Enviva's co-founder and executive vice president of sales and marketing Thomas Meth says the global production of pellets will grow to 57 million tons by 2028. This will be facilitated by growing demand in Asian markets - only in Japan, the demand for pellets will exceed 7.7 million tons per year by 2028.
Lesprom Network: What are the benefits of the MLP corporate structure?
Thomas Meth: The Master Limited Partnership (MLP) is a very typical for U.S. infrastructure investments that is a tax efficient structure that drives lower cost of capital. Enviva Partners (the MLP) is publicly listed on the New York Stock Exchange. Its sponsor, Enviva Holdings, currently holds approximately 40% of the common units of the Enviva Partners. In addition to being a unitholder in Enviva Partners, Enviva Holdings, through its development subsidiary and its joint venture, develops and constructs new production plants and terminals for sale to Enviva Partners. This structure protects Enviva Partners from risks associated with the development and construction process.
Lesprom Network: For the second quarter of 2019 Enviva’s revenue grew by 24%. What are the reasons for this growth?
Thomas Meth: Enviva’s net revenue grew to $168.1 million in the second quarter of 2019, a 24% increase compared to the same period a year ago, mainly due to increased product sales. Over the quarter, we sold 869,000 metric tons of wood pellets as compared to 699,000 metric tons in the second quarter of 2018, which consequently resulted in higher product sales revenue.
Lesprom Network: The production of your company is concentrated in the USA. Why is it more profitable to produce pellets in the USA than in the countries you export your products to?
Thomas Meth: Enviva owns and operates wood pellet production plants and deep-water marine terminals across five states – Virginia, North Carolina, South Carolina, Mississippi and Florida – generally referred to as the U.S. Southeast. The focus on this area is first and foremost linked to the availability of feedstock: More than 50% of the U.S. Southeast is covered with forest, a total of around 1.1 million square kilometres, making it one of the most densely forested areas in the world. For context, that is three times the total size of Germany. The availability of fibre means that procurement costs are relatively low, which attracted a range of industries to operate in this area: High-quality logs are typically sold to sawmills supplying the building or furniture industry, while residues and low-quality wood such as portions of stems, treetops and crooked trees in the past were purchased by the paper industry. As digitalization led to the retreat of paper mills, the wood pellet industry moved in to fill the vacuum they left behind: pellet producers became the purchaser of low-quality fibre. Fibre is scarce in countries we export our pellets to, which in turn makes it expensive for those countries to procure and produce pellets. For example, as of March 31, 2019, the U.K.’s woodland area only comprised 13%, or 31,900 square kilometres, of its total size. All of the 7.8 million metric tonnes of wood pellets consumed by the UK in 2018 were imported. Despite transport costs – shipping in bulk keeps prices low – it is cheaper for U.K. customers to purchase U.S. pellets than buy fibre from regions nearby.
Lesprom Network: How do you ensure the supply of wood for production? What are the main sources, and how will their share for production change in the future?
Thomas Meth: We are an integral part of the harvesting process and the forest products industry at large: we take those parts of trees that lumber mills do not want in areas where paper mills have declined. We also take sawdust and shavings produced by sawmills when logs are processed. We continue to expand because there are many landowners and sawmills in the U.S. Southeast that have significant amounts of excess wood supply no other industry would take. Overall, that means we are a crucial part of the forest products industry and the re-forestation cycle: only where there is healthy demand for fibre will landowners feel encouraged to re-grow their forests and keep their tracts as forested land.
Lesprom Network: What innovations are in the field of biofuels in the near future? What new technologies are emerging?
Thomas Meth: The world is beginning to realize that decarbonization of heat has even fewer options to replace fossil fuels than power generation. We see tremendous opportunity in that sector globally for bioenergy. Carbon capture and storage is one of the most noteworthy technologies currently emerging in the bioenergy world. While it is still at elementary stage it has the potential to become an important part of bioenergy and contribute to achieving negative emissions. Long term, the supply chain we have created will be used for drop-in chemicals etc. to replace petroleum in those processes.
Lesprom Network: What are your main export markets?
We have existing customers in Europe in countries such as the UK, Belgium, Italy, France, Denmark and The Netherlands. Our customers are mostly European electricity and heat/power producers seeking to decrease their dependence on traditional fossil fuels, such as coal, and reduce their emissions of carbon dioxide. Although the majority of our production is presently delivered into Europe, the Asian market is growing very rapidly, and we have shipments scheduled for customers in Japan already this year. Japanese market demand for industrial pellets has grown from close to nothing just three years ago to a size that is forecast to reach more than 7.7 million metric tonnes by 2028. Dozens of pellet-fired power plants are currently financed or under construction and are set to come online by 2023. This trend is reflected in our long-term contract mix, which amounts to a total of 3 million metric tonnes per year as of 2025. South Korea is another Asian market with strong growth fundamentals, and demand is expected to exceed 5.8 million metric tonnes by 2022.
