New wood fiber demand has the potential to significantly impact the Pacific Northwest market over the next 20 years

In the Pacific Northwest, the pulp and paper industry pioneered the vertically integrated model for the forest industry that included growth and harvest of forest lands, solid wood product manufacture and use of the by-products of these processes to produce pulp and paper. This transformation resulted in the full utilization of available wood fiber.

Driven by an abundant supply of residual wood chips from lumber production, the pulp and paper industry flourished under this model. Going one step further, many mills began generating their own steam and electricity by installing large hog fuel boilers.

In the last 20 years, however, this model has disintegrated. Timberlands have been sold or spun off to timber investors who market logs to the independent operators now dominating lumber and panel production.

As a result of lethargy in the housing market, which has led to a 30 percent decline in mill residue chip availability, pulp and paper mills no longer operate around the clock on residue chips. Instead, costly whole log chips, which once were used to supplement residual chips, make up nearly 50 percent of their supply.

The fallout has been disastrous. The higher cost of raw materials has forced the closure of several mills. Two or three more will likely close across the region as a result of fundamental changes in raw material supply and dwindling product demand. As a result, instead of the full utilization of wood fiber that used to characterize the market, there is a pending oversupply of wood chips, particularly in western Oregon. As housing rebounds and lumber production increases, this over supply will increase, as mill residue chips displace whole log chips and leave additional wood fiber without a home.

Into this mix, causing further uncertainty is the prospect of the wood bioenergy, which is being propelled by state renewable electricity standards, state and federal grants, loans and tax credits and the prospect of federal renewable electricity standards. The combination of these initiatives is of great concern to the pulp and paper industry, and rightly so.

Much of the renewable electricity in the region is expected to come from wind. Because wind power is neither constant nor predictable, it seems logical that wood will play a large role as a complementary source of electricity because it can be generated on demand.

THE SURVEY
Forest2Market recently completed an assessment of what renewable electricity standards will mean in the Pacific Northwest over the next 20 years. We ran two sets of numbers--one based solely on existing state renewable electricity standards and one based on the federal standard proposed in the Waxman-Markey bill.

Figure 1 illustrates the amount of additional wood-to-electricity capacity that will be needed between 2010 and 2030 in each of the states in order to meet renewable standards. Figure 2 shows the additional wood fiber that will be needed in order to support this new capacity, if it should come online.

For the purpose of this analysis, we began with the data from the Energy Information Administration quantifying the amount of electricity that was generated from wood in 2008 and assumed that the percentage of non-hydro renewable electricity generated from wood would remain fairly constant at 2008 levels.¹ As the charts indicate, new wood fiber demand just to generate the amount of electricity required by the standards has the potential to significantly impact the market in the Northwest.

The amount of capital investment that this increase in capacity would represent is expected to fall somewhere between US$ 3.5 billion to US$ 5 billion (depending on the standard). The new facilities would benefit struggling local economies as well by providing jobs and tax revenues. If successful, bioenergy facilities could certainly strain the wood fiber supply and challenge existing pulp and paper mills for critical wood raw materials. The opposite is also true: if existing forest and wood products mills and the emerging industry are unable to capture bioenergy potential, wood residue will be under-utilized and forest-based communities will continue to struggle.

CAN THEY COEXIST?
We believe that forest products and bioenergy can coexist, but that it will require some change. First of all, we feel that new bioenergy capacity will come online gradually over the next 20 years. Even with enforceable standards, the practical considerations cannot be overlooked. Bioenergy plants have difficulty raising capital funds. They must go through drawn out permitting processes, need time to work out technology issues after startup, and generally build to full capacity over time. In addition, they often lose both funding sources and "not-in-my-backyard" arguments. If the past is prologue, only 10 percent to 30 percent will actually materialize, and most of those will open later than planned.

