Navigant Research Blog

Going Small, Gas-to-Liquids Finds a Niche

— July 2, 2014

Typically, converting gaseous fuels like natural gas to liquids requires high upfront capital investment and substantial energy inputs to maintain operations and results in significant energy loss.  Despite these challenges, smaller-scale gas-to-liquid (GTL) deals have increased sharply of late.  They include a joint development project involving Waste Management, NRG Energy, Velocys, and Ventech to develop a platform than can convert landfill gas to renewable fuels and chemicals.

To date, GTL projects have been built in only the most extreme cases – where macroeconomic trends are especially favorable or when liquid fuels are unavailable (e.g., Germany during World War II and South Africa under apartheid, both of which relied on coal-to-liquid conversion).

These narrow circumstances explain why just five GTL facilities are in operation globally today, despite GTL technologies being proven commercially.  The most high-profile project, Shell’s Pearl Plant in Qatar, commissioned in 2011, cost a whopping $18 billion to construct, or about $8 per gallon of annual production capacity.  With such a high price tag, the project’s return on investment (ROI) hinges on a free supply of natural gas feedstock and a per-barrel oil price in excess of $40 (brent crude was trading at about $110 per barrel just before ISIS’ recent advance in Iraq).  Meanwhile, Shell recently cancelled another high-profile GTL project slated to be built in Louisiana, citing high estimated capital costs and market uncertainty regarding natural gas and petroleum product prices.  In short, commodity prices matter.

Modular Mode

In light of this limited market uptake, the recent surge of smaller-scale GTL projects is unexpected.  Targeting stranded or associated gas resources, however, these systems are able to skirt many of the macroeconomic barriers to the large-scale GTL projects described above.

Usually wasted or unused, stranded or associated gas presents a number of financial challenges to bring to market using conventional infrastructure.  In other words, the problem lies not in getting the gas out of the ground, but in finding a practical, economical, and efficient way of moving it to market.

In the case of stranded gas – gas fields located near local markets that are usually too small or in places too distant from industrialized markets – smaller-scale GTL processing can convert natural gas into a liquid product that is cheaper to transport.  In associated gas applications, where gas is either flared or injected into oilfields to maximize recovery, smaller-scale GTL can unlock new revenue streams.

Smaller and Safer

In both cases, smaller-scale GTL conversion has significant advantages over conventional infrastructure.  Shrinking the hardware allows greater tailoring of systems to the local resource supply and reduced construction costs.  The modularity of GTL systems allows capital to be allocated in phases, reducing risk to project investors.  And because the modules and reactors are designed only once and then manufactured many times, much of the plant can be standardized and shop-fabricated in skid-mounted modules.

The opportunity for smaller-scale GTL remains significant.  Stranded and associated gas is relatively abundant (estimated at 40%-60% of the world’s proven gas reserves).  One of the more exciting opportunities that has gained attention more recently is the pairing of frontend conversion technologies for processing abundantly available solid biomass and waste into synthetic gas (or syngas) which unlocks many more opportunities globally for smaller GTL platforms.  Navigant Research’s recently published Smart Waste report forecasts that annual revenue from municipal solid waste energy recovery will increase to $6.5 billion worldwide by 2023, due in part to the expansion of emerging technologies like small-scale GTL.

 

In the United Kingdom, Biopower’s Future Dims

— July 29, 2013

Earlier this month, in what some are calling a “blow to Britain’s renewable power industry,” RWE npower announced that it would close its aging Tilbury power station.  The German electricity generator, a key player in the United Kingdom’s power market, cited a lack of investment capacity and challenges associated with converting the plant to use wood, waste oil, and other biomass materials in place of coal.

In a separate development, the U.K. government confirmed in its most recent draft Energy Market Reform (EMR) delivery plan that facilities dedicated to exclusively burning biomass for power generation would not qualify for subsidies.  The exclusion from EMR’s Contracts for Difference (CfD) subsidy scheme is a nail in the coffin for an industry that was bursting with proposals for new-build large-scale projects just a few years ago.

The timing of Tillbury’s closure and the exclusion of dedicated biomass under EMR are in part coincidence, but together they bring the challenges facing biopower in the United Kingdom – ranging from environmental concerns to feedstock access to economic feasibility – into sharp focus.

Backlash

In its short quest to convert from coal to biomass, the antiquated Tilbury plant had overcome a fire in early 2012 that consumed nearly 6,000 tonnes of stored wood pellets as well as stiff resistance from those who challenge the environmental sustainability of burning organic resources in place of fossil fuels. In particular, the backlash against biomass stations has been widespread across the United Kingdom, forcing the abandonment of several proposed plants in recent years.

