The frenzy and the desire of individuals to stock up significantly for the coming heating season have significantly increased the demand for wood pellets, which local manufacturers did not expect. As a result, wood pellet prices have risen not only in Latvia but also in many other places in Europe.

Over the last 10 years, the global demand for wood pellets has increased approximately fourfold, as fossil energy resources are gradually being replaced by renewables; wood fuel—mostly wood pellets, as well as fuel chips, briquettes, and firewood—is used for heat and electricity production. Latvia is one of the largest wood pellet producers and exporters. After Russia’s invasion of Ukraine, the focus shifted, and many European countries (to avoid funding the invaders) renounced Russian gas supplies, or Russia simply stopped supplies, citing unsettled payments by buyers (demanding settlement in roubles).

As a result, power plants in many countries reduced their consumption of Russian natural gas or stopped it entirely, attempting to compensate for the shortfall with gas supplies from other countries, while several stations using (diversified) types of energy resources increased their wood fuel consumption. At the same time, sanctions have been imposed that prohibit the purchase and import of wood fuel from Russia and Belarus. This creates fertile ground for a frenzy and for maintaining, or even raising, the price level of energy wood, especially since pellet and briquette prices had experienced a decline in previous years during the spring, when the heating season concluded, only to climb upwards again as the heating season approached. It should be noted that it is not only in Latvia that residents have been urged to change their heating raw materials by installing pellet boilers.

Consequences of the frenzy

"Frenzy," is how Didzis Palejs, Chairman of the Board of the Latvian Biomass Association Latbio, answers the question about the main cause of the unprecedented price level of wood pellets in Latvia and the issues regarding their availability. He justifies his statement by saying that, unlike in other years, individuals want to purchase significantly more pellets in the spring of 2022. "If a person previously bought, for example, two tonnes of wood pellets to heat their home, then this year they are buying twice as much – that is, for the next heating season and the one after that. This is nothing but additional stockpiling, which is a consequence of the frenzy," explains D. Palejs. He emphasises that the frenzy is by no means a Latvian phenomenon, as a similar picture can be observed in Austria and Germany. "People are worried about product availability," emphasises D. Palejs. He points out that the frenzy among people is further increased by companies that buy pellets in large quantities but are currently keeping them in warehouses.

"The only logical explanation for building up stocks is to sell them and make a profit when pellet prices rise on the market," says D. Palejs. He reminds that wood pellets could still be imported from Russia, and several trading companies have done so. "Already now, pellet prices are almost twice as high as before, as the increase is around 150 euros/t, although when compared to, for example, the rise in fuel prices, it is small," D. Palejs answers to the question about the price level. In his opinion, even though wood pellet prices are fantastically high, they are still lower than for fossil fuels.

Domestic consumption about 10%

According to data from the Latvian Biomass Association Latbio, approximately 2.2 million tonnes of wood pellets are produced in Latvia each year, but domestic market consumption is only about 0.2–0.22 million tonnes. "Manufacturers working in Latvia have no problems covering the domestic market demand because it makes up only about 10% of the total production share," explains D. Palejs. He hastens to add that two types of wood pellet producers work in Latvia – those that produce so-called industrial (brown) pellets, which are mostly consumed by district heating stations, and premium (light) pellets, which are consumed by owners of individual houses. "The premium pellet producers working in Latvia had already anticipated larger production and sales volumes this year, but no one expected such a huge increase in demand," explains D. Palejs. He points out that industrial pellet producers have contracts for product deliveries abroad and do not have a volume of pellets uncovered by contracts to offer additionally on the local market. "There will be no shortage of pellets, only there may be questions about their price levels and availability, because the production capacities of manufacturers for whom the local market is a priority allow covering Latvia’s consumption," says D. Palejs. He emphasises that for the majority of premium pellet producers, Latvia is the priority market.

"Such a situation is possible," answers D. Palejs to the question of whether a situation could arise where everyone buys pellets with a huge reserve this year and then, in 2023, the demand for this product in Latvia falls sharply. However, he points out that the era of uncertainty will end and everything will fall into place.

