Tag: forestry and forest management and arboriculture

What is the carbon cycle?

3 March 2023

Carbon capture

What is the carbon cycle?

All living things contain carbon and the carbon cycle is the process through which the element continuously moves from one place in nature to another. Most carbon is stored in rock and sediment, but it’s also found in soil, oceans, and the atmosphere, and is produced by all living organisms – including plants, animals, and humans.

Carbon atoms move between the atmosphere and various storage locations, also known as reservoirs, on Earth. They do this through mechanisms such as photosynthesis, the decomposition and respiration of living organisms, and the eruption of volcanoes.

As our planet is a closed system, the overall amount of carbon doesn’t change. However, the level of carbon stored in a particular reservoir, including the atmosphere, can and does change, as does the speed at which carbon moves from one reservoir to another.

What is the role of photosynthesis in the carbon cycle?

Carbon exists in many different forms, including the colourless and odourless gas that is carbon dioxide (CO2). During photosynthesis, plants absorb light energy from the sun, water through their roots, and CO2 from the air – converting them into oxygen and glucose.

The oxygen is then released back into the air, while the carbon is stored in glucose, and used for energy by the plant to feed its stem, branches, leaves, and roots. Plants also release CO2 into the atmosphere through respiration.

Animals – including humans – who consume plants similarly digest the glucose for energy purposes. The cells in the human body then break down the glucose, with CO2 emitted as a waste product as we exhale.

CO2 is also produced when plants and animals die and are broken down by organisms such as fungi and bacteria during decomposition.

What is the fast carbon cycle?

The natural process of plants and animals releasing CO2 into the atmosphere through respiration and decomposition and plants absorbing it via photosynthesis is known as the biogenic carbon cycle. Biogenic refers to something that is produced by or originates from a living organism. This cycle also incorporates CO2 absorbed and released by the world’s oceans.

The biogenic carbon cycle is also called the “fast” carbon cycle, as the carbon that circulates through it does so comparatively quickly. There are nevertheless substantial variations within this faster cycle. Reservoir turnover times – a measure of how long the carbon remains in one location – range from years for the atmosphere to decades through to millennia for major carbon sinks on land and in the ocean.

What is the slow carbon cycle?

In some circumstances, plant and animal remains can become fossilised. This process, which takes millions of years, eventually leads to the formation of fossil fuels. Coal comes from the remains of plants that have been transformed into sedimentary rock. And we get crude oil and natural gas from plankton that once fell to the ocean floor and was, over time, buried by sediment.

The rocks and sedimentary layers where coal, crude oil, and natural gas are found form part of what is known as the geological or slow carbon cycle. From this cycle, carbon is returned to the atmosphere through, for example, volcanic eruptions and the weathering of rocks. In the slow carbon cycle, reservoir turnover times exceed 10,000 years and can stretch to millions of years.

How do humans impact the carbon cycle?

Left to its own devices, Earth can keep CO2 levels balanced, with similar amounts of CO2 released into and absorbed from the air. Carbon stored in rocks and sediment would slowly be emitted over a long period of time. However, human activity has upset this natural equilibrium.

Burning fossil fuel releases carbon that’s been sequestered in geological formations for millions of years, transferring it from the slow to the fast (biogenic) carbon cycle. This influx of fossil carbon leads to excessive levels of atmospheric CO2, that the biogenic carbon cycle can’t cope with.

As a greenhouse gas that traps heat from the sun between the Earth and its atmosphere, CO2 is essential to human existence. Without CO2 and other greenhouse gases, the planet could become too cold to sustain life.

However, the drastic increase in atmospheric CO2 due to human activity means that too much heat is now retained between Earth and the atmosphere. This has led to a continued rise in the average global temperature, a development that is part of climate change.

Where does biomass fit into the carbon cycle?

One way to help reduce fossil carbon is to replace fossil fuels with renewable energy, including sustainably sourced biomass. Feedstock for biomass energy includes plant material, wood, and forest residue – organic matter that absorbs CO2 as part of the biogenic carbon cycle. When the biomass is combusted in energy or electricity generation, the biogenic carbon stored in the organic matter is released back into the atmosphere as CO2.

This is distinctly different from the fossil carbon released by oil, gas, and coal. The addition of carbon capture and storage to bioenergy – creating BECCS – means the biogenic carbon absorbed by the organic matter is captured and sequestered, permanently removing it from the atmosphere. By capturing CO2 and transporting it to geological formations – such as porous rocks – for permanent storage, BECCS moves CO2 from the fast to the slow carbon cycle.

This is the opposite of burning fossil fuels, which takes carbon out of geological formations (the slow carbon cycle) and emits it into the atmosphere (the fast carbon cycle). Because BECCS removes more carbon than it emits, it delivers negative emissions.

Fast facts

  • According to a 2019 study, human activity including the burning of fossil fuels releases between 40 and 100 times more carbon every year than all volcanic eruptions around the world.
  • In March 2021, the Mauna Loa Observatory in Hawaii reported that average CO2 in the atmosphere for that month was 14 parts per million. This was 50% higher than at the time of the Industrial Revolution (1750-1800).
  • There is an estimated 85 billion gigatonne (Gt) of carbon stored below the surface of the Earth. In comparison, just 43,500 Gt is stored on land, in oceans, and in the atmosphere.
  • Forests around the world are vital carbon sinks, absorbing around 7.6 million tonnes of CO2 every year.

Go deeper

What is sustainable forest management?

18 January 2022

Sustainable bioenergy

Sustainable forest management is frequently defined in terms of providing a balance of social, environmental, and economic benefits, not just for today but for the future too. It might be seen as the practice of maintaining forests to ensure they remain healthy, absorb more carbon than they release, and can continue to be enjoyed and used by future generations.

To achieve this, foresters apply science, knowledge, and standards that help ensure forests continue to play an important role in the wellbeing of people and the planet.

Managed forests, also called working forests, fulfil a variety of environmental, social, and economic functions. These range from forests managed to attract certain desired wildlife species, to forests grown to provide saw timber and reoccurring revenue for landowners.

How are forests sustainably managed?

How forests are managed depends on landowner goals – managing for recreation and wildlife, focusing on maximising production of wood products, or both. Each forest requires management tailored to its owner’s or manager’s objectives.

There are many ways to manage forests to keep them healthy – there is no ‘one size fits all’ – but keeping track of how they are doing can be tricky. One alternative for monitoring forests is to use satellite imagery.

One common sustainable forestry practice is thinning, which involves periodically removing smaller, unhealthy, or diseased trees to enable stronger ones to thrive. Thinning reduces competition between trees for resources like sunlight and water, and it can also help promote biodiversity by creating more space for other forest flora.

The wood removed from forests through thinning is sometimes not high-quality enough to be used in industries such as construction or furniture. However, the biomass industry can use it to make compressed wood pellets; a feedstock for renewable source electricity.

By providing a market for low-quality wood, pellet production encourages landowners to carry out thinnings. This practice improves the health of the forest, and helps support better growth, greater carbon storage, and creates more valuable woodland.

Fast facts

What are the environmental benefits of sustainably managed forests?

Through their ability to act as carbon sinks, forests are an important part of meeting global climate goals like the Paris Agreement and the UK’s own target of reaching net zero emissions by 2050.

When managed effectively through thinning or active harvesting, and replanting and regeneration, forests can often sequester – or absorb and store – more carbon than forests that are left untouched, increasing productivity and improving planting material.

Harvesting trees before they reach an age when growth slows or plateaus can help prevent fire damage, pests, and disease, so timing of final cutting is important. Though the vast majority of timber from such cutting will go to other markets (construction, furniture etc) and secure higher prices from those markets, being able to sell lower quality wood for biomass provides the landowner with some extra revenue.

Sustainably managed forests also help achieve other environmental goals, such as sustaining biodiversity, protecting sensitive sites and providing clean air and water. Managed forests also have substantial water absorption capacity preventing flooding by slowing the flow of sudden downpours and helping to prevent nearby rivers and streams from overfilling.

Wood from working forests also help tackle climate change in that high-value wood from harvested trees can be used to make timber for the construction or furniture sectors. These wood products lock up carbon for extended periods of time, and the wood can be used at end-of life to displace fossil fuels. Using wood also means materials such as concrete, bricks or steel are not used, and these materials have a large carbon footprint compared to wood.

What are the socioeconomic benefits of sustainably managed forests?

There are also social and economic benefits to managing forests. Sustainably managed working forests make vital contributions both to people and to the planet.

The commercial use of wood in industries like furniture and construction drives revenue for landowners. This encourages landowners to continue to replant forests and manage them in a sustainable way that continues to deliver returns.

Healthy forests can also improve living standards for local communities for jobs and helping to address unemployment in rural regions. Managed forests can also improve access for recreation. On a larger scale, sustainable forestry can offer a valuable export for regions and nations and foster trade between countries.

Go deeper 

Forests, net zero and the science behind biomass

22 December 2021

Sustainable bioenergy

Tackling climate change and spurring a global transition to net zero emissions will require collaboration between science and industry. New technologies and decarbonisation methods must be rooted in scientific research and testing.

Drax has almost a decade of experience in using biomass as a renewable source of power. Over that time, our understanding around the effectiveness of bioenergy, its role in improving forest health and ability to deliver negative emissions, has accelerated.

Research from governments and global organisations, such as the UN’s Intergovernmental Panel on Climate Change (IPCC) increasingly highlight sustainably sourced biomass and bioenergy’s role in achieving net zero on a wide scale.

The European Commission has also highlighted biomass’ potential to provide a solution that delivers both renewable energy and healthy, sustainably managed forests.  Frans Timmermans, the executive vice-president of the European Commission in charge of the European Green Deal has emphasised it’s importance in bringing economies to net zero, saying: “without biomass, we’re not going to make it. We need biomass in the mix, but the right biomass in the mix.”

The role of biomass in a sustainable future

Moving away from fossil fuels means building an electricity system that is primarily based on renewables. Supporting wind and solar, by providing electricity at times of low sunlight or wind levels, will require flexible sources of generation, such as biomass, as well as other technologies like increased energy storage.

In the UK, the Climate Change Committee’s (CCC) Sixth Carbon Budget report lays out its Balanced Net Zero Pathway. In this lead scenario, the CCC says that bioenergy can reduce fossil emissions across the whole economy by 2 million tonnes of CO2 or equivalent emissions (MtCO2e) per year by 2035, increasing to 2.5 MtCO2e in 2045.

Foresters in working forest, Mississippi

Foresters in working forest, Mississippi

Biomass is also expected to play a crucial role in supplying biofuels and hydrogen production for sectors of the global economy that will continue to use fuel rather than electricity, such as aviation, shipping and industrial processes. The CCC’s Balanced Net Zero Pathway suggest that enough low-carbon hydrogen and bioenergy will be needed to deliver 425 TWh of non-electric power in 2050 – compared to the 1,000 TWh of power fossil fuels currently provide to industries today.

