Approving the draft conditions currently being drafted in European offices, which could significantly impact the use of wood for energy, would create a catastrophic situation for heat supply not only in Latvia but also in Sweden; therefore, forest-rich countries must not allow them to be adopted.
This picture emerges from a discussion held by Dienas Bizness in cooperation with the forest and related industry portal zemeunvalsts.lv, focusing on wood as a vital energy resource—especially in the current energy climate where natural gas prices have skyrocketed—as well as the future prospects and risks of this resource, particularly in relation to the draft regulatory acts being prepared within the European Union.
Several dangerous signals
“In Europe, everything related to biomass is viewed with great caution, especially regarding sustainability issues—in the context of the renewal capacity of the used resource, the preservation of biological diversity, and the mitigation of climate change. Moreover, positions tend to differ as there are various interest groups,” says Jurģis Miezainis, an energy policy expert at the Forest Certification Council of Latvia, describing the situation. He admits that outspoken supporters of the EU Green Deal and biodiversity are pushing proposals to implement a faster cascading principle, which could remove a significant volume of wood from the energy sector. There is also a proposal being advanced to reclassify current renewable biomass (wood) as a non-renewable resource.
“If these initiatives are adopted, they will have catastrophic consequences for Latvia, because 60% of the fuel used in district heating is currently biomass—wood—and in rural homes, it is even more than 90%,” explains J. Miezainis. He points out that by making wood a non-renewable resource, it would enter the emissions trading system, and the relief currently enjoyed by residents using wood as fuel (wood chips, firewood, pellets, briquettes) would end. It is possible that the transition period will last until 2030. “If such a scenario comes to pass, the current heating situation with super-high prices will become even more tragic in the future,” says J. Miezainis.
The cornerstone of district heating
“Biomass (wood chips) is the cornerstone upon which district heating in Latvia is built, while firewood is used in regions that lack district heating or where natural gas infrastructure has never been built, and where gas has also been more expensive than other fuel types; therefore, hindering the use of this resource or making it more expensive has a significant impact,” explains Andris Vanags, Chairman of the Board of the district heating company Gren Latvija. He reminds us that biomass (wood chips) is the only energy resource we produce in Latvia; we consume about half of it domestically and convert the other half into wood pellets for export.
“The correlation ratio between pellet exports and the natural gas consumed in Latvia is almost 1:1, as in 2021 we exported 10 TWh of pellets and imported 11 TWh of natural gas in their place. Of course, not all natural gas can be replaced by pellets, but it can be done in district heating,” emphasizes A. Vanags. He notes that every euro by which this resource becomes more expensive ultimately impacts residents' wallets by 16 million euros. Specifically, if the cost increase is 10 euros, it will already amount to 160 million euros in the wallets of the population.
“Conversely, if wood as an energy resource were to be banned, for example, costs would increase by another two or three times compared to the current record-high heating prices,” says A. Vanags. J. Miezainis adds that a significant amount of electricity in the region is produced using natural gas. “In the first nine months of this year, Latvia has spent 805 million euros on gas, while in previous years for the same period it was only around 100 million euros, which means that electricity will not be cheap, and for those using heat pumps for heating, this heat will not be cheap,” explains J. Miezainis.
A. Vanags draws attention to the investment cycle of district heating. “In Latvia, through national policy, support, as well as EU structural funds, we have encouraged the increased use of wood chips in district heating. State support programmes are also currently open, intended for the transition from natural gas to renewable energy resources—wood chips and also pellets,” says A. Vanags. In his opinion, for these technologies to be efficient and not cause cost increases for the consumer, their operational lifespan must be 20-30 years. However, if a decision is made to reduce or even completely ban the use of biomass, the transition period must be as long as possible.
“This must be discussed as a potential solution 30 years from now, while simultaneously gradually moving towards it so that businesses can replace technologies and consumers can adapt to the new situation,” A. Vanags explains his position. In his view, the significant differences between European Union countries must definitely be taken into account, as Latvia is one of the countries with biomass self-sufficiency, and we even export a portion of it as a product to other European countries.
“A specific (unique) regulation must be found so that countries that have enough biomass can consume it,” says A. Vanags. In his view, such consumption, where biomass is obtained through sustainable forestry processes, is Priority No. 1, and it should not be hindered by additional regulation. “If this resource is obtained in accordance with sustainable forest management, there should be no questions about complex proof procedures and certification processes regarding whether the biomass was obtained in a sustainable management system,” notes A. Vanags. In his view, Latvian residents must benefit from the resource available in Latvia.
