Straw in Skåne The imminent development of the Skåne straw market triggered by the Örtofta Biomass Boiler - PDF

Lund University Department of Economic History Economic Growth, Innovation & Spatial Dynamics Master Thesis Spring 2008 Straw in Skåne The imminent development of the Skåne straw market triggered by the

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Lund University Department of Economic History Economic Growth, Innovation & Spatial Dynamics Master Thesis Spring 2008 Straw in Skåne The imminent development of the Skåne straw market triggered by the Örtofta Biomass Boiler Astrid Kander Lunds University Thesis Advisor Assistant Professor Circle Research Center Peter Ottosson Lunds Energi Koncern Advisor Managing Plant Coordinator Abstract Biomass energy production is changing the dynamics of energy and agriculture. Straw, which was once considered a waste product, is now being used to fuel straw biomass boilers. These boilers have existed for some time as small-scale, low capacity farm boilers. In 2010 Lunds Energi Koncern will build a 145 MWh biomass boiler in Örtofta, Sweden. The 80,000 tons of straw required a year will create an exogenous shock to the small straw market. This paper explores the commoditization and market development of straw in Skåne. Straw boilers in Denmark, the United Kingdom, and Spain are examined for influential factors. A discussion of price indicators is presented, along with an analysis of economic triggers which could influence the regional price of straw. Local conditions and attitudes are also provided by a Skåne farmer survey. The circumstances pertinent to this case indicate a rapidly increasing price of straw concurrent with the institutionalization of a formal straw market in Skåne. 2 Contents Page 1. Introduction 4 2. Methodology 8 3. Part A: International Cases Part B: Skåne Price Indicator s Skåne Farmer Survey Results Summary 33 References 34 Appendices 37 List of Tables 42 3 Introduction Research Topic The energy market is changing. There is currently strong pressure on energy supplies; rising energy prices and a growing demand for energy create pressure to increase energy supply through innovative means. As electricity prices rise in Sweden (Figure 1) renewable energy sources become increasingly attractive. Innovative energy solutions such as biomass energy production are being embraced. Biomass energy production is an outspoken priority for the Swedish Government (Ministry of Agriculture, 2008). Bioenergy prospects are strengthened by low emissions and a large supply. The environmental impact of biomass electricity production is lower than fossil fuel alternatives. Emissions contain no sulfur and are carbon dioxide neutral (Flavin, 1994). When crops grow, they absorb carbon dioxide from the atmosphere, thus negating any greenhouse gas emissions that result from burning the biomass (World resources Institute, 2006). Figure 1 Source: Official Statistics Sweden Note: Based on household consumers (70 m2, 3 rooms + kitchen), prices include VAT & grid charges One such biomass solution is the new Combined Heat and Power Plant in Örtofta, Sweden. Among its four biofuel sources is straw, which was previously regarded as a waste product from cereal grain production. The procurement of straw at the scale necessary to fuel the biomass plant will create a scenario never before experienced in the history of Skåne. 4 Aim & Justification The 2010 activation of the Örtofta District Heating Plant will create an exogenous shock to the small straw market in Skåne. Because of its unprecedented nature, it could potentially cause disruptive effects to the underdeveloped and virtually non-existent straw market. Of primary concern is the overnight emergence of a new straw market. The absence of such a straw market is due to the fact that virtually all straw is currently consumed by the farmers themselves. Traditionally, straw is used to cover agriculture, feed livestock, and enhance soil composition. The purpose of this thesis is to explore the potential price impacts and consequences of the straw market triggered by the creation of a new District Heating Plant in Örtofta, Sweden. Research Question How will the Örtofta Heating Plant instigate the price and development of a straw market in Skåne? The relevance of this case should not be understated. The Örtofta CHP plant will create penetrating conditions in the local straw market in the immediate future. How the market forces react and mature will provide an unprecedented glimpse into to the fledgling biomass movement. Scope & Limitations The value of this study is establish and offer Lunds Energi Koncern 1 economic indicators which may affect the price development of straw in Skåne consistent with the study s specific research question. A rigorous price forecast is not included, nor does it advocate the speculation of a specific price per year- that would simply not be realistic given the current nebulous of the straw market in Skåne. Furthermore, you will not find a statistical analysis of other country s straw market price development herein. Instead, price predictors have been scrupulously examined and compared as fundamental price factors. These price predictors include both supply and demand driven factors: economic indicators such as the global grain price trends influence demand, while supply is impacted by seasonal variations of the cereal grain crop. Furthermore, the costs of straw have been deconstructed and examined in an individual context to illuminate separate straw price components. 