Biomass Pellet Prices – Drivers and Outlook What is the worst that can happen?

European Biomass Power Generation1st October 2012Cormac O’CarrollDirector, London OfficePöyry Management Consulting (UK) Ltd.

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PÖYRY GROUP Pöyry Group is a global management consulting and engineering companydedicated to balanced sustainability. Over 7,000 experts in 50 countries working on17,000 projects annually.

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PÖYRY MANAGEMENT CONSULTING

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AcquisitionsDivestmentsAsset valuationsBusiness valuations Project pre-feasibility / feasibility assessments

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Supply/market analysisPricing strategiesContract negotiationsSupply chain optimization

Sourcing strategy formulationSupplier assessmentsTransfer Pricing

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Market Insights and Modeling

Market analysisMarket forecastsDemand, supply, and cost analysisPrice projectionsIndustry cost curves

Market design and modelingMarket regulatory frameworksMarket scenarios

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CONTENT

1. Biomass Supply & Demand for Power Generation in Europe

2. Biomass Availability

3. Pellet Demand

4. Wood Pellet Trade Flows

5. Wood Pellet Supply

6. Pricing Dynamics for Pellets

7. Pellet Market Liquidity

8. Summary and Conclusions

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NREAP ANALYSIS- SOLID BIOMASS FOR POWER GENERATION

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Based on NREAP, the 9 most energy consuming European countries will have acombined solid biomass-based demand of ~1,600 PJ for power generation by 2020.

0

100

200

300

400

500

600

700

800

900

Peta

joul

e

Solid biomass demand for power generation

2010 2015 2020

3.5%

11.6%

14.1%

5.2% 7.1%6.0% 8.9% 14.0%

4.7%

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BIOMASS SUPPLY AND DEMAND OUTLOOK EU27 (NREAPs)

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A total biomass supply gap of ~50 Modt/a (wood equivalent) is likely to develop by2020.

Mill

ion

odt /

a

0

50

100

150

200

250

300

350

Supply Demand Gap Supply Demand Gap

2010 2020

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WOOD BIOMASS AVAILABILITY – GLOBAL

Woody biomass availability

Stable harvest potentialIncreasing harvest potential

Raw material deficitStable harvest potential but in high demand

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GLOBAL PELLET CONSUMPTION – 2015 AND 2020 OUTLOOK

Million tonnes/a201020152020

11

24

35

WesternEurope

3 4 6

NorthAmerica

0.1 0.1 0.2

LatinAmerica

0.0 0.1 0.1

Oceania

0.9 1.4 1.8

Eastern Europe

04 6

Japan & South Korea

13

10

China

0.0 0.1 0.1

Russian Federation

Year Total Consumption2010 16 million tonnes/a

2015 37 million tonnes/a

2020 59 million tonnes/a

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Source: Pöyry Wood Pellet Multiclient

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WORLD PELLET TRADE FLOWS IN 2011Increasing volumes will be exported from the US and Brazil to Europe.

1,200

1,000

500

400

4,400*

* EU 27 internal trade

CurrentEmerging

50

Trade flows (1,000 tonnes)

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Capacity increase hot spots

Planned wood pellet production capacity increases (as of 2011)

More than 80 pellet production projects have been announced globally

PLANNED PELLET PRODUCTION CAPACITIES

US

Bra

zil

Rus

sia

Can

ada

UK

Ger

man

y

Chi

na

Latv

ia

Number of planned mills 20 3 14 5 9 9 4 1

Total planned capacity

(1,000 mt)4,024 3,000 1,817 1,055 795 560 350 200

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New emerging supply from lower wood cost regions may push higher costproducers further back on the global cost/supply curve.

Demand 2

INDUSTRIAL PELLETS – PRICING DYNAMICS AND OUTLOOK

Demand 1

ILLUSTRATIVE

- Delivered cost to end-user, USD/GJ-

- Cumulative capacity, million tonnes/a -

Potential additional low cost supply

Demand 3

Key variables:• speed of demand vs.

supply development• cost woody biomass

• cost for transport• exchange rates

• pellet paying capability

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PÖYRY’S PELLET PRICING MODEL

We construct forward supply and demand curves from our data on power plants,pellet mills, and our views on future markets and regulatory environment

Volume

Price

• Existing and planned co-firing and biomass conversion power plants and CHP units:

• Volume determined by plant capacity, plant availability, and efficiency.

• Capacity of existing and planned mills• new pellet mills endogenously

deployed within the model, adding to supply volumes.

Each power plant and CHP plant has a paying capability, for the peak and off-peak block of each month, based on:

• wholesale power price;• coal and carbon price (including

Carbon support in GB);• biomass incentives; and• each individual plant’s efficiency.

