European biomass markets are fragmented and intransparent, writes Jakub Kucera, economic analyst at RSJ, a Prague-based investment company. With one exception: Lithuania has a well-functioning biomass spot market, Baltpool. Could this become a model for other European countries? The Lithuanians would like to expand.
Getting a basic understanding of the oil market is pretty easy. The black gold enjoys a lot of attention in the media and there are tonnes of overviews, reports and papers about the workings of the market as well as main producers and suppliers. Do you want to know the current price of oil? Look it up on the Internet, just select the proper regional index.
By contrast, to get an understanding of the biomass market is anything but easy. The market is fragmented and rather murky. You can ring a local supplier to get a price quote but that is pretty much all you can do easily. Unless you live in Lithuania.
The solution is called BALTPOOL
Anyone who wants to buy biomass, in the form of wood chips, wood pellets and most recently milled peat, can register at the BALTPOOL exchange and post a buy order there. You just need to specify the amount of tonnes of oil equivalent (yes, the exchange works with energy units), including a minimum amount as an option, the type of biomass you need, delivery location and the maximum price you are willing to accept.
When bells in Lithuanian churches are chiming 11 a.m. the main activity moves to the most lucrative contracts. Every lowering of the price prolongs the trading sessions by three minutes
The buyer can be sure that the potential sellers are technically and financially capable of delivering chips or pellets. The exchange takes care of it and checks all participants. The exchange rules also stipulate what quality standards the delivered biomass has to meet, how to measure these and what happens if anything goes wrong.
That does not happen often, though, since, according to BALTPOOL, 94% of delivered biomass meet the required quality standards fully (the remaining 6% are mostly still usable, in most cases the biomass just has a higher ash content). This is one of the reasons why only a fraction, 0.3% to be precise, of trades are later disputed by either side.
The trading session – a later stage (app. 10:45 EET)
– this is a selection of the exchange´s order book, there are buy orders on the left and corresponding sell orders on the right
Alytus county (the uppermost line) is in the very south of Lithuania. But nevertheless, is 145 EUR/toe not lucrative enough for a seller? In other counties a supplier makes do with only 120 EUR or even 112 EUR (highlighted green).
Buyers, after posting their quote, can just sit in front of their computer screens and wait to see if a suitable seller emerges. If they conclude a deal, they can wait for the biomass to be supplied, as sellers are responsible for transport and unloading.
Most important is the activity at the exchange on Tuesday mornings. In several rounds, it is decided who will in the end satisfy a buy order. At first, buyers can also change their quotes as they could have for the past week. Later on, only sellers can do so and the activity intensifies. Sellers strive to get the trades, now with fixed conditions, by adjusting their quotes. Mostly, they lower their price in order to get ahead of their competitors. Whoever offers the lowest price, gets the deal.
If the demanded volume of biomass is big enough, more suppliers can participate – they all get the highest but still successful ask price. When bells in Lithuanian churches are chiming 11 a.m. the main activity moves to the most lucrative contracts. Every lowering of the price prolongs the trading sessions by three minutes. Finally, no seller wants to lower their price, all contracts are literally behind bars and the exchange calculates the results. Around noon, all the successful traders get corresponding invoices to their email accounts.
Drama until the last minute (till app. 11:15 EEST)
A seller willing to supply biomass to Alytus county has finally appeared. He has apparently jumped the queue by offering only 144 EUR/toe.
The trader currently in second place fights back and lowers his price to 141 EUR.
In the end, after several other adjustments a trader offering 125 EUR/toe has won. We do not know his identity but this does not bother the buyer at all. It is important for him to pay 20 EUR per toe less, thus saving 360 EUR.
Forced to efficiency
BALTPOOL offers an effective and at the same time simple tool to find out market biomass prices and, if needed, to immediately buy wood chips or pellets of a required quality. However, not all participants trade over the exchange voluntarily.
As exchange trading leaves less room for murky business practices, Lithuania in 2016 decided to require all regulated heat providers to buy all biomass via BALTPOOL The exchange acknowledges that the new regulation has helped a lot (regulated companies trade 88% of their biomass over the exchange), although a third of the 74 registered buyers are not regulated.