Although it is classified as renewable, the carbon impact associated with burning biomass remains an unsettled issue among policymakers from Washington to Brussels to London.  Campaigners also argue that the scale of demand for dedicated biomass fuel in the United Kingdom, mostly in the form of imported wood pellets, is unsustainable on two fronts.

First, the availability of biomass at home and abroad in sufficient quantity to meet the U.K.’s energy supply needs remains highly dubious.  The country currently supplies roughly 15 million tons of biomass from within its own borders, mostly in the form of agricultural residues and biogenic wastes.  Estimates, meanwhile, put total biomass demand at 102 million tons to meet an aspirational target of 6 GW of dedicated biomass power capacity by 2020, vastly exceeding domestic supplies.  With domestic biomass availability constrained by the U.K.’s limited land area, a rapid expansion of biomass importing capacity from North America and Russia would be needed.  The Tilbury plant alone would have burned more than 3 million tons of wood pellets per year – compared with 13 million tons burned in the entire European Union (EU) in 2012.

Second, biopower opponents cite the negative impacts associated with burning more biomass on the world’s forests, a key carbon sink in the fight against climate change.  While the EU has proposed sustainability policies for the use of solid biomass to generate electricity, ensuring global compliance remains a challenging proposition.

Exodus

Meanwhile, the U.K. government has embarked on an ambitious effort to overhaul its incentive structure to spur investment in renewables.  With subsidies for dedicated biomass scrapped altogether, effectively eliminating a key price support mechanism necessary to drive project viability, the government has sent a clear message that it favors cogeneration (CHP), coal-to-biomass conversion projects like Tilbury, or co-firing of coal and biomass over new-build dedicated biomass facilities.

The uncertainty surrounding the future of biopower subsidies under proposed EMR schemes, combined with sticky environmental concerns, has already led to the abandonment of 2 GW of biopower development projects in recent years.  The absence of dedicated biomass in the EMR, alongside Tilbury’s closure, is likely to spark a biopower exodus in the United Kingdom.

 

Feedstock Shortages Fuel Pellet Boom

— April 12, 2013

Facing unresolved feedstock challenges – including access, cost, and security of supply – the global biomass power market is teetering on the verge of obsolescence.  Combined with controversy around emissions, changes in subsidy programs, and a boom in natural gas power generation, an increasing number of projects have  been cancelled in recent months across the United States and Europe.  Meanwhile, a wave of biomass pellet plant installments may presage an industry boom – albeit much later than otherwise expected.

In the United Kingdom alone, roughly one-third of announced biomass power projects across the country have been abandoned in recent years.  Many of these were dedicated facilities, ranging from 100 MW to 300 MW of capacity.

The Achilles heel of biomass power production is sourcing an adequate supply of feedstock at a reasonable cost.  Biopower’s problem is not so much a function of scarcity – biomass is ubiquitous and currently the fourth largest energy resource worldwide after coal, oil, and natural gas – but it’s an inefficient source of carbon relative to fossil fuels.  Unlike coal, oil, and natural gas, biomass lacks density in two ways.  First, it’s scattered across large swaths of land (such as forest thinnings from national forests) and must be collected and aggregated.  Second, its energy density is three-fifths that of coal, adding a premium to the cost of transporting volumes from source to customer.

Competing against low-price fossil fuels like coal and natural gas, biomass feedstocks can’t afford to rack up costs associated with harvesting, aggregating, processing, and transportation without heavy subsidization.  Where coal producers capture efficiency through economies of scale and an international transport infrastructure, biomass production remains, at best, a cottage-based market.

Pellet Pull

For these reasons, the financial viability of biomass power falls off a cliff when resources are sourced outside of a 50-mile radius, making larger projects with bigger biomass appetites much riskier.  These projects typically bank on a concentrated local source combined with the import of biomass pellets from international suppliers, a market still in its infancy.

Today, wood pellets are one of the largest internationally traded solid biomass commodities used specifically for energy purposes, but they represent only a fraction of the scale of the global coal trade.  Biomass pellets have lower moisture content than raw biomass, which decreases fuel degradation during the storage period, increases energy density, and creates a more homogeneous composition, all of which translate to higher energy efficiency during combustion.

Growth in biomass power generation is dependent upon the expansion in the international trade of wood pellets over the next decade – principally from Canada, the Southern United States, Russia, and Baltic region of Europe to the European Union and Asia Pacific.  Responding to the sudden surge in the global trade of industrial biomass pellets, Energy Exchange APX-ENDEX was launched in November 2011, becoming the world’s first dedicated exchange for biomass renewable energy.  The exchange is expected to bring more transparency to the market by adopting several certification schemes for industrial wood pellets already used in today’s bilateral contracts in order to ensure that the wood pellets originate from sustainable wood sources.