Sweden – Latvia’s ally
“It is positive that Latvia is so rich in renewable resources that we can also export them and generate income,” evaluates Lars Georg Hedlund, Chairman of the Board of the forestry company Sodra Latvia. “Sweden, like Latvia, is rich in forests, only in Sweden natural gas is not used for district heating; it is almost entirely provided by wood,” says L. G. Hedlund. In his opinion, both in the situation of Latvia and Sweden, a ban on using wood (chips, pellets) for district heating would be akin to a catastrophe.
“We are in the same boat, and we must work together in Brussels to ensure that such a scenario, where wood is equated to a fossil energy resource, does not materialise,” L. G. Hedlund is convinced. He reminds us that the crux of the dispute is whether sawlogs should be allowed to be used as fuel, but it is clear that this is not a sensible idea, and no one does it, but somehow this perception has arisen in Europe.
“It is logical that rotted large-diameter roundwood would be used as energy wood, but historically, cellulose raw materials—pulpwood, cellulose chips—have always been more expensive than firewood, let alone sawlogs. The market with its price levels does not even allow logs to be diverted as fuel to a boiler house,” emphasises L. G. Hedlund.
Feeling the rise in demand
“That is the reality of today,” L. G. Hedlund replies to the question of whether the increasing demand for energy wood is being felt. He notes that energy wood is sold to wood pellet manufacturers, as well as to local municipal heating companies. “Wood chips are a wonderful resource. Last summer was a very busy time for heat producers, as the prices for this resource have increased significantly in 2022. Moreover, if in previous years there were opportunities to conclude contracts for wood chip supply for a year and suppliers could ensure a fixed price for the entire contract period, this year the situation has changed, conditions are dictated by wood chip sellers—producers, heat producers cannot be picky,” explains A. Vanags. He admits that the increase in wood chip prices is enormous, as in October of this year compared to October last year, it has increased fourfold. Gren Latvija buys wood chips produced from logging by-products, but not all consumption, especially in a cold winter scenario, can be covered by this resource, and natural gas is also needed.
“The preference for a foreign or domestic buyer of wood chips is determined by price. If a local buyer is ready to offer the same price as a buyer at the ship in the port, the chips stay in Latvia. If the exporter's price seems too high, ships would regularly export this resource from Latvia to Europe,” notes A. Vanags. He emphasises that prices have in a way evened out, although the price of wood chips in Sweden is lower than in Latvia.
“In Sweden, wood chips at the boiler house cost about 15 euros per loose cubic metre; a year ago, the price was lower—only 12 euros per loose cubic metre. An increase of nearly 25% was not the happiest news,” says L. G. Hedlund. A. Vanags rushes to add that in Sweden, unlike in Latvia, there are long-term contracts where district heating companies have the opportunity to revise the price only once a year. “The news that the price of heat would increase by 25-30% this heating season caused public outrage in Sweden; in Latvia, the price of heat energy (for those who use wood chips as fuel in district heating) has doubled, while for those consuming natural gas, it has increased by 300-400%, even though household incomes are not increasing proportionally, and the price increase is not only in energy but also in food products,” says A. Vanags. He concludes that the purchasing power of the population is decreasing. “This is an emergency situation in which emergency measures and solutions are needed, including state intervention and subsidies,” notes A. Vanags. He reminds us that before the energy crisis, the price factor successfully worked as a dictate for different wood assortments, directing them to the appropriate sectors. “A year ago, no one turned pulpwood into burning wood chips, but today price gaps for wood assortments are forming that are not logical. However, this is a short-term phenomenon, and in the long run, everything will return to the usual order where roundwood that can have value added to it will be processed through deeper refining, while lower-quality wood that cannot otherwise be processed or used will go to energy. Therefore, we should not implement ‘over-insurance’ with any additional regulation, for example, that wood can only enter energy production after its third stage of processing,” says A. Vanags.