Even so, the projects that come to fruition will place additional demand on the system. And like pulp and paper mills, bioenergy facilities are unlikely to be able to shoulder the higher costs associated with whole log chips. Instead, the focus should be on increasing biomass recovery rates in combination with careful forestry planning.

Industrial forestlands west of the Cascade Mountains and Inland Empire are currently the best situated to exploit energy opportunities. The owners of these forests have great interest in using logging slash for wood energy, since it improves site preparation for reforestation and reduces the need for burning, which is highly regulated in the region to limit smoke emissions. A result of the conducive circumstances, two 20 MW plants are being analyzed for the Idaho panhandle specifically to capture biomass from private forests.

Throughout the region, biomass availability is also limited by the terrain. West of the Cascades, where only 30 percent of the land base is suitable for ground-based logging operations, some of this material is already being used. If a more aggressive approach is taken, though, western Oregon industrial forestlands can readily produce one million green tons of logging slash annually. Washington would likely produce similar quantities.

A much bigger challenge is the recovery of forest biomass from steep slopes requiring cable logging methods. Whole tree logging, where tree-lengths are yarded to a landing area for mechanized de-limbing and processing into log lengths, could conservatively produce roughly two million green tons of biomass annually. However, economic feasibility dictates this material must be removed concurrently with the production and shipment of logs, which it currently is not. Even at a delivered price of US$ 25 per green ton, the expense involved is difficult to justify.

Oregon has had some success in promoting biomass removal by providing tax incentives of US$ 10 per green ton for companies recovering this material. Washington has recently adopted a similar incentive to promote biomass collection and use. To date, these incentives have encouraged producers to capture this material, though the haul distance is usually limited to 50 miles or less. If the federal Biomass Crop Assistance Program's matching payment program for the collection, harvest, storage and transport of biomass has the intended effect, the amount of material that is harvested, and the distance it is hauled, may expand.

The largest source of western biomass can be found in federal forests, which encompass about 60 percent of all forestlands in the region. These forests have been subject to the ravages of drought, insect infestation and wildfire, problems that are greatest for dry inland forests. The bulk of these lands are easily logged with ground-based equipment. They have the potential to produce millions of tons of recoverable wood fiber annually.

But these areas are remote, at least 150 miles distant from the developed infrastructure for traditional use of wood fiber. Locating bioenergy facilities closer to these resources would make sense. Present federal policies, however, have been ineffective in assuring potential investors that the raw material supply from federal lands will be ongoing and sufficient. Governments will need to adopt integrated and non-contradictory policies in order to guarantee the supply needed to accomplish renewable energy standards and support new markets.

Though California is one of the top producers of energy from wood, the Pacific Northwest generally lags behind states like Maine, Alabama, Georgia, North Carolina and Virginia. Part of the reason is abundant hydro-power and low electricity rates. With renewable energy standards, however, and the penalties for failing to meet the standards that often accompany them, cost will no longer be the sole determining factor.

Under either of the renewable energy scenarios previously outlined, the supply of currently available wood biomass produced by forestry operations is greatly outstripped by the potential for demand. Even under the more conservative projections, a shortfall in wood fiber may limit energy development and produce fertile opportunities for resourceful and innovative operators.

New methods and developing strategies for economically capturing and using biomass will undoubtedly accelerate growth in bioenergy. And creative forestland owners partnering with innovative power generating facilities will find new revenue streams from forest biomass. Just as pulp and paper manufacturers pioneered the full utilization of wood fiber in the last half of the twentieth century, some will be instrumental in this market transformation as well.

¹2008 levels: California--14%, Idaho--69%, Montana--15%, Oregon--23%, and Washington--22%. These percentages are expected to remain fairly consistent over time; however, with the huge demand placed on the supply in the latter half of the forecast period in some states, these levels are not likely to be achievable.

About the Author:
Gordon Culbertson is Manager of Forest2Market's Pacific Northwest operations. Contact him at (541) 302-8010 or gordon.culbertson@forest2market.com. Learn more about Forest2Market at www.forest2market.com.