With the trade in industrial pellets still in its infancy, many biomass power plant operators like RWE in Germany and Drax Group in the United Kingdom have taken matters into their own hands, investing in upstream pelleting facilities outside their domestic markets.  Many oil majors – from Conoco to Chevron – are getting in on the action as well.  Although the biomass pellet market is heating up, it will be 5 to 10 years before biomass power generation picks up steam.

 

As Forests Burn, Biopower Feedstocks Go Up in Flames

— December 30, 2011

According to a recent study released by the Texas Forest Service, as many as 500 million trees in the state – roughly 10 percent of the state’s forests – succumbed to heat and water stress over the past year as a result of 2011’s unrelenting drought. The study does not include the 4 million acres already lost to wildfires across the state over the past year.

The finding is an alarming reminder of the deteriorating health of forest landscapes worldwide. From pine beetle infestation in evergreens to declining aspen forests throughout the Rockies, a number of tree species are showing signs of acute stress. In areas already clobbered by persistent drought, wildfires root out what’s left. Across Russia, 10 million to 30 million acres of forest have gone up in flames, or are still burning. Estimates suggest that 2009 wildfires in Australia released the energy equivalent of 1,500 Hiroshima-sized atomic bombs.

In light of dying forests, large scale biopower, which mostly relies on wood biomass to generate electricity and heat, faces difficult challenges ahead. Derivatives of woody biomass – black liquor, tree trimmings, urban waste wood, sawdust, etc. – currently account for nearly three-quarters of the fuel used in the biopower industry. In the forthcoming Pike Research report, Biopower Markets & Technologies, we estimate that consumption of biomass resources will reach 1 billion tons by 2021. Industry expansion depends heavily on a burgeoning trade in densified biomass pellets, largely derived from wood resources, expected to reach at least 17 million tons by the end of the next decade. The two trends – the succumbing of forests to drought and wildfire on one hand, and growing demand for wood biomass from the biopower industry on the other – appear to be on a collision course, with difficult consequences for the industry.

As a recent New York Times article explains, in all cases, the magnitude of recent devastation raises concerns over the loss of carbon sinks and is a grim reminder of the potential threat posed by climate change. Forests play a pivotal role in mitigating the climate impact of greenhouse gas emissions. Studies show that tropical forests absorb about 18 percent of all carbon dioxide added by fossil fuels. The loss of forest cover can also increase the reflectivity of surface areas, contributing to a positive feedback loop that could accelerate global warming.

With “natural” phenomena already wreaking havoc on the world’s forests, if left unchecked, accelerated demand for wood biomass could compound the problem by hastening the loss of vital forest cover. Although the use of forest thinnings and sustainable forest management – or “milking” the forest – can alleviate fire danger in threatened areas, this process is often too expensive and the resources too distributed to justify large scale operations.

With an increasing number of 100MW+ biopower facilities under construction, the volume of demand for biomass feedstocks from the power generation sector will require the development of an efficient and stable supply chain.

The burgeoning biomass pellet trade is showing early signs of meeting this challenge. According to our analysis, the bulk of production is currently centered in North America with the EU-27 countries consuming an estimated 5.5 million tons or 70% of the global supply.


Although Pike Research’s analysis shows that the trade in biomass pellets will grow rapidly over the next decade, markets that are highly dependent on these resources will have to contend with increased opposition from environmental groups. Our forecasts assume this to be the case in the EU, where despite strong policies promoting the use of biomass for power and heat generation, growth is expected to fall short of 2020 targets due to challenges associated with sourcing wood biomass.

The Swedish state-owned multinational Vattenfall, a company featured in our forthcoming Biopower report, demonstrates the challenges associated with navigating these issues. Currently Europe’s fifth largest energy producer, its affiliate Vattenfall Europe, based in Berlin, is planning to build one of the largest biomass power plants in Europe, with a total capacity of 190 megawatts (MW). The company has also drawn up plans for a smaller plant (32 MW) and will co-fired facilities (260 MW) in four existing coal-fuelled plants. With limited forest resources available locally, Vattenfall Europe is planning to import pellets from rubber trees in Liberia. The move has faced significant opposition.

As the Vattenfall case study illustrates, the large-scale use of biomass can hardly be met by local sources, leading to an increasing global trade in woody biomass. Although purpose-grown trees offer a sustainable solution, these short rotation species are hardly a replacement for the carbon abatement potential of old growth forests. The scale-up potential of the biopower industry rests squarely on the industry’s ability to navigate these complex issues amidst persistent drought and wildfires.

 

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