Russia’s wood pellets sector is the primary bio-based energy product in the country and remains a significant global player. Production of wood pellets in Russia in CY 2017 was estimated at 1.75 million metric tons, an increase of 32% over production in CY 2016. Such a significant increase is attributed to continued strong demand from the European Union and new markets in Asia such as Japan and China. In addition, government initiatives to subsidize exports of wood pellets and the launch of new production operations in Russia raised production. The Russian Customs Service reports exports of wood pellets from Russia in 2017 at 1.44 MMT, or more than 34% higher than in 2016. Exports of wood pellets are expected to increase but at a moderate pace of 4% to reach 1.5 MMT in 2018.
Biofuels Industry
Different sources estimate that renewable energies, including biofuels, represent 1.2% of Russia’s total energy production, with biomass production accounting for only 0.5% of total production. While there are no official statistics that measure total energy production attributable to biofuels, it is estimated that biofuels account for 5% of Russia’s heating energy and 1% of its electrical power. At present, Russia utilizes only 30% of its economically viable hydro-energy resources.
The bioethanol and biodiesel sectors will remain niche industries in Russia, at least in the short-term. The production of biofuels still remains small and has almost no impact on Russia’s overall domestic grain and oilseed prices. High excise taxes for ethanol in Russia, coupled with high production costs and increasing demand for grain for other uses, are all major obstacles for the development of the bioethanol industry not to mention the thriving oil and gas sector.
The Russian Ministry of Energy reports that there are no government-backed biofuel projects in operation at this time. The majority of biofuel ventures in Russia are supported by regional governments or financed by foreign investors. In most cases, these projects are in the pilot phase and produce just enough biofuel to generate heat/electricity for their own facility, or for the production of organic fertilizer from agricultural waste. Currently, there is no industrial production of either bioethanol or biodiesel in Russia, except for several regional facilities that are supported by either regional administration or private companies.
However, since 2017 the State Duma has supported a document that is important for the development of regulatory norms in biofuels sector. On June 7, 2018, the State Duma of the Russian Federation approved amendments to the Federal Law “On State Regulation of Production and Turnover of Ethyl Spirit, Alcohol Products Containing Spirit and Limitations on Consumption of Alcohol Products,” developed by the Federal Service for Regulation of the Alcohol Market. The document supported the idea of defining bioethanol and motor bioethanol as separate products. The document includes a more specific definition of bioethanol, identifying that motor oils that contain no more than 10% of bioethanol are not subject to regulation as products containing spirits. Also, it exempts the production of bioethanol as an additive to motor oil from excise taxes.
The Russian bioethanol community has been lobbying for many years for this exemption. However, so far the amendments have not been approved by the government. According to the Russian Biofuels Assn., if enacted, the potential for expansion of bioethanol production in the near term will increase up to 2 million MT. This expansion would be primarily for use as an additive. The potential for expansion for the use of bioethanol production for blending with 95% fossil gasoline (B5) could increase up to 5%. However, without strong support at the federal level, these targets are unlikely to be achieved.
The Government of Russia Order No.892-p of May 10, 2017 approved “The Development Strategy of the Russian Export Center until 2019.” The Russian Export Center (REC) will act as the government agent for distribution of subsidies and state guarantees and will directly support exporters and investors abroad. The total budget for the programs under the “Development Strategy of the REC until 2019” for 2017-2019 is estimated at 33.6 billion rubles. Specifically, REC will compensate companies for their expenditures for certification, logistics and registration in foreign markets.
From the third quarter of 2017, the program for partial compensation of costs for transportation of products with planned allocation of 11.8 billion rubles wasexpected to be fully operational. According to the regulation, REC is authorized to compensate up to 80% to wood pellet exporters of the transportation cost of wood pellets to the final foreign destination. Experts believe that this measure will stimulate further expansion of wood pellet production, which is already export oriented. However, sources indicate that in 2017 none of the Russian exporters received this compensation for transportation. Although most exporters stated that the compensation covered expenses for participation in exhibitions and certification procedures.
Wood Pellets
While Russia’s wood pellet production is relatively young, it accounts for a 6% share of world wood pellet exports. Russia ranks 8th in the world for total wood pellet production, with 3% of total world wood pellet production. According to FAOSTAT, production of wood pellets in Russia is forecast to increase significantly by 5 MMT by 2020, and by 8 MMT by 2025. However, Russian Ministry of Energy and Industry analysts forecast that production will increase at a slower pace, between 10 and 12% annually. Stabilization of world prices for wood pellets in 2018, after a downward trend in 2015 due to a drop in oil prices, will also be a driver for stimulating exports from the Russian producers.
The growing interest from the European Union for biofuels, particularly wood pellets, will continue to be a major incentive for Russia to increase production of wood pellets. Also, recently Asian countries, such as Japan and South Korea, have become more interested in Russian wood pellets and as this interest grows it will also contribute to an expansion of Russian wood pellet production. Currently, Russia is the third largest exporter of wood pellets to the EU, after the United States and Canada.
Production
According to Rosstat (Russian Federal Statistical Service), Russia produced 1.34 MMT of wood pellets in 2017, more than a 30% increase from 2016. However, sources report that production statistics for wood pellets are incomplete. The statistics primarily capture large-capacity factories, while mid-sized and smaller facilities which operate as part of larger wood processing plants do not report their production. Inaccurate wood pellet production statistics also could contribute to the high difference in production in 2013 and 2014.
Therefore, the estimated production of wood pellets in Russia in 2017 in increased to 1.75 MMT, an increase of 32% over production in 2016. Such a significant increase in production is attributed to launching new production facilities and continued strong demand from the European Union and new markets in Asia, such as Japan and China, complemented by the government initiative to provide compensation to wood pellet exporters up to 80% to cover transportation and certification expenses, as well as participation in the exhibitions and fairs. However, the lack of a domestic standard for pellets, poor transport infrastructure, a lack of warehouses, and the product’s seasonality are challenges to further growth of the wood pellet sector in Russia.
Industry sources believe that Russia will require large investments in order to upgrade its facilities and expand its production capacity. Domestic demand can also absorb some of the increased, near-term production; however, experts do not forecast further development of local market in the near-term. As a result, domestic consumption of wood pellets is expected to be flat.