Surprise in May

"If in previous years nobody really wanted to buy pellets in May, this year everything that was available was being bought," describes Laimonis Onzuls, co-owner of SIA Latvāņi. He reminds us that there is such a thing as technological pauses in pellet production when technical maintenance of production equipment must be carried out, which, of course, reduces the ability of a specific plant to produce and sell goods. "Such a pause is also planned for the Latvāņi plant, but in other plants, this technical maintenance has been completed, and they are resuming production," answers L. Onzuls to the question of whether a technological pause in pellet production will not cause even more of a frenzy. He points out that to satisfy the frenzy demand for pellets on the domestic market, producers of industrial (brown) pellets have also started bagging them and offering them on the market. "This means that for people who want to buy pellets, the choice has increased, because alongside the light (premium) pellets, one can also buy the so-called industrial (brown) pellets," emphasises L. Onzuls.

Orders already until autumn

"Demand for pellets is huge; the order book is full until September, and it is no longer possible to include anything extra in it," explains Lauris Ļubka, executive director of the farm Lūsēni. However, he cannot compare the 2022 situation with 2021. "Only last year did we start producing wood pellets, and this is our first year of operation," explains L. Ļubka. He points out that the company was previously known in the fuel segment as a producer of briquettes. "The increase in demand for wood pellets has its share in the fact that the Russian and Belarusian markets, which were a significant supplier of this product to consumers in Latvia, closed," says L. Ļubka. Although there is currently a huge demand for wood pellets, Lūsēni does not yet plan to increase production volumes of this product. "Even if we wanted to increase production volumes, it is not feasible in a short time because lead times for equipment have become very long, and by the time they are received and installed, the market situation will have changed," answers L. Ļubka to the question about the possibilities of increasing pellet production volumes. In his opinion, the frenzy will subside, and the situation will normalise.

Imports = re-exports

Data from the Central Statistical Bureau show that in January–April 2022, wood pellet exports were 0.6 million tonnes, which is 27% less than in the same period in 2021, when 0.82 million tonnes were exported. The volume of pellet imports during this same time this year was also only 151,300 tonnes compared to 175,600 tonnes in 2021.

D. Palejs points out that the main countries of origin for pellet imports are Russia and Belarus, but it is no longer possible to bring them from these countries. "Pellet imports also occur from Estonia," answers D. Palejs to the question of from which countries pellets are brought into Latvia. He points out that the import of pellets from eastern countries is more related to them being brought into Latvia already as an EU member state, in order to then deliver them to the markets of other European countries, and thus they create both imports and exports. "Time will tell," D. Palejs answers regarding this disappearance of Russian and Belarusian pellets from European and Latvian statistical columns and its impact. Data show that pellet imports have increased 17-fold over nine years, from 34,000 tonnes in 2012 to nearly 600,000 tonnes in 2021. In turn, pellet exports have increased from 0.9 million tonnes in 2012 to 2.5 million tonnes in 2021.

Resources will be needed more

"In a situation where pellet producers usually start building stocks in warehouses in other years, this year they are unable to satisfy existing orders," explains Kristaps Klauss, Executive Director of the Latvian Forest Industry Federation. He emphasises that the global demand for a renewable resource – wood pellets – will increase, and this situation can be used by pellet producers in many countries, including Latvia. "Time will tell," answers K. Klauss to the question of whether new wood pellet plants could be established in Latvia.

He emphasises that one of the most significant factors in pellet production is the availability of wood resources. The informative report prepared by the Ministry of Agriculture on the current situation in agriculture and possible solutions for overcoming the crisis related to Russia’s military invasion of Ukraine also indicates that, given the situation in the fossil energy resource market (the rapid rise in oil product and natural gas prices, the reduction or stopping of Russian natural gas supplies) and the current geopolitical situation (the ban on importing wood products from Russia and Belarus), the demand for local renewable energy resources, especially firewood and wood chips, has significantly increased. In turn, the increase in demand has caused a significant price rise and raises concerns about the availability of locally sourced renewable energy resources in Latvia. Given the situation in the energy resource market and evaluating the possibilities to switch from natural gas to wood fuel in heat production, it is necessary to increase the availability of fuel chips in Latvia. The price is determined by the fact that many consumers are fighting for the resource. Competition in the market has also increased due to the resources needed for the chipboard plant in Akmene. The pulp industry, as well as pellet and board producers, are also fighting for the availability of wood.

