain region’s largest consumer of wood

products, and represent significant fixed infrastructure.

• Mills produce a variety of products, including market pulp, communication papers (coated and uncoated), and tissue. Each of these markets is unique.

• The Northern American paper industry has been shrinking, both in output and capacity. Individual mills often do well, but new investment in production is extremely limited in the U.S.

• Maine and New York will remain paper producing states for well into the future

• Expect reduced pulpwood consumption, and reduced prices for pulpwood (a bunch of factors in this one, not just demand).

• The closures are NOT cyclical (they are structural world-wide).

Challenges to the Pulp & Paper Industry

• You will hearHigh taxes

High energy costs

High wood costs

And so on

• There are all very real, and present real challenges to the industryMills and regions now fighting over a shrinking worldwide pie

• They aren’t the fundamental issue, which is change in the marketplace (reduced world market), and a capital intensive industry that is hard to change with any reasonable speed.

Biomass electricity

Wood Energy (cont.)

Innovative Natural Resource Solutions, LLC 12

Biomass Power Plants

Wood Energy (cont.)

Innovative Natural Resource Solutions, LLC 13

Biomass Power Plants (new)

Wood Energy (cont.)

Innovative Natural Resource Solutions, LLC 14

Biomass Power Plants (closed)

Biomass Electricity

(MWh)

“Green” Attributes(Renewable Energy Certificate)

Electricity (MWh)

(Wholesale)

Average over the next year$47.14

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

Average Real Time Wholesale Electricity Prices, ISO New EnglandFutures Prices as of 4/25/2016 9:15 AM

Actual Futures

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,0001

99

7

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Biomass Fuel Use - New HampshireGreen Tons / Year, 1997 -2015

Bio Energy Corporation

Bridgewater Power - Ashland

Burgess BioPower

Concord Steam

DG Whitefield (formerly Whitefield P&L)

Indeck – Alexandria

Pinetree – Bethlehem

Pinetree – Tamworth

PSNH Schiller (Portsmouth)

Springfield Power (formerly Hemphill P&L)

Biomass Electricity – Fuel Costs (estimated in New England representing a range of plant sizes)

• ~1.6 - ~1.8 green tons of fuel per MWh• That means if biomass fuel is $28 / ton, fuel cost is ~$44.80

to ~$50.40 per MWh (hypothetical)

•Add in staffing, consumables (emissions control), maintenance, debt service, etc. @ $30 to $35 per MWh•Cost of generation (absent profit) is somewhere around

$75 to $85 per MWh• That’s with $28/ton fuel…

Biomass Electricity – RECs

•Plants need Renewable Energy Certificates (RECs) to operate economically• MA has effectively excluded stand-alone biomass

Set an efficiency standard that cannot be met by a stand-alone facility

Also a forestry standard, which suppliers were responsible for

• CT has a phase-down for biomass beginning in 2018(?)• Biomass a huge economic boost to local regions, forestryand it is the only renewable with ongoing economic benefits• Apparently not as important to Southern New England as

we would hope…

REC Prices (Connecticut, indicative, broker quote, spring 2016)

$- $10 $20 $30 $40 $50

2017

2016

2015

What does it take to operate biomass in 2016?

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Revenue Expenses

Electricty RECs (CT) Fuel O&M

• Assumes:

Electricity at current futures price for the next year

RECs at current broker quote

Biomass fuel at $28, 1.7 green tons per MWH

O&M at $30 per MWh

• With these assumptions, this is not an attractive business

Biomass thermal

Innovative Natural Resource Solutions, LLC 24

Wood Pellet Plants today

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Wood Pellet Plants 1995

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NH Biomass thermal

• Now have 116 commercial/industrial facilities using wood chips or pellets for heat in NH (up from 30 in 2005)

• Over 1000 residential (homes) using wood pellets in central heating systems

• Economic and Environmental Benefits:

$9.78 million saved in heating costs

$4.7 million direct spending on wood pellets and chips

$29.4 million in total economic benefit to New Hampshire

57,217-ton net reduction in carbon dioxide emissions

The glass is half full…• We have some good low-grade markets, and are incredibly well

positioned compared to other parts of the country

• We have the forest resource and supply infrastructure (landowners, loggers, entire forest industry ecosystem) that would make other regions jealous

• We live in close proximity to (and are part of) the greatest collection of consumers in the history of the world

• There may never be a better time to be develop a project or technology that uses low-grade, particularly softwood.

• But we are in trouble with low-grade…

…2001-02 DRED studies

• PSNH had just bought out 2 wood-fired power plants (Alexandria & TIMCO) and about to buy-out a third (Bio-Energy)

• Fears of more buy-outs

• Beginning fears about Berlin and Groveton pulp mills

• Concern for what reduced low-grade markets can do to good forestry and sawmills because residues are so important to their business model.

…2001-02 DRED studies (cont.)

• Existing biomass power plants

• Pulp and paper manufacturing

• Pellets

• Chip export

• Small-scale gasification

• Process heat / co-location

• Ethanol and biochemicals

• Solid wood composites • Firewood • Animal bedding • Landscaping mulch • Densified logs • Lumber from small-diameter

material • Co-firing with wood at coal-

fired energy plants.

Phase I – review of low-grade market possibilities:

…2001-02 DRED studies (cont.) Phase I conclusions

• Pulp & paper largest low-grade market – work hard to keep

• Biomass power plants – work hard to keep

• Conduct a feasibility study to determine the economic feasibility of siting a Medium Density Fiberboard plant in New Hampshire

• develop a plan for the use of wood in co-firing at Merrimack Station

• Other remote possibilities: Oriented Strand Board, Ethanol, Chip exporting from the Port of Portsmouth

…2001-02 DRED studies (cont.)

• MDF would use 300,000 tons /year

• Cost $153 million (2001 dollars)

• Conclusion:

Power costs too high

Wood costs too high

Too distant to market

• NOT FEASIBLE

Phase II – MDF plant feasibility:

…2001-02 DRED studies (cont.)

• Conclusion of Phase I & II – Only opportunity for large-scale low-grade markets in NH is biomass electricity plants

• To operate in a deregulated market, the wood plants will receive $40/MWh while it costs $54/MWh to produce

• Subsidy needed was $14/MWh or $10.8 million per year for all the plants…

Phase III – Keeping Biomass Electricity Plants

…2001-02 DRED studies (cont.) Phase III – Keeping Biomass Electricity Plants

…2001-02 DRED studies (cont.) Phase III – Keeping Biomass Electricity Plants

Charles Levesque

Innovative Natural Resource Solutions LLC

Phone 603-588-3272Email levesque@inrsllc.com

www.inrsllc.com