1 This research project was conducted in conjunction with Lunds Energi Koncern as an exjobb, with full supervision, approval, and disclosure from Lunds University. 5 The purpose of this paper is to uncover economic indicators which will influence the straw price in Skåne. What this study reveals are economic variables which may catalyze the future price of straw. The intentions of this are clear: to assist in the upcoming procurement of straw for the Örtofta CHP in Örtofta, Sweden. The goal of this paper is to serve as an advisory reference as such, and to give foresight to the potential price development of straw in Skåne. It does not take the profitability of Lunds Energy Koncern s energy plants into account, nor is it designed to be read as a road map for straw prices. Rather, it aspires to clarify straw market developments by examining national and international events. It would also be prudent to mention this paper does not include energy crops nor does it compare the relative merits of energy crops. The reason for this is simple: energy crops, grown specifically for energy conversion, are an entirely different class of goods. While included in the sustainable energy conversation, energy crops are not brought into this study because of the vast distinctions between the two. The energy crop equation is unique because the crops are grown exclusively as a fuel, whereas straw is a by-product of grain and is grown with the purpose of consumption as food. The fact that straw was once considered a waste product and has recently emerged as a valuable commodity offers unique circumstances to study the path dependency and marginal benefits of biomass energy price development. Why Straw? Ironically, straw, which was once burned because it was considered a waste product, has great value. Straw is composed of 50% carbon, which is why it can be used as fuel. Although biomass energy production from straw is more expensive than from hydro-electric dams, its benign environmental impact more than makes up the difference, as it is renewable and carbon dioxide neutral (Duft, 2002). Traditionally, straw has been used to cover agriculture, feed livestock, and enhance soil composition. Virtually all straw is consumed by the farmers themselves. The most common use of straw is to provide structure to the soil. This is also the easiest and least labor intense method of straw management, as it requires no additional input labor. Harvest machines are equipped with a scarifier (also known as a chopper ) which cuts the straw and leaves it in the field. The scarified straw can immediately be ploughed in, thus fortifying the soil mix (Alberta,). 6 It is important to understand straw is not used as fertilizer as it contains only trace amounts of nutrients. Instead, straw (composed of roughly 50% hydrocarbon) replenishes the soil with organic matter. This carbon rich straw improves the consistency of the soil, essentially acting as insurance ensuring the energy rich biomass content of the soil. There are several other ways to use straw. Farmers can feed straw to their animals as a replacement for hay. Many farmers in cold climates use straw as cover to insulate vegetables against frost. There is a small market for straw in this capacity- some European examples include the tulip trade in Holland and the Strawberry market. Straw is also useful to spread in barns to reduce mud underfoot. Many farmers have large yearly surplus of straw. After they use what they need, many farmers would simply burn the excess. But in 1990 an environmental ban went into effect which banned the burning of straw in the fields (Mattson, 2006). At this point excess straw became a disposal burden to some large grain farms. Many resourceful farmers embraced this policy change and built small straw boilers to dispose of the straw while capturing the heat for their personal use. The initial investments to build the costly boilers were motivated by the opportunity to sell surplus energy, in the form of electricity, to the energy company. These farmers were supplying energy to the grid for a profit. Thus the Swedish straw boiler phenomenon was born, albeit on a small and isolated scale. 