However, bioenergy can only be considered to be good for the climate if the biomass used comes from sustainably managed sources. Good forest management practises ensure that forests remain sustainable sources of woody biomass and effective carbon sinks.

A report co-authored by IPCC experts examines the scientific literature around the climate effects (principally CO2 abatement) of sourcing biomass for bioenergy from forests managed according to sustainable forest management principles and practices.

The report highlights the dual impact managed forests contribute to climate change mitigation by providing material for forest products, including biomass that replace greenhouse gas (GHG)-intensive fossil fuels, and by storing carbon in forests and in long-lived forest products.

The role of biomass and bioenergy in decarbonising economies goes beyond just replacing fossil fuels. The addition of carbon capture and storage (CCS) to bioenergy to create bioenergy with carbon capture and storage (BECCS) enables renewable power generation while removing carbon from the atmosphere and carbon cycle permanently.

The negative emissions made possible by BECCS are now seen as a fundamental part of many scenarios to limit global warming to 1.5oC above pre-industrial levels.

BECCS and the path to net zero

The IPCC’s special report on limiting global warming to 1.5oC above pre-industrial levels, emphasises that even across a wide range of scenarios for energy systems, all share a substantial reliance on bioenergy – coupled with effective land-use that prevents it contributing to deforestation.

The second chapter of the report deals with pathways that can bring emissions down to zero by the mid-century. Bioenergy use is substantial in 1.5°C pathways with or without CCS due to its multiple roles in decarbonising both electricity generation and other industries that depend on fossil fuels.

However, it’s the negative emissions made possible by BECCS that make biomass  instrumental in multiple net zero scenarios. The IPCC report highlights BECCS alongside the associated afforestation and reforestation (AR), that comes with sustainable forest management, are key components in pathways that limit climate change to 1.5oC.

Graphic showing how BECCS removes carbon from the atmosphere. Click to view/download

There are two key factors that make BECCS and other forms of emissions removals so essential: The first is their ability to neutralise residual emissions from sources that are not reducing their emissions fast enough and those that are difficult or even impossible to fully decarbonise. Aviation and agriculture are two sectors vital to the global economy with hard-to-abate emissions. Negative emissions technologies can remove an equivalent amount of CO2 that these industries produce helping balance emissions and progressing economies towards net zero.

The second reason BECCS and other negative emissions technologies will be so important in the future is in the removal of historic CO2 emissions. What makes CO2 such an important GHG to reduce and remove is that it lasts much longer in the atmosphere than any other. To help reach the Paris Agreement’s goal of limiting temperature rises to below 1.5oC removing historic emissions from the atmosphere will be essential.

In the UK, the  CCC’s 2018 report ‘Biomass in a low-carbon economy’ also points to BECCS as both a crucial source of energy and emissions abatement.

It suggests that power generation from BECCS will increase from 3 TWh per year in 2035 to 45 TWh per year in 2050. It marks a sharp increase from the 19.5 TWh that biomass (without CCS) accounted for across 2020, according to Electric Insights data. It also suggests that BECCS could sequester 1.1 tonnes of CO2 for every tonne of biomass used, providing clear negative emissions.

However, the report makes clear that unlocking the potential of bioenergy and BECCS is only possible when biomass stocks are managed in a sustainable way that, as a minimum requirement, maintains the carbon stocks in plants and soils over time.

With increased attention paid to forest management and land use, there is a growing body of evidence that points to bioenergy as a win-win solution that can decarbonise power and economies, while supporting healthy forests that effectively sequester CO2.

How bioenergy ensures sustainable forests

Biomass used in electricity generation and other industries must come from sustainable sources to offer a renewable, climate beneficial [or low carbon] source of power.

UK legislation on biomass sourcing states that operators must maintain an adequate inventory of the trees in the area (including data on the growth of the trees and on the extraction of wood) to ensure that wood is extracted from the area at a rate that does not exceed its long-term capacity to produce wood. This is designed to ensure that areas where biomass is sourced from retain their productivity and ability to continue sequestering carbon.

Ensuring that forestland remains productive and protected from land-use changes, such as urban creep, where vegetated land is converted into urban, concreted spaces, depends on a healthy market for wood products. Industries such as construction and furniture offer higher prices for higher-quality wood. While low-quality, waste wood, as well as residues from forests and wood-industry by-products, can be bought and used to produce biomass pellets.

A report by Forest 2 Market examined the relationship between demand for wood and forests’ productivity and ability to sequester carbon in the US South, where Drax sources about two-thirds of its biomass.

The report found that increased demand for wood did not displace forests in the US South. Instead, it encouraged landowners to invest in productivity improvements that increased the amount of wood fibre and therefore carbon contained in the region’s forests.

A synthesis report, which examines a broad range of research papers,  published in Forest Ecology and Management in March of 2021, concluded from existing studies that claims of large-scale damage to biodiversity from woody biofuel in the South East US are not supported. The use of these forest residues as an energy source was also found to lead to net GHG greenhouse emissions savings compared to fossil fuels, according to Forest Research.

Importantly the research shows that climate risks are not exacerbated because of biomass sourcing; in fact, the opposite is true with annual wood growth in the US South increasing by 112% between 1953 and 2015.

Delivering a “win-win solution”

The European Commission’s JRC Science for Policy literature review and knowledge synthesis report ‘The use of woody biomass for energy production in the EU’ suggests  a win-win forest bioenergy pathway is possible, that can reduce greenhouse gas emissions in the short term, while at the same time not damaging, or even improving, the condition of forest ecosystems.

However, it also makes clear “lose-lose” situations is also a possible, in which forest ecosystems are damaged without providing carbon emission reductions in policy-relevant timeframes.

Win-win management practices must benefit climate change mitigation and have either a neutral or positive effect on biodiversity. A win-win future would see the afforestation of former arable land with diverse and naturally regenerated forests.

The report also warns of trade-offs between local biodiversity and mitigating carbon emissions, or vice versa. These must be carefully navigated to avoid creating a lose-lose scenario where biodiversity is damaged and natural forests are converted into plantations, while BECCS fails to deliver the necessary negative emissions.

In a future that will depend on science working in collaboration with industries to build a net zero future continued research is key to ensuring biomass can deliver the win-win solution of renewable electricity with negative emissions while supporting healthy forests.

Enviva Cottondale pellet plant catchment area analysis

18 August 2021

Sustainable bioenergy

The Enviva Cottondale pellet mill has a production capacity of 760,000 metric tonnes of wood pellets annually. Raw material used by the mill includes a combination of roundwood, chips, and secondary residuals (i.e., sawdust and shavings), with pine accounting for 80‐90% of total feedstock. In October 2018, Hurricane Michael passed through the centre of the Cottondale catchment area, causing significant damage to the forest resource with more than 500,000 hectares (ha) of forestland destroyed and an estimated loss of 42 million m3of timber (equivalent to around 4 times the UK annual production of roundwood).

This event has had an impact on the data trends for forest inventory, growth and harvesting removals – as harvesting levels were increased to salvage as much timber as possible before it became unusable due to decay. This can be clearly seen in many of the charts below. However, these forest areas have been restored and now continue to grow, allowing the catchment area to return to its pre-hurricane trends in the medium term.

Forest Area 

The catchment area around Enviva’s Cottondale pellet mill includes 4.3 million ha of land, based on the historical feedstock sourcing patterns of the mill. Timberland represents 68.7% (2.95 million ha) of the total land area in the Cottondale catchment area, this has increased slightly since 2000 from 67.8% and can be considered to have remained stable over this time period.  There are also around 300,000 ha of woodland (associated with agricultural land) and around 800,000 ha of cropland and pastureland.  Forestry is the dominant land use in this catchment area (Figure 1).

Figure 1: Land area by usage

Planted pine represents 33% of the timberland area, natural pine 20%, with 10% mixed stands and the remainder being hardwood forest of which 94% is naturally regenerated (Figure 2).  The breakdown of forest type and species composition has remained relatively stable and largely unchanged over the last 20 years, in contrast to other parts of the US South where some natural pine stands have been converted to planted pine. The pine and mixed forest areas are actively managed and produce the majority of the timber harvest in the catchment area. Despite the large area of hardwood forest, management and timber production is limited. Much of this area is classified as bottomland hardwood located alongside rivers, streams, and creeks and in streamside management zones (SMZs), which restricts active management. In addition, the proportion of this catchment area located in Florida contains a large area of swampland, which is largely composed of hardwoods and cannot be actively managed for timber production and is recognised as having important ecological value.

Figure 2: Breakdown of forest type

Volume and Growth

The overall trend of volume and growth in the Cottondale catchment area is of a maturing forest resource and an increasing accumulation of standing volume, particularly in the larger forest product classes (saw-timber and chip-n-saw). Figure 3 shows that total standing volume increased by 64 million m3 from 2000 to 2018, with the largest increases in the pine saw-timber and chip-n-saw categories. In 2018, the devastating impact of Hurricane Michael caused a substantial reduction in the standing volume across every product category with the total standing volume being reduced by 42 million m3. This event has had a significant impact on the forest resource and is a primary cause of recent data trends.

However, the overall long-term trend in the catchment area is of maturing forest and increasing inventory. This should continue in the long-term once the impact of the hurricane damage has been managed and replacement forest areas begin to mature.

Figure 3: Standing volume by product category

Pine pulpwood inventory increased steadily by around 8 million m3 from 2000 to 2013, reaching a peak of 49 million m3. This then declined slightly to 46 million m3 in 2018 due to the maturing age class of the forest and pulpwood forest growing into the larger size class of chip-n-saw and saw-timber forest (Figure 4), in addition to an increase in pulpwood demand as biomass markets became operational and ramped up production. Following the hurricane in 2018, the pine pulpwood inventory dropped by more than 10 million m3. 

Replanting and reforestation of damaged areas will ensure that future pine pulpwood production will increase again once these forests start to mature.

In the period from 2000 to 2018 pine sawtimber standing volume increased by 41.5 million m3 (78%) and chip-n-saw by 19.6 million m3 (73%), indicating a maturing age class and a growing forest resource. The 2018 hurricane caused a reduction in standing volume in both of these product categories of 11.6 and 8 million m3respectively (12% and 17% of the 2018 volume). However, the increasing trend is likely to continue once the forest area recovers.

Figure 4: Standing volume by product category

The growth drain ratio (GDR) is the comparison of average annual growth to removals (typically harvesting), where the growth exceeds removals the GDR will be in excess of 1 and this is considered sustainable, where removals exceed growth then the GDR will be less than 1 and this is not sustainable if maintained in the long-term – although in the short-term this can be a factor of large areas of mature forest with low growth rates and high rates of harvesting, short periods of high demand for a particular product or salvage harvesting after a natural disturbance. The GDR should be considered over a longer time period to ensure it reflects the long-term trend. In the period from 2003 to 2020 the combined GDR for pine products averaged 1.52 with a high of 1.84 and a low of 1.08 (Figure 5).