The reduction in wood imports from Russia and Belarus, caused by sanctions against Belarus, the export duty introduced by Belarus, and Latvia’s requirements to perform caesium-137 checks on wood, plays a significant role in resource availability. The reduction in wood imports from Russia and Belarus has not only a primary but also a secondary impact on the availability of wood energy carriers and the price increase, because as sawn timber imports decrease (even to zero), wood processing residues that were used for chip production also decrease.

The Akmene 2 plant was also built with the thought that wood chips imported from Belarus would be available. The overall wood deficit in the Baltic region has and will have a significant impact, including on energy carriers. On 8 March 2022, the Cabinet of Ministers made a decision to promote energy efficiency and the use of local renewable energy resources in district heating, providing support for the transition to the use of renewable energy resources in district heating, which will provide an additional 59 MW of capacity produced from renewable energy resources in 2023. To achieve this, additional wood chip resources will be needed for the extraction of approximately one terawatt-hour of thermal energy. Additional demand for wood chips is also caused by the differences in efficiency coefficients between gas and wood chip boiler houses. While it is 0.92 for natural gas boiler houses, it is only 0.8 for wood chip boiler houses. To replace one terawatt-hour (TWh) of thermal energy with wood chips, 500,000 solid cubic metres of wood are required. Additional demand will cause an even greater rise in wood resource prices, and to lower the price in a free market, it is necessary to increase supply. The main challenge is to increase the availability of wood without compromising sustainable forest management. In the context of Green Deal requirements, forest management activities are already being reduced in Latvia.

To obtain additional wood resources without compromising sustainable forest management, it is necessary to create a mechanism that stimulates better forest regeneration, as well as encourages forest owners to increase forest productivity – current increment, which is simultaneously also CO₂ sequestration. To evaluate possible measures for increasing CO₂ sequestration that would promote the achievement of EU climate goals, the Latvian State Forest Research Institute Silava conducted a study in 2021, in which it was acknowledged that one of the solutions that would promote an increase in CO₂ sequestration in the long term is purposeful forest stand management. Evaluating the regulatory framework regarding the main felling diameter in Latvia, Estonia, and other Baltic Sea countries, and scientists’ studies on forest readiness models in Latvia, it was found that it is necessary to change the numerical values of the main felling diameter to ensure the efficient use of land resources and promote the productivity of forest stands, as well as to increase the capital value of the forest, the potential for generating annual net income in the forest sector, and the competitiveness of the forest sector, the Ministry of Agriculture report indicated.

Additional 180,000 cubic metres

As the demand for energy products continues to rise on the local market, JSC Latvijas valsts meži (LVM) will increase its energy wood production volumes and produce an additional 180,000 loose cubic metres of energy chips for the needs of the 2022/2023 heating season. "LVM is a responsible member of society, aware of its significant role in the sustainable management of Latvia’s strategic assets and in balancing the economic, social, and environmental needs of society. The LVM Council has reviewed and supports the plan prepared by the company’s management board for increasing energy chip production. As part of this, it is planned to produce up to 30% more energy chips, providing support during the coming heating season," explains LVM Council Chairman Edmunds Beļskis. He points out that sales and contract signing are scheduled for July and August, in order to start energy chip deliveries according to a schedule agreed with buyers from September. "Any thermal energy production company will be able to apply," explains LVM Board Member Edvīns Zakovics. LVM produces energy chips from wood biomass – both from logging residues, such as branches, tops, offcuts, small trees, needles, and from scrub and small wood remaining in the forest after clearing roadside and ditch vegetation and thinning young stands. After its preparation, energy wood must naturally dry for 3 to 6 months so that it reaches its optimal energy value at the moment of chipping and is suitable for immediate use – heat production. In 2021, LVM sold 591,800 megawatt-hours of wood chips.

Source: Ministry of Agriculture based on data from the Central Statistical Bureau