Apart from environmental grounds, the economics of using biomass are very sound too
There are advantages in exchange trading for biomass suppliers too. Besides offering anonymity of counterparties and their verification, which of course applies to buyers as well, BALTPOOL offers an algorithm that figures out transportation costs to all the registered buyers. This way, sellers can in a quick and reliable fashion adjust their prices. They can theoretically compete for biomass deliveries all over Lithuania no matter where they are actually located.
And there are plenty of buyers as the maps below shows. It is no problem either to sell biomass from more points simultaneously. You can have a selling point in every Lithuanian county.
Map of registered buyers
BALTPOOL alters the market
BALTPOOL exchange, established in 2010, is two thirds owned by EPSO-G, the state-controlled operator of the Lithuanian electricity and gas grids, and one-third by Klaipėdos Nafta, the state-owned operator of the oil and gas terminal in Klaipėda on the Baltic Sea. It is licensed and supervised by the National Commission for Energy Control and Prices.
Originally BALTPOOL focused on power and gas trading but the power trading was taken over in 2012 by the Scandinavian power exchange NORDPOOL and gas trading by the all-Baltic gas exchange GET Baltic. However, the know-how acquired stood BALTPOOL in good stead when it came to reorienting to biomass in August 2013.
In 2015 the value of traded contracts since the exchange’s launch reached 40 mil. EUR and last year the threshold of 100 mil. EUR was crossed when, among other things, 76,000 trucks full of wood chips (1.8 million tonnes) were sold for 56 mil. EUR.
BALTPOOL now has 292 registered members and is undoubtedly the number one platform for anyone wanting to buy biomass in Lithuania. Last year 86% of all biomass produced in Lithuania was traded there.
The whole Baltic region, including Lithuania, is often a target of Russia´s aggressive behaviour. Domestic biomass is a vital part of Lithuania´s strategy towards its much bigger neighbour
The growth of exchange trading has naturally had an impact on the market as a whole. During the heating season 2012-2013 the major sellers, defined as controlling at least 5% of the market, shared 72% of the market which was, moreover, dominated by a single seller with a market share over 40%. In 2016 the biggest player had a mere 14% of the market and major sellers shared between them only 39% of the market. BALTPOOL admits all participants even those who want to buy or sell mere tens of tonnes.
It is not easy to pin down BALTPOOL´s effect on biomass prices in Lithuania. Andrius Smaliukas, BALTPOOL´s CEO, points out two statistics.
Firstly, exchange prices have mostly been lower, often markedly, than OTC (over-the-counter) prices (see chart below). This was plain especially in 2014 and the first half of 2015. Recently the difference in prices has shrunk largely owing to the fact that BALTPOOL has more or less become the entire market. As a result mostly only products you cannot trade at the exchange, such as sawdust and bark, are traded outside BALTPOOL, usually in small quantities.
Secondly, prices at the exchange remained more or less steady although prices for firewood, a proxy for wood in general, were increasing (see chart below). This could be a proof of efficiency of trading at the exchange.
There is, however, one achievement that cannot be denied. As recently as in the heating season 2012-2013 biomass prices in two neighbouring counties could have diverged by as much as 30%. Nowadays, that is not possible anymore.
A safe haven in woods
The main reason for BALTPOOL´s success is indisputably Lithuania itself. Biomass has become one of the country´s main energy sources. In 2015 the share of biomass (without biogas) in energy consumption was 17% and it must have risen since.
Biomass has started playing a big role chiefly in central district heating. Since 2004 its share in this sector has risen ten-fold up to 61%. According to the Lithuanian official plan, this share is supposed to reach 80% by 2020. Biomass is predicted to play a bigger part also in industrial heating (the target is to grow the share from 6% in 2015 to 20% by 2020) as well as power production (from currently 33% to 55%).