Figure 5: Growth to drain ratio by product category

The maturing forest resources can be clearly seen from the growth to removals data for each product category. Average tree sizes getting larger and more pulpwood class stands moving into the larger saw-timber and chip-n-saw categories. This trend can be seen by comparing the data values from 2003 and 2018 where saw-timber average annual growth increased by 90% (1.6 million m3), and removals by 41% (0.98 million m3).  Chip-n-saw growth increased by 73% (1.3 million m3) whilst removals increased by 160% (1.9 million m3). Pulpwood growth decreased by 7.5% (0.4 million m3) whilst removals increased by 63% (1.6 million m3).  Over this time period the total annual surplus of pine growth compared to removals averaged 3.7 million m3 per year (Figure 6).

Figure 6: Pine growth and removals by product category and year

Hardwood saw-timber and pulpwood removals declined by 20% and 40% respectively between 2000 and 2018, whilst growth increased by 23% for hardwood saw-timber and declined by 16% for hardwood pulpwood. The average annual hardwood surplus over this time period was 1.5 million m3 per year (Figure 7).

Figure 7: Hardwood growth and removals by product category and year

Despite a short-term imbalance in some product categories, the overall surplus of pine growth compared to removals has remained strong, with an average of 3.3 million m3 between 2000 and 2020, which includes the increased salvage harvesting in 2018 (Figure 8).

Figure 8: Cumulative annual surplus of growth compared to removals

Wood Prices

Stumpage price is the value paid to the forest owner for each category of product at the time of harvesting. The variation in prices in the Cottondale catchment area has been significant and shows some interesting trends. The higher value pine products (saw-timber and chip-n-saw) began with high stumpage values in 2000, as markets were strong for construction and furniture grade timber and supply limited at that stage due to the young age class and predominance of pulpwood stands at that time.  In 2008, following the global economic crisis and the crash in housing and construction markets, saw-timber prices declined substantially reaching a low of $23 per ton, a 47% decline from the 2000 price. This stumpage price has never recovered, despite an improvement in the economy and an increase in housing starts and demand for structural timber. The reason for the continued deflated saw-timber stumpage price is a substantial surplus of supply in this catchment area.  As the forest area has matured and more saw-timber grade stands are available, markets have been able to satisfy demand without an increase in price.

Pine pulpwood prices at Cottondale were lower than the US South-wide average in 2000 and remained relatively low until around 2013. A reduction in saw-timber production, and consequent reduction in mill residuals, due to the recession of 2008, led to a shortage of pulp mill feedstock and increased harvesting of pulpwood stands. This caused an increase in pine pulpwood stumpage values alongside an overall increase in demand as biomass and pellet markets began production around this time. The data shows a short-term spike in pine pulpwood stumpage prices in 2013-14, but this returned to a more normal trend as more saw-timber residues became available and pulpwood stumpage values have been around $10-11 per ton since 2015 (Figure 9).

Figure 9: Variation in stumpage value over time

Biomass demand 

Biomass demand in the Cottondale catchment area began in 2008 and has averaged around 800 thousand m3per year since that time with a high of just over 1 million m3 in 2013 to 2015 and a low of 200 thousand m3 in 2008. Other pulpwood markets have had an average annual demand of 3.97 million m3 between 2000 and 2020 with a high of 4.76 million m3 in 2018 and a low of 3.2 million m3 in 2009.  In 2020 the biomass market represented 16% of the total pulpwood demand in the Cottondale catchment area (Figure 10).

Figure 10: Total pulpwood demand

Forest Management

The average size of clear-cut harvesting sites from 2000 to 2020 has been 47 ha, ranging from 38 ha up to 56 ha. The average size of thinning sites has been 65 ha, ranging from 55 ha up to 76 ha. When isolating the period from 2000 to 2010 and 2011 to 2020, the averages and range remain very similar, suggesting that there has been no significant change in harvesting coupe size over this period.

Figure 11: Average size of harvesting sites

The impact of biomass and wood pellet demand on the key metrics in this catchment area are considered below. This is a summary of Hood Consulting’s view on the trends and impacts in the Cottondale catchment area.

Is there any evidence that bioenergy demand has caused the following:

Deforestation?

No. US Forest Service (USFS) data shows a 55,166-hectare (+1.9%) increase in the total area of timberland in the Enviva Cottondale catchment area since the Enviva Cottondale pellet mill commenced production in 2008. Furthermore, a strong positive relationship was identified between biomass demand and timberland area, suggesting that the increase in timberland area since 2008 can be linked, to a degree, to increased demand attributed to bioenergy.

A change in management practices (rotation lengths, thinnings, conversion from hardwood to pine)?

Inconclusive. Changes in management practices have occurred in the catchment area over the last two decades. However, the evidence is inconclusive as to whether increased demand attributed to bioenergy has caused or is responsible for these changes.

Clearcuts and thinnings are the two major types of harvests that occur in this region, both of which are long-standing, widely used methods of harvesting timber. TimberMart-South (TMS) data shows that thinnings accounted for 63% of total reported harvest area in the Cottondale market from 2005-2011 but only 39% of total harvest area reported from 2012-2020. Specifically, the decreased prevalence of thinning since 2012 can be linked to the strengthening of pine pulpwood markets and concurrent weakening of pine sawtimber markets beginning in the mid-2000s.

Prior to the bursting of the US housing bubble in 2006, timber management in this market had been driven to a large degree by pine sawtimber production. However, challenging market conditions saw pine sawtimber stumpages prices decline more than 40% from 2006-2011. At the same time, pine pulpwood markets started to strengthen, with pine pulpwood stumpage prices increasing more than 50% from 2006-2010. So, with sawtimber markets weakening and pulpwood markets strengthening, the data suggests that many landowners decided to alter their management approach (i.e. to take advantage of strong pulpwood markets) and focus on short pulpwood rotations that typically do not utilize thinnings.

Bioenergy has had an impact on this market by adding an average of roughly 680,000 metric tons of additional pine pulpwood demand to this catchment area annually since 2008. However, bioenergy has accounted for only 17% of total softwood pulpwood demand in this market since Enviva Cottondale’s startup. Ultimately, the shift in management approach that occurred in this market can be more closely linked to other factors, such as increased softwood pulpwood demand from non-bioenergy sources (i.e. pulp/paper) as well as the weakening of pine sawtimber markets.

Diversion from other markets?

No. Demand for softwood (pine) sawlogs increased an estimated 23% in the Cottondale catchment area from 2008-2020. Also, there is no evidence that increased demand from bioenergy has caused a diversion from other softwood pulpwood markets (i.e. pulp/paper), as softwood pulpwood demand not attributed to bioenergy has increased 25% since the Cottondale mill’s startup in 2008.

An unexpected or abnormal increase in wood prices?

Inconclusive. The startup of Enviva Cottondale added more than 900,000 metric tons of softwood pulpwood demand to the catchment area from 2008-2013, and this increase in demand coincided with a 28% increase in the delivered price of pine pulpwood (PPW) – the primary roundwood product consumed by the Enviva Cottondale mill. However, since 2013, delivered PPW prices have held flat, despite biomass-related softwood pulpwood demand falling to an average of roughly 635,000 tons per year since 2016, down more than 40% compared to 2013 peak levels. (Note the decrease in roundwood consumption was due to a higher utilization of secondary residuals). It’s also important to point out that the roughly 410,000-metric ton decrease in softwood biomass demand from 2013 to 2020 was offset by a roughly 455,000-metric ton increase in softwood pulpwood demand from other sources.

Statistical analysis did identify a positive relationship between softwood biomass demand and delivered PPW price. However, that relationship was found to be relatively weak. The relationship between delivered PPW price and softwood pulpwood demand from other sources was found to be much stronger, which was not unexpected to find given that softwood pulpwood demand not attributed to bioenergy has accounted for 83% of total softwood pulpwood demand in the catchment area since 2008.

Furthermore, there is some evidence linking the increase in pine sawmill chip prices to increased consumption of secondary pine residuals by Enviva Cottondale. Specifically, consumption of secondary pine residuals by Enviva Cottondale more than doubled from roughly 213,000 metric tons in 2012 to nearly 490,000 metric tons in 2016, and this increased consumption of pine residuals coincided with a nearly 20% increase in the price of pine sawmill chips. However, increased consumption of residuals by the bioenergy sector was only one of several contributing factors that can be linked to the increase in pine sawmill chip prices. Increased consumption of pine residuals by the pulp/paper industry also contributed to higher pine sawmill chip prices. In addition, there is a strong linkage between pine sawmill chip prices and softwood lumber production. Specifically, the increase in softwood lumber production that begun in the early-to-mid-2010s consequently resulted in the increased production of secondary residuals, and the increased availability of this lower-cost material led to greater competition and ultimately higher pine residual prices.

A reduction in growing stock timber?

No. From 2008 (the year Enviva Cottondale commenced production) up until Hurricane Michael struck in late-2018, total growing stock inventory increased an average of 1.8% per year (+19% total) in the Cottondale catchment area. Specifically, inventories of pine sawtimber and pine chip-n-saw increased 58% and 28%, respectively, while pine pulpwood (PPW) inventory decreased 4% over this same period.

However, note that the decrease in pine pulpwood inventory from 2008-2018 was not due to increased demand from bioenergy or increased harvesting above the sustainable yield capacity of the forest area, as annual growth of pine pulpwood exceeded annual removals every year throughout this period. Rather, this slight decrease in PPW inventory levels is more a reflection of the aging of the catchment area forest and the movement of stands classified as pulpwood to stands classified as chip-n-saw.

A reduction in the sequestration rate of carbon?

No. US Forest Service (USFS) data shows the average annual growth rate of total growing stock timber in the Cottondale catchment area decreased from 5.9% in 2008 to 5.2% in 2020, suggesting that the sequestration rate of carbon also declined slightly over this period. However, there is little evidence to suggest that increased demand attributed to bioenergy is responsible for this change.

The reduction in overall growth rate (and therefore reduction in the sequestration rate of carbon) is more a reflection of the aging of the catchment area forest. Specifically, growth rates decline as timber ages, and this is exactly what USFS data shows in the Cottondale catchment area, with the average age of growing stock timber increasing from less than 44 years of age in 2008 to nearly 46 years of age in 2020.

An increase in harvesting above the sustainable yield capacity of the forest area?

No. Growth-to-removals (G:R) ratios, which compare annual timber growth to annual timber removals, provides a measure of market demand relative to supply as well as a gauge of market sustainability. In 2020, the latest available, the G:R ratio for pine pulpwood (PPW), the predominant timber product utilized by the bioenergy sector, equaled 1.26 (recall that a value greater than 1.0 indicates sustainable harvest levels).