Lesprom Network: What are the growth prospects for pellet markets in South Korea and Japan? How will the demand for pellets develop in these countries?
Thomas Meth: Both economies are significant growth markets. Japan’s long-term power generation projects approved under its feed-in-tariff (FiT) scheme are still looking for fuel supply. Long-term demand of imported wood pellets continues to grow as the government targets 6.0 to 7.5 GWs of biomass-fired capacity, which equates to roughly 15 to 20 million metric tons per year of biomass, by 2030. Meanwhile, South Korea’s generation companies, or GENCOs, have about 2 million tons of demand every year. New-build power plants, so-called IPPs, tend to procure wood pellets under long-term contracts at least for a portion of demand. Historically, the South Korean market has been characterized by [spot] procurements undertaken on short-term tenders. However, driven by excessive demand, it is expected that there will be a shift from short-term tenders to long-term contracting.
Lesprom Network: How do you assess the demand for pellets in Europe? Where is pellet consumption growing?
Thomas Meth: European nations, and the EU at large, have adopted aggressive, mandatory renewable energy targets, most recently the Renewable Energy Directive II (RED II) policy framework covering the 2020-30 period. Several countries have put additional regulations in place that are designed to phase out many coal plants altogether. Since existing coal-fired infrastructure can be converted to use wood biomass instead, Enviva provides a reliable, cost-effective and environmentally beneficial means of meeting these objectives. Countries such as Germany, which generate a significant amount of district and industrial heat from coal, are likely to be particularly well suited to new wood pellet applications at industrial scale. Germany is currently focused on solutions to replace coal due to its recently agreed coal phase-out policy. Poland, another European economy heavily dependent on coal, is also likely to become a future market for biomass and wood pellets, as the need for dispatchable heat and power will accelerate coal-to-biomass conversions.
Lesprom Network: How can Brexit affect your business and the business of European importers of your pellets?
Thomas Meth: It is difficult to predict what impact Brexit will have on businesses at large, given that it remains uncertain whether the UK will reach an agreement with the European Union on the terms of its departure. However, generally speaking, Brexit is not expected to impact our firm long-term off-take contracts in any material way, and we anticipate that its impact on the biomass industry in the UK is likely to be fairly subdued.
Lesprom Network: What are the main trends in the global pellet market?
Thomas Meth: The global wood pellet market has seen significant growth over the past decade, reaching a size of around 35 million [metric] tons last year from around 12 million [metric] tons in 2008. As countries around the world continue moving towards renewable energy sources to replace fossil fuels, prospects for the market remain promising. A recent estimate by research house Hawkins Wright predicted that the global market will total 52 million [metric] tons in 2023 and grow to as much as 57 million [metric] tons by 2028. Asian demand in particular is set to drive this trend with an estimated increase of more than 10 million [metric] tons between 2021 and 2028 for industrial pellets alone.
Lesprom Network: How do you assess the domestic pellet consumption in the USA? How do you assess the possibility of increasing demand for pellets in the USA? What is holding it back?
Thomas Meth: At this point in time, our business solely comprises exports, and we can sell overseas every ton of pellets that we produce. If and when our home market will eventually start using biomass at industrial scale will largely depend on policy changes.
Biography: Thomas Meth is a Co-founder and Executive Vice-President of Sales and Marketing at the Enviva family of companies. Thomas has led Enviva’s global sales and marketing team since the company was founded, developing strategies and contracts for utility, industrial and commercial customers in the US, Asia, Europe and the Caribbean. He also is responsible for Enviva’s sustainability and public affairs initiatives. Thomas holds a bachelor’s degree in commerce from the Vienna University of Economics and Business, and a master’s degree in business administration from the University of Virginia’s Darden Graduate School of Business. He was born in 1975 in Vienna, Austria, but lives in Washington, DC.
Company profile: Enviva is the world's largest manufacturer of wood pellets, it is headquartered in Bethesda, Maryland. Enviva owns and operates eight plants in the Southeast US and produces more than 3.5 million metric tonnes of wood pellets every year. Enviva was founded in 2004 and the company conducts its activities primarily through two entities: Enviva Partners, LP, a publicly-traded master limited partnership (NYSE: EVA), and Enviva Development Holdings, LLC, a wholly-owned private company.