Threshold could be lowered
J. Miezainis draws attention to the fact that during the revision of the EU regulation, another initiative has appeared—to lower the mandatory participation threshold for the emissions trading system from the current 20 MW, for example, to 10 MW or even 5 MW for district heating companies. “There are situations where even such small heating stations are forced to replace one fuel resource with another for a time (for example, peat), and this will mean that their costs will increase because they must buy CO2 emission quotas (currently they cost around 70–80 euros/t), thus increasing the price of the final product,” explains J. Miezainis. He notes, however, that only about 10% of the obtained wood is consumed in energy, but there is currently a paradoxical situation where, in the short term, energy production is more expensive than sawn timber. “In the current crisis, state intervention with subsidies or grants helps stabilise the situation, but in the long run, it would be worth adopting the Finnish experience, which builds fuel reserves that do not interfere with the market until there is a crisis,” suggests J. Miezainis.
In the case of Latvia, in the event of an energy crisis being declared, municipal heating companies can conclude a contract without a public procurement tender for the energy resource; however, this does not regulate the price for the heat consumer and will not help avoid dramatic increases in heating tariffs, for example, by 100-200%. “It is only possible to help in such situations by purposefully building a system that would be able to provide fuel at a fixed price during a crisis, so that rapid tariff spikes do not occur. These not only hit households’ wallets painfully but also hit entrepreneurs’ competitiveness, because the heat portion of calculated fixed costs must be significantly increased, which in the best case will mean lower profits or even the need to increase the price of one’s product or service,” explains J. Miezainis. He reminds us that in Latvia, district heating is an autonomous function of municipalities, but... in 2020, in one locality, a heating company was threatened with closure, yet no ministry was prepared to get involved in solving the problem, and even dismissing the local council would not have solved the heating issue in that particular place. “Neither municipal nor, even more so, private heating companies have the capacity from their own funds to amortise such huge energy resource price fluctuations in the market as we are experiencing now,” emphasises J. Miezainis.
There will be enough resources, the only question is what their price will be
“Gren operates in all three Baltic states; we consume about 2 TWh of energy resources, most of it in Estonia—about 1 TWh; in Lithuania, waste is used as an energy resource. For this heating season, there will be enough energy wood resources; the question is their price,” A. Vanags answers when asked if there will be enough resources for heating. He has observed that in Lithuania, on the Baltpoll biomass exchange, prices have been decreasing by a few per cent for three weeks in a row, exactly like the prices of sawn timber.
“The situation is normalising in the short term, but the risks (uncertainty) regarding what the winter will be like (cold and long or not too cold and short) not only in Latvia but also in Scandinavia and Europe remain, and it will depend on these factors how we get through the winter,” evaluates A. Vanags. He explains that wood chips are only one aspect, because in the case of a cold winter (-15 °C for a longer period), more natural gas will have to be consumed, thus it is very important that both energy resources are available. The question is how secure the contracts for their supply can be concluded, because in the current situation, it may be even economically more advantageous for suppliers to withdraw from fulfilling a concluded contract and pay a termination fee than to fulfil the contract at the resource supply prices provided for in it. Specifically, previously 90% of the expected amount for supplied wood chips was paid monthly, and the remaining 10% served as security, which was accumulated and paid to the wood chip supplier at the end of the heating season—in April. Currently, the price increase is so large that the supplier pays the 10% security deposit and withdraws from the execution of the concluded contract, and if there are no other suppliers, the heat producer in such a case is left without a resource, and people—without heat.
“For both energy resource buyers and sellers, the whole winter will pass in negotiations about how large the supplier’s reserves are, whether they can be relied upon, whether an additional contract needs to be concluded with another supplier, etc.,” A. Vanags outlines the upcoming work period. In his view, this risk will be higher in this heating season compared to the last one. “The highest risk in relation to gas was in August; currently, the situation has normalised, but it must be taken into account that district heating does not need as much gas as electricity production,” A. Vanags answers to the question about the gas factor.
J. Miezainis, in turn, reminds us that in such a situation, a national-level safety buffer is needed. “We will not heat a specific locality with a contractual penalty, therefore either reserve fuel or another supplier is needed,” says J. Miezainis. He draws attention to the fact that energy security is based on diversity—the more diverse the resources, the greater the alternatives and more varied the options, and the lower the risks and higher the security. “In biomass stations, one can use burning peat, even waste; Rīgas TEC gas can be temporarily replaced with diesel fuel, but these opportunities must be identified in a timely manner, and I do not see a state policy in this area,” evaluates J. Miezainis.
Discussion video available here:
https://www.youtube.com/watch?v=mjJHmIF7YVU