Note, however, that the PPW G:R ratio averaged 1.57 in the catchment area from 2013-2017 before falling to 1.20 in 2018 and averaging 1.27 since. This notable drop in 2018 was due to a nearly 35% increase in PPW removals (due to Hurricane Michael). It’s also important to note that while annual removals have moved back in line with pre-Michael levels since 2019, this lower PPW G:R ratio is likely reflective of the new norm (at least over the midterm). Hurricane Michael destroyed an estimated 22% of total pine pulpwood inventory in the Cottondale catchment area, and this loss in inventory will be reflected in reduced growth until the destroyed forests regenerate. However, in spite of this loss, adequate PPW inventory levels still remain and sustainable market conditions are expected to persist moving forward.

Timber growing stock inventory

Neutral. According to USFS data, inventories of pine pulpwood (PPW) decreased 25% in the catchment area from 2008-2020. However, this substantial decrease was due to Hurricane Michael, which destroyed nearly 520,000 hectares of catchment area timberland when it hit the Florida panhandle in late-2018. Prior to this event occurring, PPW inventory levels had held relatively steady, decreasing slightly but averaging 47.2 million m3 in the catchment area from 2008-2018. However, the destruction caused by Hurricane Michael resulted in the immediate loss of more than 10.3 million m3 of PPW inventory, or a 22% decrease compared to pre-hurricane levels.

Moreover, the slight decrease in PPW inventory levels that did occur from 2008-2018 was not due to increased demand from bioenergy. Typically, a reduction in inventory is linked to harvest levels above the sustainable yield capacity of the forest area, but in the Cottondale catchment area, annual growth of PPW exceeded annual removals every year throughout this period. Ultimately, the decrease in PPW inventory from 2008-2018 can be more closely linked to decreased pine sawtimber production beginning in the early to mid-2000s. Specifically, annual removals of pine sawtimber decreased 28% from 2003-2014, and the reduction in harvest levels over this period translated to a reduction in newly-re-established pine stands and ultimately the slight reduction in PPW inventory levels that occurred in the mid-to-late 2010s.

Timber growth rates

Neutral. Overall, timber growth rates declined slightly in the catchment area from 2008 (the year Enviva Cottondale commenced operations) through 2020. However, this decrease in timber growth rates was not due to increased demand attributed to bioenergy but rather to the aging of the catchment area forest. Specifically, USFS data shows the average age timber inventory in the Cottondale catchment area increased from an estimated 43.6 years of age in 2008 to 45.7 years of age in 2020.

Forest area

Positive. In the Enviva Cottondale catchment area, total forest area (i.e. timberland) increased more than 55,100 hectares (+1.9%) from 2008 through 2020, and this increase can be linked to several factors, including increases in softwood pulpwood demand (from both bioenergy and other sources) as well as conversion from farmland.

Specifically, the more than 55,100-hectare increase in catchment area timberland from 2008-2020 coincided with a 1.1-million metric ton increase in annual softwood pulpwood demand (roughly half of which was attributed to bioenergy). While statistical analysis identified moderately strong positive relationships between timberland area and both softwood biomass demand and non-bioenergy-related softwood pulpwood demand, a strong positive correlation was found between timberland and total softwood pulpwood demand – suggesting that the increases in timberland since 2008 can be attributed, in part, to the increase in total softwood pulpwood demand (from both bioenergy and other sources).

The more than 55,100-hectare increase timberland from 2008-2020 also coincided with a roughly 75,000-hectare decrease in farmland (i.e. cropland, woodland, and pastureland) over this period. Specifically, the catchment area experienced a roughly 31,800-hectare loss in cropland, 8,900-hectare loss in pastureland, and 34,300-hectare loss in woodland from 2008-2020. Furthermore, statistical analysis confirmed this inverse relationship, identifying a strong negative correlation between timberland and farmland in the Cottondale catchment area.

Wood prices

Negative / Positive. Total softwood pulpwood demand attributed to bioenergy in the Cottondale catchment area increased from zero tons in 2007 (the year prior to Enviva Cottondale’s startup) to over 1.0 million metric tons in 2013. Over this same period, the price of delivered pine pulpwood (PPW) – the predominant roundwood product utilized by Enviva Cottondale for wood pellet production – increased 42% (from $21.06 per ton in 2007 to $29.82 per ton in 2013).

However, the apparent link between increased softwood biomass demand and increased delivered PPW price is only loosely supported by statistical analysis, which identified a relatively weak positive relationship between these two variables. Furthermore, delivered PPW price has remained nearly unchanged in the catchment area since 2013, despite softwood biomass demand declining and averaging roughly 577,000 metric tons per year since 2016. (Note that the roughly 410,000-metric ton decrease in softwood biomass demand from 2013-2020 was offset by a roughly 455,000-metric ton increase in softwood pulpwood demand from other sources). Ultimately, the increase in delivered PPW prices in the catchment area can be linked to increased demand for softwood pulpwood from all sources, and roughly half of the 1.2-million metric ton increase in softwood pulpwood demand since 2007 can be attributed to bioenergy.

However, it’s also important to note that the increase in bioenergy-related wood demand has been a positive for forest landowners in the Enviva Cottondale catchment area. Not only has bioenergy provided an additional outlet for pulpwood in this market, but the increase in delivered PPW price resulting from increased softwood pulpwood demand from bioenergy has transferred through to landowners in the form of higher PPW stumpage prices. Specifically, over the six years prior to Enviva Cottondale’s startup, PPW stumpage price – the price paid to landowners – averaged roughly $7.40 per ton in the Cottondale catchment area. However, since 2010, PPW stumpage prices have averaged more than $11.15 per ton, representing a more than 50% increase compared to pre-mill startup levels.

Markets for solid wood products

Positive. In the Enviva Cottondale catchment area, demand for softwood sawlogs used to produce lumber and other solid wood products increased an estimated 23% from 2008-2020. This increase in softwood lumber production has consequentially resulted in an increase in sawmill residuals (i.e. chips, sawdust, and shavings) – by-products of the sawmilling process and materials utilized by Enviva Cottondale to produce wood pellets.

Specifically, softwood sawlog demand has increased more than 16% in the catchment area since 2014, and this increase in demand has coincided with a nearly 60% increase in pine residual purchases by Enviva Cottondale. (Note that pine residuals constituted 25% of total raw material purchases by Enviva Cottondale in 2014 but 41% of total raw material purchases in 2020). So, not only has Enviva Cottondale benefited from the greater availability of this sawmill by-product, but lumber producers have also benefited, as Enviva Cottondale has provided an additional outlet for these producers and their by-products.

Read the full report: Enviva Cottondale pellet plant catchment area analysis. 

This is part of a series of catchment area analyses around the forest biomass pellet plants supplying Drax Power Station with renewable fuel. Others in the series can be found here. 

Evaluating regrowth post-harvest with accurate data and satellite imagery

13 May 2021

Sustainable bioenergy

  • Drax has been using effective post-harvest evaluations, which includes remote sensing technology and satellite imagery

  • Alongside sustainable forest management, monitoring can help support rapid regrowth after harvesting

  • Evidence shows healthy managed forests with no signs of deforestation or degradation

As part of Drax’s world-leading programme of demonstrating biomass sustainability, including ongoing work on catchment area analysis (CAA), responsible sourcing policy and healthy forest landscapes (HFL). We have also been trialling the use of high-resolution satellite imagery to monitor forest conditions on specific harvesting sites in the years after harvesting has taken place, in addition to the catchment area level monitoring of trends and data. Post-harvest evaluations (PHE) are an essential part of an ongoing sustainability monitoring process, ensuring that the future forest resource is protected and maintained and that landowners restore forests after harvesting to prevent deforestation or degradation.

The most effective form of PHE is for an experienced local forester to walk and survey the harvesting site to check that new trees are growing and that the health and quality of the young replacement forest is maintained.

Rapid regrowth

The images below show some of the sites surrounding Drax’s Amite Bioenergy pellet plant in Mississippi, with trees at various stages of regrowth in the years after harvesting.

A full site inspection can therefore enable a forester to determine whether the quantity and distribution of healthy trees is sufficient to make a productive forest, equivalent to the area that was harvested. It can also identify if there are any health problems, pest damage or management issues such as  weed growth or water-logging that should be resolved.

Typically, this will be the responsibility of the forest owner or their forest manager and is a regular part of ongoing forest management activity. This degree of survey and assessment is not practical or cost-effective where a third-party consumer of wood fibre purchases a small proportion (typically 20-25 tonnes per acre) of the low-grade fibre produced at a harvest as a one-off transaction for its wood pellet plant..  It is time consuming to walk every acre of restocked forest and it is not always possible to get an owner’s permission to access their land.

Forests from space

Therefore, an alternative methodology is required to make an assessment about the condition of forest lands that have been harvested to supply biomass, without the need to physically inspect each site.  One option is to use remote sensing and satellite imagery to view each harvested site in the years after biomass sourcing, this helps to monitor restocking and new tree growth.

Drax has been testing the remote sensing approach using Maxar’s commercial satellite imagery.  Maxar has four satellites on orbit that collect more than three million square kilometres of high-resolution imagery every day. Drax accesses this imagery through Maxar’s subscription service SecureWatch.

To test the viability of this methodology, Drax has been looking at harvesting sites in Mississippi that supplied biomass to the Amite Bioenergy pellet plant in 2015 and in 2017.  As part of the sustainability checks that are carried out prior to purchasing wood fibre, Drax collects information on each harvesting tract. This includes the location of the site, the type of harvest, the owner’s long-term management intentions and species and volume details.

This data can then be used at a later date to revisit the site and monitor the condition of the area. Third-party auditors, for instance Through Sustainable Biomass Program (SBP) certification, do visit harvesting sites, however this is typically during the year of harvest rather than after restocking. Maxar has historical imagery of this region from 2010, which is prior to any harvesting for wood pellets.  The image below shows a harvesting site near the pellet plant at Gloster, Mississippi, before any harvesting has taken place.

March 2010 (100m)

Satellite image © 2021 Maxar Technologies.

The image below shows the same site in 2017 immediately following harvesting.

December 2017 (100m)

Satellite image © 2021 Maxar Technologies.

If we look again at this same site three years after harvesting, we can see the rows of trees that have been planted and the quality of the regrowth. This series of images demonstrates that this harvested area has remained a forest, has not been subject to deforestation and that the regrowth appears to be healthy at this stage.

August 2020 (50m)

Satellite image © 2021 Maxar Technologies.

Another site in the Amite catchment area is shown below. The image shows a mature forest prior to harvesting, the site has been previously thinned as can be seen from the thinned rows that are evident in the imagery.

May 2010 (200m)

Satellite image © 2021 Maxar Technologies.