7 Methodology This thesis employs an exploratory research study. The hypothesis development focuses on a relatively modern phenomenon the value and subsequent price derivation a burgeoning straw market. A case study of the Örtofta District Heating Plant in Skåne is in order. The study includes a qualitative analysis and literature review of past and current straw-burning biomass district heating plants. A cross national study component of the international cases buttresses the case study. The study is divided into two parts. First, Part A explores straw in a modern biomass context. The merits of straw-burning plants are not without success stories, and in this preliminary section we explore various operations in Denmark, Spain, and the United Kingdom. These cases are more than simple literature reviews- I have approached the author of each to inquire about their personal observations regarding straw price developments. This process was conducted using the author s addresses generously provided within their respective studies. An introductory was first sent explaining the nature of the study and asking for their participation. The responses have been compiled into the analysis. Secondly, Part B will dive into the Skåne case, examining the current state of events, developing empirical data, and forecasting future price potentialities. A recent Swedish University of Agricultural Sciences thesis segues into my study. I have also had the opportunity to exploit local information gleaned from a quantitative depth survey conducted as a compliment in order to enhance empirical data. The ad hoc survey investigates straw pricing by the producers of straw in Skåne. It conveys a representative sample through convenience sampling of the ten largest farms in Skåne. The fieldwork collected responses and observations of the straw producers including their expectations and attitude towards the straw market development in regards to the Örtofta District Heating Plant. This quantitative data was compiled into a formal analysis. Theory The foundations of this research project are rooted in mainstream neoclassical economic theory. In addition, concepts from the field of Agronomics have shaped this analysis. Economic historical perspectives have also complimented this straw market development study. 8 Agronomics is an agricultural branch of economics. It tends to be micro-oriented as it focuses on the optimization of land use decisions faced by agricultural producers. A unique tenant of Agronomics involves an inelastic supply curve. The supply is fixed by the merits of the land (through the yearly harvest) rather than the price. The supply is non-responsive to changes in the price, which is known as zero elasticity (Eatwell, 1987). This phenomenon is counter to traditional economies of scale, where the more of a commodity desired, the lower the unit price. In agricultural terms, the more of a commodity desired, the higher the price, because market inventories are fixed. Having a rigid supply accounts for the inverse relationship between supply and price, also known as negative price elasticity (Eatwell, 1987). This study borrows from the Dahmenian concept of development blocks, including market widening and market suction. The inelastic supply of energy and the current events chronicled in this research project resemble a market suction (or demand pull ) shift in demand (Kander, 2007). It is also important to be aware the production of straw is entirely dependent on the production of cereal grain. That is, straw is a byproduct (once regarded as a waste product) of cereal grain production. This is known as a path dependency. The costs associated with growing and producing straw are a marginal cost compared to those of producing cereal grain. Practical Considerations The practical considerations of conducting a survey in a language other than my native tongue are complex. To overcome the language barrier I asked the assistance of the two advisors to this project, Astrid Kander 2 and Peter Ottosson 3. They consulted with me regarding the sample, survey questions, survey translation, and results analysis. Once the questions were finalized, the entire questionnaire was translated into Swedish by a native Swedish speaker. The interviews were conducted via telephone with the assistance of a bilingual family member who translated the individual interview questions and documented the answers and responses. Terms & Concepts Bioenergy Renewable energy made available from materials derived from biological sources; Also known as biofuel. 2 Astrid Kander is Assistant Professor of Economic History at Lunds University and a researcher at CIRCLE. 3 Peter Ottosson is the Managing Plant Coordinator at Örtofta District Heating Plant for Lunds Energi Koncern. 