If a government of an otherwise suitable country forced regulated heat producers to switch to exchange trading as did Lithuania or if they introduced a similar measure, this would be a major incentive to start another biomass exchange
The popularity of biomass in Lithuania has several reasons. Above all, it is ready available as a third of the country´s territory is covered in forests. Lithuania is also located in the East European Plain so that logging is pretty easy.
Apart from environmental grounds, the economics of using biomass are very sound too. While wood chips cost 115 EUR per tonne of oil equivalent, you have to dole out 198 EUR for gas with the same energy content. Of course, it is easier to burn gas (that is why burning wood pellets, a much more user-friendly product, comes at 280 EUR/toe). On the other hand, we must not forget that gas is extremely cheap now. In 2013 Lithuanian gas consumers paid almost 600 EUR/toe.
It is very doubtful whether we can call the prices Lithuania was forced to pay for gas several years ago market prices. The only gas supplier was Russia´s Gazprom. That said we come to the last, but in no way least, reason for Lithuanian preference for biomass. It constitutes, together with agricultural waste, the only significant domestic energy source. In 2015 wood biomass and solid agricultural residues made up two thirds of domestic energy sources (in second place with an approximate share of 20% were the other renewables, including hydropower; biogas came third with 8%).
The whole Baltic region, including Lithuania, is often a target of Russia´s aggressive behaviour. Domestic biomass is a vital part of Lithuania´s strategy towards its much bigger neighbour. In particular, since Russia´s invasion of Ukraine, every measure to increase independence from Russia is of importance.
First of its kind or the only one?
Will BALTPOOL remain a unique phenomenon or will similar exchanges spring up in other countries too? The question is hard to answer, yet.
Lithuania is particularly rich in biomass. But, so are other countries, among them Lithuania´s neighbours where we can find similar conditions (flat landscape, heavily forested). Especially Latvia, with half of its territory covered by woods, has a lot to offer as it is Europe´s number six in wood chopping (twice as much as in Lithuania) and 1.5 million tonnes of wood pellets were produced in the country in 2015 (which made it the third largest producer in Europe, after Germany with 2 mil. tonnes and Sweden with 1.7 million tonnes; fourth place went to Estonia, another Baltic republic).
If a government of an otherwise suitable country forced regulated heat producers to switch to exchange trading as did Lithuania or if they introduced a similar measure, this would be a major incentive to start another biomass exchange.
“We believe that electronic biomass trading centres are really necessary for the market especially considering all those new projects in Europe which are planning to use biomass as the fuel”
Or, BALTPOOL could spread to other countries. It already has over 17 registered suppliers and three registered buyers from Latvia as well as one supplier from Belarus and one from Estonia. Theoretically, it would be possible to integrate buyers or sellers from the other side of the Baltic Sea too as BALTPOOL has worked out conditions for transport to and from the Baltic ports. Scandinavia has huge production and consumption of wood biomass and the traders there do not enjoy the advantages of an exchange so far. The only thing that helps them a little is the existence of a price index they can pin their trades to (PIX Pellet Nordic Index by FOEX).
The Exchange model does not need to stick only to heavily forested countries. Heat and power can be produced from agriculture-based biomass such as hay and straw, too. If turned into pellets, it makes sense to transport even this type of biomass over longer distances. BALTPOOL itself is ready to satisfy any possible demand in this regard – all that needs to be done is establish quality standards and the way of measuring them.
Andrius Smaliukas, BALTPOOL´s CEO, confirms that his company would like to expand one way or the other. He says: “We believe that electronic biomass trading centres are really necessary for the market especially considering all those new projects in Europe which are planning to use biomass as the fuel.”
Indeed, exchange trading could attract more biomass buyers. Big power producers, who consume millions of tonnes of biomass annually such as the British power plant Drax, can afford their own procurement divisions. Demand from small customers, who burn biomass mostly in the form of wood pellets directly at home, can be satisfied by local retailers, but for medium-sized businesses or smaller district heating plants it could be an interesting option to buy biomass at exchanges.
Eventually the expansion of exchange trading could lead to a transparent European-wide biomass market which would contribute to the internal energy market and the Energy Union.