Looking at the same site in the year after harvesting, the clear cut area can be seen clearly. Some green vegetation cover can also be seen on the harvested area, but this is weed growth rather than replanted trees. Some areas of mature trees have been left at the time of harvesting, and are visible as a grey colour in the 2010 image. These are likely to be streamside management zones that have been left to maintain biodiversity and to protect water quality, with the grey winter colouring suggesting that they are hardwoods.

September 2018 (200m)

Satellite image © 2021 Maxar Technologies.

Three years after the harvest, in a zoomed in view from the previous image, clear rows of replanted trees can be seen in the imagery.  This demonstrates that the owner has successfully restocked the forest area and that the newly planted forest appears healthy and well established.

August 2020 (50m)

Satellite image © 2021 Maxar Technologies.

While examining different harvesting sites in satellite imagery, Drax noted that not every site had evidence of tree growth, particularly within the first three years after harvesting. Deliberate conversion of land to non-forest use, such as for conversion to pasture, agricultural crops or urban development, is likely to be evident fairly soon after harvesting.

Preparing for planting

Some forest owners like to leave a harvested site unplanted for a couple of years to allow ground vegetation and weed growth to establish, this can then be treated to ensure that trees can be planted and that the weed growth does not impede the establishment of the new forest, this process can mean that trees are not visible in satellite imagery for three to four years after harvesting.

The image below shows a site three years after harvesting with no evidence of tree growth.  Given that no conversion of land use is evident and that the site appears to be clear of weed growth, this is likely to be an example of where the owners have waited to clear the site of weeds prior to replanting.  This site can be monitored in future imagery from the Maxar satellites to ensure that forest regrowth does take place.

November 2020 (100m)

Satellite image © 2021 Maxar Technologies.

Drax will continue to use Maxar’s SecureWatch platform to monitor the regrowth of harvesting sites and will publish more detailed results and analysis when this process has been developed further.  The platform allows ongoing comparison of a site over time and could prove a more efficient method of analysis than ground survey.  In conjunction with the CAA and HFL work, PHE can add remote sensing as a valuable monitoring and evidence-gathering tool to demonstrate robust biomass sustainability standards and a positive environmental impact.

Go deeper: 

Discover the steps we take to ensure our wood pellet supply chain is better for our forests, our planet and our future here, how to plant more trees and better manage them, our responsible sourcing policy for biomass from sustainable forests and a guide to sustainable forest management of the Southern Working Forest.

At the heart of the energy transition

Will Gardiner, Chief Executive Officer, Drax Group

19 March 2021

Opinion
Tree nursery in Mississippi

Will Gardiner opened the second day of the Chatham House Energy Transitions conference. Watch his keynote address below or scroll down the page to read his speech in full.

The energy transition is central to our purpose of enabling a zero carbon, lower cost energy future.

Drax has been at the heart of Britain’s energy system for decades. And we have played a key role in the decarbonisation of the power sector: Drax Power Station in Selby, North Yorkshire, is the UK’s largest power station and Europe’s largest decarbonisation project. Cruachan, our Scottish Pumped Storage facility is a key complement to Britain’s ever increasing supply of offshore wind.

Our transition from coal to biomass has allowed us to reduce our greenhouse gas emissions by over 80% while providing clean and flexible energy to millions of homes and businesses across the UK. This month saw the end of commercial coal generation at Drax power station – a milestone in the history of our company and of the UK economy, too.

But the scale of the climate crisis means that we cannot stop here.

Which is why we have committed to a world-leading ambition to be carbon negative by 2030.

We will achieve this by making a transformational investment in bioenergy with CCS, or BECCS, which will enable us to permanently remove carbon emissions from the atmosphere while continuing to supply the renewable electricity that millions of British homes and businesses depend upon.

Water outlet into Loch Awe from Cruachan Power Station

Water outlet into Loch Awe from Cruachan Power Station

Today, we are pioneering BECCS at Drax Power Station as part of the Zero Carbon Humber Cluster, a coalition of diverse businesses with one ambition: to create the world’s first net zero emissions industrial cluster.

The benefits are enormous

BECCS is a vital technology in the fight against climate change. Expert bodies such as the Climate Change Committee here in the UK and the IPCC at a global level are clear that we need negative emissions technologies including BECCS to reach net zero, and BECCS is central to the UK and Europe’s decarbonisation plans.

As the world’s largest, and most experienced, generator and supplier of sustainable bioenergy there is no better place to pioneer BECCS than at Drax. The economic, social and environmental benefits are enormous.

BECCS at Drax will permanently remove millions of tonnes of carbon from the atmosphere and help heavy industry in the UK’s largest emitting area decarbonise quickly and cost effectively;

It will enable the creation of tens of thousands of green jobs in the North of England, levelling up the economy and delivering a green recovery from the Covid crisis;

And it will put the UK at the forefront of global efforts to develop carbon removal technology in this, the year that we host COP26 in Glasgow.

The scale of the climate crisis means that we cannot stop here.

A proven technology

We know that BECCS works and that the technology is available now. Looking at cost projections from the CCC, we also know that it is the best value negative emissions technology.

Engineer at BECCS pilot project within Drax Power Station

Engineer at BECCS pilot project within Drax Power Station

We have already successfully run two BECCS pilots at the power station. In 2019 we demonstrated that we can capture CO2 from a 100% biomass feedstock. And in 2020, we began a second pilot working with Mitsubishi Heavy Industries to further enhance the potential for delivering negative emissions.

We aim to deploy BECCS at scale by 2027. To that end, earlier this month, we kickstarted the planning process for our proposals to build our first BECCS units, marking a major milestone in the project and putting us in a position to commence building BECCS as soon as 2024.

The support we need

Drax Power Station has a proud history of transformation. And today we are making rapid progress in further decarbonising our operations and making bold commitments about our future.

The core of our successful decarbonisation has been a close partnership with government. And it is this partnership that will make BECCS a reality and enable the multiple benefits that come with it. An effective negative emissions policy and regulatory framework from government will enable further investments from companies such as Drax.

We believe it is possible for such a policy framework to emerge in the coming months.

With COP26 later this year, making that policy commitment will allow us to accelerate our own decarbonisation journey and support the industries of the future here in the UK.

BECCS in context

But we know that there is no silver bullet solution to tackling climate change.

Negative emissions technologies such as BECCS will be needed alongside others, for example more renewables, electric vehicles, energy storage, energy efficiency and hydrogen.

BECCS will enable us to permanently remove carbon emissions from the atmosphere while continuing to supply the renewable electricity that millions of British homes and businesses depend upon.

BECCS complements – and does not – and should not – substitute for ambitious decarbonisation plans. Technologies such as BECCS have a clear and unique role to play by helping harder to abate sectors such as heavy industry, aviation and agriculture – decarbonise.

This is critically important if we are to meet our legally binding 2050 net zero target. The CCC estimates that 51m tonnes of CO2 will need to be captured via BECCS to meet net zero.

Sustainability at our core

We know that BECCS can only make a meaningful contribution to tackling climate change if the bioenergy is sustainably sourced. This has been fundamental to Drax’s transition from coal to biomass, and it remains fundamental as we progress our plans for BECCS.

Infographic showing how BECCS removes carbon from the atmosphere

Biomass, as the UK Government has stated, is one of our most valuable tools for reaching net zero emissions. So we need the right framework to ensure it is sourced sustainably.

As the world’s largest bioenergy producer and generator, we recognise our responsibility to be the world leaders in sustainability, too.

At Drax, we have invested in world leading policies, tools and expertise to ensure that our biomass is sustainably sourced. We go beyond regulatory compliance and have set up an Independent Advisory Board, Chaired by the UK Government’s former Chief Scientific Advisor, to help us and challenge us on sustainable biomass and its role in Drax’s transition to net zero.

front cover of 'Responsible sourcing' PDF

[click to read]

Thanks to our independent catchment area analyses, we know more about the forests we source from than ever before. We know and can demonstrate how demand for biomass can support healthy forests. For example, in the South East US where Drax sources most of its biomass, there is more than double the carbon stored in forests than there was 50 years ago.

A partnership with our stakeholders

The purpose of today’s session is to discuss all these issues and more. Our aim is clear: to enable a successful energy transition.

At Drax we stand ready to invest hundreds of millions of pounds to scale up BECCS technology;

To put the UK at the forefront of global efforts to reach net zero emissions;

And to help create tens of thousands of green jobs in the North of England.

But I want your help in making BECCS as sustainable and successful as it can be.

We know and can demonstrate how demand for biomass can support healthy forests.

Thank you very much for listening and I wish you a good and constructive session tackling this critical global challenge.

Will Gardiner delivered this keynote address at Energy Transitions 2021.

The video of Will’s speech can be watched in full here and with subtitles here.

The science behind measuring and analysing trees

12 March 2021

Sustainable bioenergy
Weyerhaeuser working forest in Amite catchment area

We have published independent Catchment Area Analysis (CAA) reports for around 68% of the total biomass wood pellet supply to Drax Power Station in 2019. Within that, 73% of the pellets were manufactured in the US South accounting for 49% of that year’s total supply quantity.

A key component of CAA analysis are measurements, data and calculations provided by the National Forest Inventory (NFI). Bespoke wood price data, mill production capacity, market trends and interviews with local experts complete the picture.

The NFI in each country or region can be quite different in its intensity and frequency of measurement and overall degree of accuracy. In this article we examine the Forest Inventory and Analysis (FIA) database produced by the US Department of Agriculture Forest Service (USDA FS).

FIA traces its origin back to the McSweeney – McNary Forest Research Act of 1928 and began the first inventory in 1930. Since that time, it has been in continuous operation with a stated mission to: make and keep current a comprehensive inventory and analysis of the present and prospective conditions of and requirements for the renewable resources of the forest and rangelands of the US.

The fundamental science behind measuring tree height and diameter to calculate growth and volume has not changed much over the decades. A girth tape is used to measure the diameter at breast height (DBH), which is a point on the tree stem 1.37m above the base of the tree or the root collar (the exact height can vary by country). The height of a standing tree is conventionally measured using a clinometer or hypsometer, which measures the angle from the top of the tree to a measured distance away from the base. This forms a triangle from which the tree height can be calculated.

Example of girth and height measurement in the US South

The combination of height and girth are then used to estimate total tree volume based on historical models for that particular species in that country or region. Many decades worth of data measurements and modelling have been used to develop complex equations to estimate volume for each species and circumstance. This calculation process needs to estimate the rate of taper of the stem, or the difference in diameter between the base and the top of the tree. This can be consistent within a single species, but it can depend on growth rates and planting density (for example closely stocked trees may grow taller and thinner but more openly planted trees tend to be shorter and wider). Whether the site has been thinned, how many times, and at what age, can impact the degree of taper in the stem. Through many years of research, measuring and modelling the Southern Research Station (SRS) FIA team has developed the following formula for under-bark volume calculation:

under-bark volume calculation

This is then modified according to the parameters shown below, depending on species and stem characteristics.