9 Biomass Cereal Straw Cogeneration CHP District Heating Plant Energy Crop Hesston Bale Joule A fuel where at least 98% of the energy content is derived from plant, animal matter or other substances not derived from a fossil fuel. It includes such fuels as agricultural wastes, forestry wastes or residues, sewage, and energy crops. A by-product of a cereal crop grown for consumption as food. Varieties include mainly wheat, barley and oats but could also include corn, maize, and rye, etc. A combustion plant where heat and electricity are generated. Combined Heat and Power; Also called cogeneration. A power plant which supplies both electricity and heat. A system for distributing heat generated in a centralized location for residential and commercial heating requirements such as space heating and water heating. The heat is often obtained from a cogeneration plant burning fossil fuels but increasingly biomass, although heat-only boiler stations, geothermal heating and central solar heating are also used. District heating plants can provide higher efficiencies and better pollution control than localized boilers. A plant crop grown primarily for the purpose of being used as a fuel. This may be grown on set-aside land provided it is not sold for consumption as food. A rectangular-shaped bale of any given product having the following dimensions: 1.2 x 1.3 x 2.50 meters Density kg/m³ The 500 Kilogram Hesston Bale is the common standard. The International System of Units measurement for energy, heat, and mechanical work. One joule is the work done, or energy expended, by a force of one newton moving one meter along the direction of the force. It is also the work done to produce power of one watt continuously for one second; or one watt second. Thus a kilowatt hour is 3,600,000 joules or 3.6 megajoules. 1 joule in everyday life is approximately the energy required to lift a small apple one meter straight up and the energy released when that same apple falls one meter to the ground. MWe MWh Electrical Energy. MegaWatt hour. A unit of electric energy equivalent to 10 6 watts. A function of time, watts per hour are not calibrated with International 10 System of Units. However, it is the preferred unit of measure for electricity suppliers. OSR Oil Seed Rape, primarily grown for seed production and used for both human consumption and the industrial oils market. Some crops are grown on set aside land (non-food use) and are sown predominately in the autumn rather than the spring, which gives high yields of both straw and seed. PJ Peta Joules. In mathematics and physics, peta is a prefix denoting10 15 or, 1,000,000,000,000,000. One PJ is the equivalent to approximately 25,000 tons of oil or 68,000 tons of straw. Straw Straw Specific Fuel Consumption See Cereal Straw. The fuel quantity required to produce 1 kw of electricity. Translations Swedish Halm Returtree Skogsflis Torv English Straw. Waste wood. Woodchips from harvest residue. Peat. 11 Part A: International Data In order to place Örtofta in an appropriate context, this thesis begins by examining a few similar cases among other European countries, including Denmark, Spain, and the United Kingdom. This literature review will contribute to a broader understanding of biomass production and offer a cross-national perspective outside of Skåne. Denmark, the United Kingdom, and Spain are included in this review. Denmark Denmark is the world s leader in renewable energy. Historically, Denmark has enjoyed much cropland yet few forests, thus the rapid development of straw boilers as a major energy source (Flavin, 1994). At the same time, Denmark has made great strides in wind energy innovations and policy. A decentralized approach, generous subsidies, and high fossil fuel taxes have helped foster the renewable energy industries in Denmark. Of primary importance to this study is the Danish scenario, in which similar circumstances ensued over a decade ago. According to the Danish Technological Institute, the Danish strawmarket has burgeoned into two geographically distinct markets, East and West, with the Great Belt toll bridge serving as a barrier between the two (Nikolaisen, 2007). This study includes production statistics, policy information (including taxation and subsidies), fuel price trends (from ), a market analysis, and a 5-10 year forecast, all of which will be paramount in the comparative analysis. Another paper, this one written by the private energy company DONG Energy, further illuminates the use of straw in Danish power plants. June 1986 is revealed as the birth date of Bioenergy in Denmark. This somewhat technical paper provides an overview of eleven strawfired plants in Denmark (Fenger, 2008). An article in provides insightful information of Naskov, a Danish plant which, like Örtofta, produces both heat and electricity. Albeit smaller, the plant has been responsible for the formalization of a local straw market. The requirements and responsibilities of the producers and purchasers are clear and concise. A three year contract between the two parties ensures a long term, mutually beneficial negotiations. Bale size, moisture content, and ash removal is also included in the contract (Christensen, 2000). 12 A final article, published by the EU, boasts of 1.3 million tons of straw converted into energy in Denmark in 2005 (EU, 2007). The 1990 ban on straw burning is given as a contributing factor to the rapid development of straw-burning for energy in Denmark. Furthermore, the paper provides a production cost table, marketing development, and recommendations for adoption of straw burning power plants. United Kingdom Following in the footsteps of Denmark, researchers from Engl
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