Each pellet mill is modeled using Pöyry’s proprietary Virtual Pellet Mill

• Pellet production costs – wood, power, propane, labour

• Transport to ARA – inland transport cost (rail or road) and shipping cost

• CAPEX, where the market can support it

Supply Demand

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Pellet price, year Z

Co-firing rate / conversion – coal plant X, country A,

year Z

Oil price - year Z

Cumulative demand alt. region AA, year Z

Bioenergy incentives / mandates for co-firing -

country A, year Z

PPC - coal plant X, country, A year Z

Demand volume – coal power plant X, country A

Aggregated demand curve –year Z

CO2 emission cost, year Z

Electricity wholesale price, country A, year Z

PPC – dedicated plant X, country A, year Z

Port to plant transport distance – plant X, country

A, year Z Cumulative demand new dedicated plants , country

A, year Z

Inland transportation cost algorithm (cost / distance),

country A, year 0

Inland transportation cost escalator, year Z

Port to plant transportation cost – plant X, country A,

year Z

Coal price, year Z

Demand volume –dedicated plant X, country A

Generation / No generation – dedicated plant A, year Z

Bioenergy incentives / mandates for dedicated -

country A, year Z

Aggregated supply curve –year Z

USD / country A exchange rate – year Z

Input Calculation Output / Iteration

Legend

MODEL STRUCTURE – DEMAND

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Biomass surplus – supply region K, year 0

Other production costs escalation – supply

region K, year Z

Other pellet production costs – mill XX, supply

region K, year 0

Biomass price algorithm (cost to biomass surplus),

supply region K, year Z

Biomass surplus - supply region K, year Z

Biomass price escalator -supply region K, year Z

Biomass price – supply region K, year Z

Oil price - year Z

Other pellet production costs – mill XX, supply

region K, year Z

Marginal cost of production – mill XX, supply region K,

year Z

Mill to ARA shipping cost algorithm (cost / distance),

mill XX, year 0

Mill to ARA shipping distance – mill XX

Mill to ARA shipping cost escalator – year Z

Mill to ARA shipping cost –mill XX, year Z

Marginal cost of supply –mill XX, supply region K,

year Z

Pellets supply volume –mill XX

Aggregated supply curve –year Z

Aggregated demand curve –year Z

Pellet price, year Z

Other pellet production costs – new mill ZZ, supply

region K, year Z

Standard scale for new pellet mill – Supply region K

CAPEX algorithm (CAPEX / scale) - year 0 CAPEX escalation – year Z

CAPEX new mill – supply region K, year Z

IRR requirement for new pellet mill – Supply region K

Other pellet production costs for standard size mill –

supply region K, year 0

Build new mill XX –yes/no

Incremental biomass demand – supply region K,

year Z

USD/ Supply region K exchange rate – year Z

Mill deployment rate –supply region K

USD/ Supply region K exchange rate – year Z

Incremental biomass demand – supply

region K

Input year Z + 1

Input Calculation Output / Iteration

Legend

New mill assessment

MODEL STRUCTURE – SUPPLY

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ALTERNATIVE SCENARIOS

Transportation costs

• Indexed to high oil price

• Indexed to central oil price

• Indexed to low oil price

High scenario Central scenario Low scenario

Coal, power and carbon prices • High • Central • Low

Level of conversion and

co-firing• High • Moderate • Limited

Demand

Supply

• High pellet demand• High paying

capability

• Central demand• Central paying

capability

• Low pellet demand• Low paying capability

• Highest supply costs • Central supply costs • Lowest supply costs

Driv

ers

Driv

er

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SUPPLY AND DEMAND DYMANICS – ATLANTIC BASIN

Each point on the supply and demand curve represents an individual pellet mill, orpower plant

Main Drivers• UK - conversion of a few

large coal fired plants.• Denmark - new Energy Plan

drives the conversion ofnumerous coal CHPs tobiomass.

• Netherlands - 10% co firingmandate.

• Belgium - favourableincentives for co-firing inFlanders.

2015 Indicative High Scenario

Supply

-50

0

50

100

150

200

250

300

350

400

450

0 5 10 15 20 25 30

Pric

e (U

SD /

t, re

al 2

011

mon

ey)

Volume (Mt / year)

SuppyDemandGBRNETBELDEN

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• Dutch APX-ENDEX has recently launched an exchange for wood pellets delivered toARA

• Trade of wood pellets currently takes place only to very limited extent• Churn rates are estimated to be near 1, i.e. traded volumes are approx. equal to

physical volumes• Currently, only suppliers and users participate – introduction of clearing shall change

this• If establishment of the APX-ENDEX exchange is successful, market liquidity is

expected to increase

LIQUIDITY OF PELLET MARKET – CURRENT STATUS

Crude Oil

150

Wood Pellets

Churn Rate Bid/Ask Spread

Crude Oil

Wood Pellets

6.8%

0.1%

17

1

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PELLET SUPPLY – LIQUIDITY OUTLOOK

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0%

20%

40%

60%

80%

100%

-

5

10

15

20

25

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025US Southeast BrazilCanada NW RussiaBaltics Other (PO, PT, UA)Short Term Pellet Availability (million tonnes) Short Term Pellet Availability (%)

Perc

enta

ge S

hare

of P

elle

ts A

vaila

ble

on S

hort

-Ter

m B

asis

(%)

Indu

stria

l Pel

let M

arke

t in

the

Atla

ntic

B

asin

(mill

ion

tonn

es)

Note: Long-term supply agreements persist beyond pellet mill debt term.

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SUMMARY AND CONCLUSIONS

Wood Pellet demand in Europe will continue to grow, driven by subsidies and legislation.

The emergence of large pellet production facilities in low cost regions will shift the supplycost curve to the right, mitigating price rises.

We expect market liquidity to remain relatively low - project financing requirements meanlong term contracts will dominate

Pellet availability and pricing will not be a limitation to the growth of biomass power. Theworst that can happen is in the hands of governments.

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Thank You! Cormac O’Carroll

Pöyry Management Consulting (UK) Ltd. + 44 (020) 7932 8200

cormac.ocarroll@poyry.com