Example of volume

Example of volume

Once the volume has been calculated, the basic density (solid wood per cubic metre) and moisture content can be used to calculate wet and dry weight, fibre content and yield.

A comprehensive record of data

The US Forest Service has built up an extensive historical record of data points through years of physical measurements – from both sampling and cutting down individual sample trees to determine the actual dimensions and statistics to compare against the estimated values. Over time, forest scientists are able to build up reasonably accurate tables for each tree species that can be used to estimate growth and volume based on the DBH and estimated tree height.

In the UK we have a forester’s handbook known as The Blue Book which contains a vast quantity of modelled data to help a forester calculate volume and growth in a range of different forest types across the country. This data has been collected and modelled by the Forestry Commission’s Forest Research branch. In the US they have a similar system of data collection and modelling but on a bigger scale, given the much larger forest area and greater variety in tree species and site type.

How can you measure an entire forest?

The forestland area of the US South covers more than 100 million hectares (ha) in total which can present quite a challenge to measure, survey and accurately predict forest growth and health. The FIA does this through a network of sample plots randomly but sequentially distributed across the forestland in each State with undisclosed locations so as to avoid biased management. Field crews collect data on forest type, site attributes, tree species, tree size, and overall tree condition on accessible forest land.

Recently, the programme has involved a five-year rolling measurement system where 20% of the plots are measured in each State, on an annual basis. At the end of a five-year period all plots will have been measured and the process begins again. This process is overseen by a robust quality assurance system to maintain and ensure the quality and accuracy of the fieldwork.

Plots are distributed at a rate of 1 plot per 6,000 acres of land (or one per 2,400 ha). This degree of plot distribution is at an extremely course scale if attempting to understand the growth of an individual stand or forest area. For example, The Blue Book recommends using 8-12 plots (and top height measurements) for a relatively uniform stand of around 10 ha. This degree of accuracy would be required to calculate the volume of standing wood for sale. In comparison, the FIA data would be completely inaccurate if trying to monitor growth and trends at an individual forest level or even at county level. This sampling intensity and the scale of measurement are the most critical factors in assessing the validity of data and trends that are identified through the FIA and through the CAA analysis.

Quantifying the level of accuracy

The physical measurement procedure and volume modelling are well established processes with data and analysis collected over many decades to support the findings; this leads to a clearly quantifiable degree of error for each measured plot. The challenge comes when using plot data to estimate the values in the surrounding forest. At this scale, the level of accuracy will depend on the ratio of plots to total forest area and the total number of plots measured. The ratio of plots per ha in the US South is pre-determined, limited by the physical and financial constraints of actually measuring trees on the ground. However, the total number of plots used to evaluate trends can vary according to how large an area is assessed.

Fundamentally, if a single county is assessed then the total number of sample plots will be low and the potential for error will be high. If an entire State is assessed, then the number of plots is much larger (despite the same ratio of plots per ha) therefore the data and the trend is statistically much more accurate. Drax’s CAA analysis falls somewhere in between these two points, with each catchment area including multiple counties but not quite at the same scale as State level analysis. An example of the variation in error is shown in the table below.

Degree of error for key metrics in Drax’s CAA analysis

Degree of error for key metrics in Drax’s CAA analysis

The data showing total inventory (volume of wood growing in the forest) has been assessed for the Chesapeake catchment area in North Carolina and Virginia. When looking at each individual county, the data error calculation is +/- 46.5%, therefore not very accurate. If looking at State level, the data error is only +/- 2.7%. This degree of error is much more accurate and demonstrates more credible and reliable data due to the much larger number of plots available across the entire State. The Drax CAA analysis for inventory in the Chesapeake area is +/- 4.7% which is reasonably close to the State level accuracy due to the large number of countries that are included in the CAA analysis.

Since the catchment area boundary is defined by the pellet mill’s historical and future sourcing pattern, this can vary in size according to each mill’s procurement strategy and local market conditions. For example, the Amite BioEnergy pellet plant sources from a much smaller area close to the mill and therefore the catchment area includes fewer counties. This can lead to a higher degree of error than in the other CAA reports as the total number of plots used is smaller.

A long history of measurement and analysis

Despite this, the overall degree of error is still in single figures and can be considered reasonable in each CAA report by the standards of forest measurement and modelling, an error of under 10% is generally considered acceptable. Measuring standing trees that are still growing is not an exact science – it is an estimation. Trees cannot be accurately weighed or measured until they are cut down. Therefore, there will always be degree of error in estimated data. In the US South, the long history of measurement, analysis and data modelling and the relatively homogenous nature of the main commercial species (southern yellow pine), mean that the error is relatively uniform and predictable if a large sample area is considered.

The potential for remote sensing data collection and analysis to replace traditional field measurement is an interesting and developing field. At an individual forest or stand level, it is possible to carry out intensive measurement with Laser or Lidar, to calculate volume and growth. However, there is currently no reliable, accurate and cost-effective way to do this at a large-scale across several million hectares. This may be a possibility as the technology and data interpretation tools continue to develop and Drax is working closely with remote sensing specialists to trial and develop this process. Until then, we can rely on boots on the ground and traditional fieldwork for an accurate view of the forest trends across our supply chain.

This blog supports a series of catchment area analyses around the forest biomass pellet plants supplying Drax Power Station with renewable fuel. Read more.

 

Proposed Acquisition of Pinnacle Renewable Energy Inc. – a major international supplier of sustainable biomass

8 February 2021

Investors

This announcement contains inside information

RNS Number: 2805O
Drax Group PLC
(“Drax”, “the Group”, “Drax Group”, “the Company”; Symbol: DRX)

Drax is pleased to announce that it has signed an agreement (the “Acquisition Agreement”) with Pinnacle Renewable Energy Inc. (PL.TO) (“Pinnacle”), providing for the acquisition by Drax Canadian Holdings Inc., an indirect, wholly-owned subsidiary of Drax, of the entire issued share capital of Pinnacle (the “Acquisition”). The Acquisition will be implemented by way of a statutory plan of arrangement in accordance with the laws of the Province of British Columbia, Canada, at a price of C$11.30 per share (representing a premium of 13% based on the closing market price as at 5 February of C$10.04 per share and valuing the fully diluted equity of Pinnacle at C$385 million (£226 million(1)), with an implied enterprise value of C$741 million, including C$356 million of net debt(2)). The Acquisition, which remains subject to Drax and Pinnacle shareholder approval, court approval, regulatory approvals and the satisfaction of certain other customary conditions, has been unanimously recommended by the board of Pinnacle and has the full support of Pinnacle’s major shareholder, affiliates of ONCAP (which, together hold shares representing approximately 31% of Pinnacle’s shares as at 5 February 2021). Completion is expected to occur in the second or third quarter of 2021.

The Board believes that the Acquisition advances Drax’s biomass strategy by more than doubling its biomass production capacity, significantly reducing its cost of biomass production and adding a major biomass supply business underpinned by long-term contracts with high-quality Asian and European counterparties. The Acquisition positions Drax as the world’s leading sustainable biomass generation and supply business alongside the continued development of Drax’s ambition to be a carbon negative company by 2030, using Bioenergy Carbon Capture and Storage (BECCS).

Highlights

  • Compelling opportunity to advance Drax biomass strategy
    • Adds 2.9 million tonnes of biomass production capacity
    • Significantly reduces Drax average cost of production(3)
  • Increased global reach and presence in third-party markets
    • C$6.7 billion of contracted sales to counterparties in Asia and Europe
    • 99% of capacity contracted through to 2026, significant volumes contracted post 2027
  • Strong return on investment
    • Cash generative with 2022 EBITDA consensus of C$99 million
    • Expected returns significantly ahead of Drax’s WACC
    • Funded from cash and existing agreements
  • Reinforces sustainable and growing dividend

The world’s leading sustainable biomass generation and supply business

  • Drax and Pinnacle combined
    • 17 pellets plants, three major fibre baskets, four deep water ports
    • 4.9Mt capacity from 2022 – 2.9Mt available for self-supply
    • 2.6GW of renewable biomass generation, with potential for BECCS
  • Global growth opportunities for sustainable biomass

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax, said:

“I am excited about this deal which positions Drax as the world’s leading sustainable biomass generation and supply business, progressing our strategy to increase our self-supply, reduce our biomass production cost and create a long-term future for sustainable biomass.

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“We expect to benefit greatly from Pinnacle’s operational and commercial expertise, and I am looking forward to what we can achieve together.

“It will pave the way for our plans to use Bioenergy with Carbon Capture and Storage (BECCS), and become a carbon negative company by 2030 – permanently removing millions of tonnes of carbon dioxide from the atmosphere each year. Negative emissions from BECCS are vital if we are to address the global climate emergency whilst also providing renewable electricity needed in a net zero economy, supporting jobs and clean growth in a post-COVID recovery.”

Duncan Davies, Chief Executive Officer of Pinnacle, said:

“Pinnacle’s Board of Directors has unanimously determined that the transaction represents the best course of action for the company and its shareholders. On closing, the transaction will deliver immediate, significant and certain cash value to our shareholders. At the same time, the combination of Pinnacle and Drax will create a global leader in sustainable biomass with the vision, technical expertise and financial strength to help meet the growing demand for renewable energy products, which is exciting for our employees, customers and others around the world.”

Drax’s sustainable biomass strategy

Sustainable biomass has an important role to play in global energy markets as a flexible and sustainable source of renewable energy, as well as having the potential to deliver negative emissions. Drax believes that the Acquisition accelerates the Group’s strategic objectives to increase its available self-supply of sustainable biomass to five million tonnes per annum (Drax currently operates 1.6 million tonnes of capacity with 0.4 million tonnes in development) and reduce the cost of biomass to £50/MWh(4) by 2027. Through the delivery of these strategic objectives Drax aims to create a long-term future for sustainable biomass, including third-party supply, BECCS and merchant biomass generation.

Employee at Morehouse BioEnergy in Louisiana

Employee at Morehouse BioEnergy in Louisiana

The Group’s enlarged supply chain will have access to 4.9 million tonnes of operational capacity from 2022. Of this total, 2.9 million tonnes are available for Drax’s self-supply requirements in 2022 (increasing to 3.4 million tonnes in 2027). Drax aims to increase the level of third-party sales and further expand its capacity to meet its target of five million tonnes of self-supply by 2027.

Drax believes that the Acquisition is highly complementary to the Group’s other long-term strategic options for biomass. Once optimised, the enlarged group’s biomass supply chain will support Drax’s own generation requirements, including the potential development of BECCS, whilst also serving the growing biomass markets in Europe and Asia via long-term off-take agreements.

A major producer and supplier of good-quality, low-cost sustainable biomass

Pinnacle, which is listed on the Toronto Stock Exchange, operates 2.5 million tonnes of biomass capacity at sites in Western Canada and the Southeastern US, with a further 0.4 million tonnes of capacity in development (commissioning in 2021). Investment in this new capacity is expected to be substantially complete in the first half of 2021. Once the new capacity is commissioned, Pinnacle’s nameplate production capacity is expected to increase to 2.9 million tonnes per annum.

