European Wood Pellets Market Outlook to 2030

Executive Summary

The European energy landscape has experienced significant turbulence over the past 18 months, resulting in substantial effects on wood pellet markets. The conflict in Ukraine led to a gas shortage in Europe, causing gas and power prices to soar. In response, wood pellets, a cost-effective alternative for residential heating, saw a surge in demand, leading to sharp price increases for both pellets and the raw materials used in their production, particularly sawdust and low-grade roundwood. In certain European regions, pulp and panel mills found themselves in direct competition with pellet and bioenergy plants for the same feedstock.

While energy and pellet prices have since decreased from their peak levels, they remain considerably above historical norms. Many of the factors that contributed to the pellet market boom in 2022 are expected to persist and continue to drive demand growth over the next decade. This has significant implications for pellet buyers and producers in Europe, as well as pellet exporters in the US and Canada, and other wood-consuming industries in Europe.

Importance of the European pellet market

Europe remains the largest global market for wood pellets, with a demand of 33 million tonnes in 2022, representing approximately 70% of global demand. The market is valued at around USD 8 billion, at average 2018-22 prices, and has been growing at a rate of about 9% per year over the last decade.

Europe is also the largest export market for wood pellets. In 2022, annual imports of nearly 12 million tonnes were significantly larger than the combined imports of Japan and South Korea. For wood pellet exporters in the US and Canada, Europe holds particular significance. While utilities in eastern Asia primarily source pellets from Southeast Asia, the European energy sector relies on North America for over three-quarters of its supply, and this importance has grown due to new trade restrictions with Russia and Belarus.

Europe is home to several large and expanding pellet producers, including Estonia’s Graanul Invest, with an output capacity of almost 3 million tonnes, along with many mid-sized players such as Pfiefer Group, Scandbio, and HS Timber, each with capacities ranging from 0.5 to 1.0 million tonnes. In total, Europe produced 21 million tonnes of wood pellets in 2022, accounting for about 45% of global production. The European pellet manufacturing sector annually consumes about 20 million dry tonnes (approximately 50 million cubic meters of roundwood equivalent) of raw materials - mainly sawmill residues such as sawdust and shavings, and smaller quantities of low-grade roundwood, recycled wood and forest residues. This is equivalent to Germany’s entire industrial roundwood harvest, or the feedstock requirements of about 20 large pulp mills.

Turbulent markets in 2022-23

Turbulence in European pellet markets over the past 18 months can be attributed to three main factors:

1. A spike in gas and power prices.
2. Higher prices for carbon emissions allowances.
3. EU renewable energy ambitions and regulations concerning biomass feedstocks.  

European gas prices experienced a dramatic spike in 2022, reaching nearly 10 times their usual levels. This surge began in 2021 with the reopening of the economy after COVID-19, combined with supply constraints in Norway, the UK, and the Netherlands. However, the true shock came in mid-2022 following the war in Ukraine, the rupture of the Nordstream gas pipeline, and Russia’s suspension of gas exports to Germany. As gas fuels a substantial portion of Europe’s marginal (price-setting) power generation, the gas shortage directly led to higher power prices across the continent, particularly in Central Europe. Given that gas and electricity together constitute over half of the energy used in European households, most households witnessed a substantial increase in their heating costs.

This situation led to a surge in demand for pellets in the residential sector, as more households installed pellet boilers, and those with existing pellet boilers increased their pellet consumption to reduce their reliance on gas and power. Wood pellet demand in the residential sector, accounting for 40% of pellet demand in Europe, saw a 13% growth in 2022, compared to an average annual growth rate of 8% over the previous decade. While gas and power prices have since improved, they remain elevated for households, making consumers more aware than ever of their vulnerability to volatile energy prices.

In contrast, demand growth for industrial pellets was subdued in 2022, with reduced demand from power plants co-firing coal and pellets. Subsidies for biomass use in power generation have been scaled back in recent years, partly due to concerns about sustainability and a preference for wind and solar power. However, rising carbon emission prices, reaching a record high of 100 EUR per tonne in February 2023, have made pellets competitive with coal, even without further subsidies. This has led to a resurgence in biomass conversion projects in European coal-fired power plants.

Outlook to 2030

Looking ahead to 2030 and beyond, EU renewable energy policies will continue to drive growth in pellet demand. The EU has recently increased its greenhouse gas emissions reduction targets to 55% by 2030 (compared to 1990 levels), previously set at 40%. It has also raised the target for renewable energy to 42.5% of energy supply by 2030, up from 32%. These targets will be translated into specific national targets for each member state, with each member responsible for meeting their targets through renewable energy subsidies, carbon taxes, and credits. This will ensure ongoing demand growth for biomass in general, and wood pellets in particular. Even as wind, solar, and heat pumps gain importance, biomass will play a central role in the clean energy transition until at least 2030. Modelling by the European Commission suggests that biomass will continue to grow until 2035 and remain the primary renewable energy source until 2050.

The latest forecast for European pellet demand anticipates a 3.6% annual growth from 2022 to 2030, compared to the 7.0% annual growth seen from 2014 to 2022 - with additional demand of more than 10 million tonnes across all market segments (power, CHP, residential and non-residential heating).

Currently, Europe imports approximately 12 million tonnes of wood pellets, primarily for the power sector, while the residential sector is mainly supplied by locally produced pellets. Europe’s pellet imports could increase to between 18 and 22 million tonnes, depending on the success of efforts to expand domestic pellet production, which in turn largely hinges on raw material availability.

Over 80% of the raw materials used in European-produced pellets are sawmill residues, including sawdust and shavings. With weak demand for lumber expected to continue until at least 2025, residue supply will be constrained. Even when growth returns to the sawmill industry, it’s unlikely to keep pace with pellet demand. This implies increased competition for residues, which may impact the wood panel industries, as they are increasingly turning to recycled wood. The competition can also extend to the pulp and paper industries, as pellet mills compete for pulpwood and chips. To prevent increased competition and higher raw material prices, it’s essential to develop alternative raw material supplies for the pellet industry, including forest residues and purpose-grown energy crops. One challenge is that these raw materials are better suited for industrial pellets, a segment largely dominated by imported pellets. Much of the growth in Europe’ pellet demand will be captured by pellet producers in the US and Canada - while many European producers continue to focus on the residential segment and traditional feedstocks.