Pinnacle has ownership of c.80% of this nameplate capacity, with the remaining c.20% co-owned with its forestry industry joint venture partners, ensuring strong commercial relationships and shared interests in security of supply. Pinnacle has sales and marketing rights to 100% of the output from all sites.

Pinnacle is a key supplier of wood pellets for Drax and other third parties in Asia and Europe, with C$6.7 billion of contracted third-party sales (including sales to Drax).

Westview terminal, Canada

Wood pellets loaded onto vessel at Westview Terminal, British Columbia

Through scale, operational efficiency and low-cost fibre sourcing, Pinnacle is currently produces biomass at a lower cost than Drax, with a like-for-like 2019 production cost of US$124/tonne(3), compared to Drax’s 2019 production cost of US$161/tonne(3). The pro forma 2019 production cost for the combined business is US$141/tonne.

Pinnacle’s lower cost partially reflects the use of high levels of low-cost sawmill residues. British Columbia has a large and well-established commercial forestry industry, which has in recent years seen increased harvest levels, in part associated with management of a pine beetle infestation, producing good levels of residue material availability for the production of biomass. This infestation has now run its course and alongside other influences on the forest landscape, including wild-fire, is resulting in a reduction in the annual harvest and sawmill closures. The industry is adjusting to this with some production curtailment as well as developing approaches to fibre recovery and use which is expected to result in some increase in fibre costs.

Since 2017, the Sustainable Biomass Program has conducted annual audits of each of Pinnacle’s operational sites, allowing Drax to ensure, through its diligence, that the material that it purchases from Pinnacle is in line with its sustainability standards.

Drax is committed to ensuring best practice in health and safety, operational efficiency and sustainability across the enlarged group and intends to invest accordingly to deliver this outcome.

Drax is committed to ensuring that its biomass sources are compliant with Drax’s well-established responsible sourcing policy and Drax expects to invest in, adapt and develop sourcing practices to ensure compliance with Drax’s policies to deliver both Drax’s biomass strategy and positive forest outcomes.

A large and geographically diversified asset base

Pinnacle has ownership interests in ten operational plants and one in development (commissioning 2021), six of which are operated through joint venture arrangements, providing access to nameplate production capacity of 2.9 million tonnes per annum.

Seven of Pinnacle’s sites are in British Columbia (1.6 million tonne nameplate capacity) and two are in Alberta (0.6 million tonne nameplate capacity). All of these sites have rail lines to ports at either Prince Rupert or Vancouver, both accessing the Pacific Ocean, providing routes to Asian and European markets.

Pinnacle also operates a US hub at Aliceville, Alabama (0.3 million tonne nameplate capacity) and is developing a second site in Demopolis, Alabama (0.4 million tonne nameplate capacity), which Pinnacle expects to commission in 2021. Pinnacle’s total operational and development nameplate capacity in the US is 0.7 million tonnes.

Pinnacle’s US sites are close to Drax’s existing operations in the Southeastern US and will utilise river barges to access the Port of Mobile and barge-to-ship loading, reducing fixed port storage costs.

Forest in LaSalle catchment area

Working forest in LaSalle BioEnergy catchment area, Louisiana

All production sites are located in areas with access to fibre and are able to operate with a range of biomass material from existing commercial forestry activities, including sawmill residues, pre-commercial thinnings and low-grade wood. Combined with a geographic spread of production capacity and access to three separate export facilities, Pinnacle benefits from operational and sourcing flexibility, further enhancing Drax’s security of supply.

Further information is set out in Appendix 1 to this announcement.

Long-term biomass revenues with access to Asian and European markets

Pinnacle has contracted sales of C$6.7 billion, with high-quality Asian and European counterparties (including Drax). This equates to 99% of its current production capacity contracted to third parties through 2026 and a significant volume contracted in 2027 and beyond, providing long-term high-quality revenues.

Vessel carrying biomass pellets at Westview Terminal, British Columbia

Pinnacle has been supplying biomass to Europe since 2004. The location of the majority of Pinnacle’s production capacity in Western Canada, with access to the Pacific Ocean, provides a strong position from which to serve the growing demand for biomass in Asian markets. In 2018 and 2019, Pinnacle entered into 12 new long-term contracts in Japan and South Korea, totalling over 1.3 million tonnes per annum, valued at C$4.6 billion, with most contracts commencing between 2021 and 2023. The average contract duration is nine years, with certain contracts extending significantly beyond this point. Contracts typically operate on a take-or-pay basis.

Global growth opportunities for sustainable biomass

The global biomass wood pellet market has a broad range of providers that are expected to expand their production capacity, including operators such as Enviva, Graanul Invest, Pinnacle, An Viet Phat, Fram and SY Energy.

The market for biomass wood pellets for renewable generation in Europe and Asia is expected to grow in the current decade, principally driven by Asian demand(5). Drax believes that increasingly ambitious global decarbonisation targets, the need for negative emissions and an improved understanding of the role that sustainably sourced biomass can play will result in continued robust demand.

Aerial photo of biomass storage domes, Drax Power Station

Train pulling biomass wagons, storage domes and wood pellet conveyor system Drax Power Station, North Yorkshire

As a vertically integrated producer and consumer of sustainable biomass Drax is differentiated from its peers and well positioned to deliver supply chain efficiencies and an expanded range of sustainable biomass materials for own-use and third-party sales.

Through its expanding lower cost supply chain, expertise in biomass generation and enhanced global footprint, Drax believes that there will be opportunities to work with other companies and countries in developing their own biomass-enabled decarbonisation strategies.

Strong return on investment

The Acquisition is expected to be cash generative and represent an attractive opportunity to create significant value for shareholders, with expected returns significantly in excess of the Group’s weighted average cost of capital.

The addition of long-term contracts with high-quality counterparties in growing international biomass markets will reduce the Group’s relative exposure to commodity prices, in line with the Group’s objective to improve earnings quality and visibility.

In total, the Acquisition increases access to lower cost biomass by a further 2.9 million tonnes after the commissioning of the Demopolis plant in 2021. The price paid for this capacity is consistent with the previously outlined strategy to invest in the region of c.£600 million to deliver Drax’s plans for five million tonnes of self-supply capacity and a biomass cost of £50/MWh by 2027.

For the year ended 27 December 2019, Pinnacle generated Adjusted EBITDA(6) of C$47 million from pellet sales of 1.7 million tonnes.

Pinnacle’s 2019 performance was impacted by fire at its Entwistle plant, reduced rail access due to rail industrial action and weather disrupted forestry activity. At the same time Pinnacle experienced regional Canadian sawmill closures, resulting in some reduction in sawmill residues and an increase in provincial fibre prices.

Fibre diversification and the development of a second hub in the Southeastern US is expected to partially mitigate the risk of fibre price rises.

Taking these factors into account, alongside the commissioning of new capacity and the commencement of Asian supply contracts, Pinnacle’s 2022 consensus EBITDA is C$99 million, increasing to C$126 million in 2023 (Bloomberg).

The Acquisition strengthens the Group’s ability to pay a sustainable and growing dividend. Drax does not expect the Acquisition to have any impact on its expectations for the final dividend payment for 2020.

Financing the Acquisition

The Acquisition is expected to be funded from cash and existing agreements. On 15 December 2020 the Group issued a trading update which noted cash and total committed liquidity of £643 million at 30 November 2020. Following the completion, on 31 January 2021, of the sale of four gas power stations, previously announced on 15 December 2020, the Group received cash of £188 million, being the agreed purchase price consideration of £164 million and £24 million of customary working capital adjustments.

Net debt to Adjusted EBITDA(7) in 2021 is expected to be above Drax’s long-term target of around 2 times immediately after completion of the Acquisition but is expected to return to around this level by the end of 2022.

Management of foreign exchange exposure

The Acquisition price will be paid in Canadian dollars. Pinnacle’s existing contracts with Drax and third parties are denominated in Canadian and US dollars and Drax expects to manage any exposure within its foreign exchange processes.

Drax’s policy is to hedge its foreign currency exposure on contracted biomass volumes over a rolling five-year period. This has given rise to an average foreign exchange rate hedge around 1.40 (US$/GBP£).

Sustainable sourcing

Sustainably sourced biomass is an important part of UK and European renewable energy policy. The renewable status of sustainably sourced biomass is based on well-established scientific principles set out by the Intergovernmental Panel on Climate Change and reflected in the European Union’s (EU) second Renewable Energy Directive and the UK Renewables Obligation.

Drax maintains a rigorous approach to biomass sustainability, ensuring the wood fibre it uses is fully compliant with the UK’s mandatory standards as well as those of the EU.

British Columbia, near Barriere, North Thompson River, aspen trees, dead pine trees behind infected with pine bark beetle (aka mountain pine beetle)

Dead pine trees in background, infected with mountain pine beetle, British Columbia

Drax recognises that the forest landscape in British Columbia and Alberta is different to commercially managed forests in the Southeastern US. Working in partnership with eNGO Earthworm, Drax has a good understanding of the considerations associated with sourcing residues from harvesting of primary forest and the particular characteristics of the forests in British Columbia and Alberta. In line with its responsible sourcing policy, Drax will work closely with eNGO partners, Indigenous First Nation communities and other stakeholders, and invest to deliver good environmental, social and climate outcomes in Pinnacle’s sourcing areas.

Operational efficiencies, improvements and savings

The strong financial returns associated with the Acquisition are not dependent on synergy benefits, but the Group has identified areas for potential operational improvements and efficiencies, and opportunities to invest across the supply chain to achieve consistent standards and improve outputs across the enlarged group.

Portfolio optimisation

Drax aims to leverage Pinnacle’s trading capability across its expanded portfolio. Drax believes that the enlarged supply chain will provide greater opportunities to optimise the supply of biomass from its own assets and third-party suppliers.

With existing plans to widen of the Group’s sustainable biomass fuel mix to include a wider range of lower cost sustainable biomass materials, Drax expects to create further opportunities to optimise fuel cargos for own use and third-party supply.

Logistics optimisation

Drax believes that the transport and shipping requirements of the enlarged group will provide greater opportunities to optimise logistics, with delivery of cargos to a counterparty’s closest port, reducing distance, time, carbon footprint and cost.

Enhanced security of supply

Control of Drax’s biomass supply chain, with geographically diverse production and export facilities, is expected to enhance security of supply, further mitigating the risk of supply interruptions thereby resulting in improved reliability and a reduced risk of supply interruption.

Combined expertise

Drax believes that there will be opportunities to share best practice and drive improved production performance across the enlarged group by leveraging combined expertise in the production of good-quality, low-cost pellets across the enlarged supply chain.

Drax also expects to leverage Pinnacle’s experience in developing and managing third-party off-take agreements alongside its existing commercial and trading capabilities to develop new agreements for supply to third-parties.

Stronger counterparty credit

Drax has a stronger credit rating, which could enable Pinnacle to develop its supply capability and contracts in Asian and European markets beyond its current position.

Reduced cost of debt

Drax’s average cost of debt is lower than Pinnacle’s giving rise to potential future savings.

Corporate cost savings

Drax expects to derive typical corporate cost savings associated with the Acquisition and delisting from the Toronto Stock Exchange.

Shareholder approvals

The Acquisition constitutes a Class 1 transaction under the Listing Rules. As a consequence, completion of the Acquisition is conditional on the Acquisition receiving the approval of Drax shareholders. A combined shareholder circular and notice of general meeting will be posted to shareholders as soon as practicable.

Among other things, the Acquisition is also conditional upon the approval of the Acquisition by Pinnacle’s shareholders, the approval of the Supreme Court of British Columbia, certain antitrust and other regulatory approvals other customary conditions.

A summary of the terms of the Acquisition Agreement is set out in Appendix 2 to this announcement.

Drax’s board has unanimously recommended that Drax’s shareholders vote in favour of the Acquisition, as each of the Drax directors that hold shares in Drax shall do in respect of their own beneficial holdings of Drax’s shares, representing approximately 0.17 per cent. of the existing share capital of Drax as at 5 February 2021, being the last business day prior to the date of this announcement.

Pinnacle’s board has unanimously recommended that Pinnacle’s shareholders vote in favour of the Acquisition at the Pinnacle General Meeting, as the Pinnacle directors (and certain current and former members of Pinnacle management that hold shares in Pinnacle) shall do in respect of their own beneficial holdings of Pinnacle’s shares, representing approximately 4.75 per cent. of the existing share capital of Pinnacle as at 5 February 2021, being the last business day prior to the date of this announcement.

In addition to the irrevocable undertakings from Pinnacle directors described above, Drax has also received an irrevocable undertaking from affiliates of ONCAP (which, together, hold shares representing approximately 31% of Pinnacle’s shares as at 5 February 2021 (being the last business day prior to the date of this announcement)) to vote in favour of the Acquisition at Pinnacle’s General Meeting.

Other

Drax issued a trading update on 15 December 2020 outlining its expectations for 2020 and expects to announce its full year results for the year ended 31 December 2020 on 25 February 2021.

Enquiries:

Drax Investor Relations: Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications: Ali Lewis
+44 (0) 7712 670 888 

Royal Bank of Canada (Financial Adviser and Joint Corporate Broker):

+44 (0) 20 7653 4000
Peter Buzzi
Mark Rushton
Evgeni Jordanov
Jonathan Hardy
Jack Wood

Acquisition presentation meeting and webcast arrangements

Management will host a webcast for analysts and investors at 9:30am (UK Time), Monday 8 February 2021.

The webcast can be accessed remotely via a live webcast link, as detailed below. After the meeting, the webcast recording will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 7am (UK time) on 8 February 2021 for download at: https://www.drax.com/uk/investors/results-reports-agm/#investor-relations-presentations

Event Title:
Drax Group plc: Proposed Acquisition of Pinnacle Renewable Energy Inc

Event Date:
9:30am (UK time), Monday 08 February 2021

Webcast Live Event Link:
https://secure.emincote.com/client/drax/drax010

Start Date:
9:30am (UK time), Monday 08 February 2021

Delete Date:
Monday 27 December 2021

Archive Link:
https://secure.emincote.com/client/drax/drax010

Important notice

The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).

RBC Europe Limited (“RBC”), which is authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the Financial Conduct Authority (“FCA”) and the PRA, is acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as its clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to its clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares in the Company or in any entity discussed herein, in any jurisdiction nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract commitment or investment decision in relation thereto nor does it constitute a recommendation regarding the securities of the Company or of any entity discussed herein.

RBC and its affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. RBC and its respective affiliates accordingly disclaim to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.

Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

Each of the Company, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.

You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.

Appendix 1

Pinnacle Production Capacity

PlantLocationStatusCommissioningNameplate Capacity (Mt)Pinnacle Ownership (%)
Williams LakeBC, CanadaOperational20040.2100%
HoustonBC, CanadaOperational20060.230%
ArmstrongBC, CanadaOperational20070.1100%
MeadowbankBC, CanadaOperational20080.2100%
Burns LakeBC, CanadaOperational20110.4100%
LavingtonBC, CanadaOperational20150.375%
SmithersBC, CanadaOperational20180.170%
EntwistleAlberta, CanadaOperational20180.4100%
AlicevilleAlabama, USAOperational20180.370%
High LevelAlberta, CanadaOperational20200.250%
DemopolisAlabama, USADevelopmentEst. 20210.470%
Total2.980%

Capacity by fibre basket in 2021

LocationNameplate Capacity (Mt)Pinnacle Ownership (%)
BC, Canada1.684%
Alberta, Canada0.683%
Alabama, USA0.370%
Total2.582%

Capacity by fibre basket in 2022

LocationNameplate Capacity (Mt)Pinnacle Ownership (%)
BC, Canada1.684%
Alberta, Canada0.683%
Alabama, USA0.763%
Total2.981%

Across its business Pinnacle employs 485 employees, principally in the operation of its assets.

Appendix 2

Principal terms of the Acquisition Agreement

The following is a summary of the principal terms of the Acquisition Agreement.

Parties and consideration

The Acquisition Agreement was entered into on 7 February 2021 between Drax, Drax Canadian Holdings Inc., (an indirect wholly-owned subsidiary of Drax) (“Bidco”) and Pinnacle. Pursuant to the Acquisition Agreement, Bidco has agreed to acquire all of the issued and outstanding shares in Pinnacle and, immediately following completion, Pinnacle will be an indirect wholly-owned subsidiary of Drax. The Acquisition will be implemented by way of a statutory plan of arrangement in accordance with the laws of the Province of British Columbia, Canada.

Conditions

Completion under the Acquisition Agreement is subject to, and can only occur upon satisfaction or waiver of, a number of conditions, including:

(a) the approval of the Acquisition by Drax shareholders who together represent a simple majority of votes cast at a meeting of Drax shareholders;

(b) the approval of the Acquisition by Pinnacle shareholders who together represent not less than two-thirds of votes cast at a meeting of Pinnacle shareholders;

(c) an interim order providing for, among other things, the calling and holding of a meeting of Pinnacle shareholders and a final order to approve the Arrangement, each having been granted by the Supreme Court of British Columbia;

(d) no material adverse effect having occurred in respect of Pinnacle;

(e) in the event that the Competition and Markets Authority (the “CMA”) has requested submission of a merger notice or opened a merger investigation, the CMA having issued a decision that the Acquisition will not be subject to a Phase 2 reference or the period for the CMA considering a merger notice has expired without a Phase 2 reference having been made;

(f) either the receipt of an advance ruling certificate or both the expiry, termination or waiver of the applicable waiting period under the Competition Act (Canada) and, unless waived by Drax, receipt of a no-action letter in respect of the Acquisition from the Commissioner of Competition;

(g) the expiry or early termination of any applicable waiting period (and any extension of such period) applicable to the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (US); and

(h) the receipt a third party consent

In addition, Drax has the unilateral right not to complete the Acquisition where registered Pinnacle shareholders representing more than five per cent. of the outstanding share capital of Pinnacle duly exercise their dissent rights.

If any of the conditions are not satisfied (or waived) by 7 September 2021, either party can terminate the Acquisition Agreement.

Non-solicitation

Prior to obtaining approval from their respective shareholders in relation to the Acquisition, each of Drax and Pinnacle are prohibited from soliciting from any third party any acquisition proposal (relating to 20 per cent. or more of their shares or their group’s assets). However, if prior to obtaining Drax shareholder approval, Drax receives an unsolicited bona fide proposal in respect of 50 per cent. or more of its shares or all or substantially all of the assets of the Drax group and which the Drax board considers would result in a transaction that is more favourable to Drax shareholders from a financial perspective than the Acquisition (a “Drax Superior Proposal”), it may engage in discussions in relation to such Drax Superior Proposal in accordance with the terms of the Acquisition Agreement. Similarly, if prior to obtaining Pinnacle shareholder approval, Pinnacle receives an unsolicited bona fide proposal in respect of 100 per cent. of its shares or all or substantially all of the assets of the Pinnacle group and which the Pinnacle board considers would result in a transaction that is more favourable to Pinnacle shareholders from a financial perspective than the Acquisition (a “Pinnacle Superior Proposal”), it may engage in discussions in relation to such proposal in accordance with the terms of the Acquisition Agreement.

Termination fees payable to Pinnacle

Drax has agreed to pay a break fee of C$25 million to Pinnacle if the Acquisition Agreement is terminated as a result of:

(a) the Drax board withholding, withdrawing or adversely modifying its recommendation that Drax shareholders approve the Acquisition;

(b) the Drax board authorising Drax to enter into any definitive agreement (other than a confidentiality agreement) in respect of a Drax Superior Proposal;

(c) the Drax board terminating the Acquisition Agreement in response to any intervening event that was not known to the Drax board as of the date of the Acquisition Agreement;

(d) Drax breaching its non-solicitation obligations set out in the Acquisition Agreement; or

(e) completion not occurring by 7 September 2021 or a failure to obtain Drax shareholder approval and, in each case, an acquisition of 50 per cent. of Drax’s shares or assets (subject to certain exceptions) is is made or announced prior to the Drax shareholder approval having been obtained and any such acquisition is consummated (or a definitive agreement is entered into in respect of the same) within 12 months of termination.

In addition, Drax has agreed to pay Pinnacle an expense fee of C$5 million in the event that the Acquisition Agreement is terminated as a result of a failure to obtain Drax shareholder approval. The expense fee shall not be payable in the event that the break fee is also payable.

Termination fees payable to Drax

Pinnacle has agreed to pay a break fee of C$12.5 million to Drax if the Acquisition Agreement is terminated as a result of:

(a) the Pinnacle board withholding, withdrawing or adversely modifying its recommendation that Drax shareholders approve the Acquisition;

(b) the Pinnacle board authorising Pinnacle to enter into any definitive agreement (other than a confidentiality agreement) in respect of a Pinnacle Superior Proposal;

(c) the Pinnacle board terminating the Acquisition Agreement in response to any intervening event that was not known to the Pinnacle board as of the date of the Acquisition Agreement;

(d) Pinnacle breaching its non-solicitation obligations set out in the Acquisition Agreement; or

(e) completion not occurring by 7 September 2021 or a failure to obtain Pinnacle shareholder approval and, in each case, an acquisition of 50 per cent. of Pinnacle’s shares or assets (subject to certain exceptions) is made or announced prior to the Drax shareholder approval having been obtained and any such acquisition is consummated (or a definitive agreement is entered into in respect of the same) within 12 months of termination.