Economies of Scale in Forest-Based Biomass Supply Chains from Early Thinnings in Finland

1. Economies of Scale in Forest-Based Biomass Supply Chains from Early Thinnings in Finland Asko Siintola 11.3.2013

2. Contents • Introduction • Purpose of the study • Methods and materials • Results • Conclusions • References Figure 1. Wood chips in Solsona, Spain. Photography: Michel Noussan

3. Introduction I • International renewable energy targets oblige Finland to increase its share of renewable energy to 38% of total energy consumption in 2020 (1,2) • Of the total renewable energy consumed in 2020 as much as 70% is proposed of being wood-based(3) • Currently wood-based energy is heavily dependent on industrial use of roundwood(4) • Black liquor from pulp mills • Solid wood by-products • Harvesting residues and stumps from final fellings • Use of industrial roundwood has been predicted to decrease in the future(5) • Sources of energy wood not directly linked to the use of industrial roundwood are needed (6)

4. Introduction II • Energy wood (excl. industrial by-products) generally consist of three biomass fractions (7) • Harvesting residues • Stumps • Energy wood from early thinnings • Energy wood from early thinnings has been suggested of being a solution for the increasing energy wood demand not directly linked to the forest industry(6, 8) • Energy wood from early thinnings is most expensive forest-based biomass fraction (10) • It has been extensively used due to remarkable subsidies paid to the supply chain actors (11) Figure 2. Supply chains of whole tree wood chips from early thinnings (7,9)

5. Introduction III • Supply chains of energy wood from early thinnings are defined according to their chipping phases (12) • Chipping at the roadside storage • Chipping at the end-use facility • Chipping at the terminal • The chipping phase affects the transportation load sizes as well as the cost of chipping • According to previous studies chipping at the roadside results in the most cost efficient supply of wood chips from early thinnings to the end-user (10) • Mainly due to high bulk density of transportation load sizes and low fixed costs of chipping • Supply chain with chipping at the end-use facility is the second in cost efficiency (10) • Low bulk density of transportation loads and high fixed chipping costs • Chipping at the terminal is considered as the most expensive supply chain for energy wood from early thinnings (10) • Additional transportation and handling of biomass

6. Purpose of the study • Investigate the costs of energy wood from early thinnings between the roadside storage and the end-use facility • Supply chains with chipping at the roadside, at the end-use facility and at the terminal are included • Study the effects of economies of scale on the cost efficiency of the above mentioned supply chains using a transportation distance dependent cost calculation model • Determine the minimum unit costs of the supply chains and the respective scales of operation • Determine the profitability of the supply functions by comparing the costs of the chips supplied to the end-use facility with the market price paid of wood chips

7. Methods and materials I • The costs of the supply chains are determined using a cost calculation model proposed in the present study • The model assumes a circle-shaped procurement area which is expanded as the scale of operation increases • The expansions are done in 10 km intervals and the maximum procurement area is restricted to 130 km • Each of the procurement discs around the end-use facility can be given unique land characteristics which restrict the availability of suitable biomass Figure 3. The basic concept of the round procurement area cost calculations with 10 kilometre intervals

8. Methods and materials II • The costs for transportation of supply chains using chipping at the roadside and at the end-user are calculated according to the equation above • represents the amount of biomass harvested from each of the procurement areas • –values are times used for different operations • –values are annual effective working hours • –values are machine capacities • –values are respective costs • refers to the ceiling function which rounds a given value to the next upper integer

9. Methods and materials III • The costs for transportation of supply chain using chipping at the terminal are calculated as below • The difference from the previous is that there are two phases of transportation as well as double loading and unloading times + +

10. Methods and materials IV • The chipping costs are calculated for all of the supply chain according to the following equation • The differences between the supply chains come from varying data used for capacities, transportation load sizes as well as loading and unloading times • Chipping at the roadside includes costs of chipper relocation and chipping at the terminal includes annual land rent for the terminal +

11. Results I • According to the results it becomes clear that there are effects of economies of scale in the supply chains included in the study • The unit costs decrease rapidly as the scale is increase with low operation scales • The unit costs, however, begin to increase as the operation scale is further increased • The cost minimizing operation scales are achieved with operation scales below 200 000 m3 per year Figure 3. Energy wood unit costs from roadside to the end-user as a function of energy wood demand with roadside, terminal and end-user chipping supply chains

12. Results II • Based on the calculations also the minimum unit costs and the cost minimizing operation scales are determined • By adding the costs of forest operations and stumpage price from previous studies (10, 14), a total cost of wood chips delivered to the end-user can be calculated • These added costs are 13.50 EUR/m3 for harvesting, 6.10 EUR/m3 for forwarding, 3.51 EUR/m3 for overhead costs and 5 EUR/m3 for stumpage price Table 1. Unit costs and cost minimizing operation scales in the default case with the supply chains included in the study

13. Results III • Comparing unit costs of wood chips with the market price paid by the end-user(13) it can be stated that without subsidies only chipping at the roadside can become profitable • According to the current subsidy system in place in Finland a total of 7 EUR/m3 (excluding taxes) is paid to the forest owner (15) • The subsidies, although remarkably lower than the previous system (16), enable all of the supply chains to become profitable with their cost minimizing operation scales Figure 4. Wood chip unit costs at the end-use facility compared with the market price of wood chips paid by the end-user

14. Conclusions I • The unit costs of wood chips from early thinnings decrease rapidly with low operation scales and have an increasing trend with higher operation scales. Due to the increasing trend, the supply chains have local cost minimizing operation scales i.e. increasing the operation scale infinitely does not result in cost efficiency improvements • With extremely thin profit margins even with the least expensive supply chain the subsidies paid to the supply chain actors are vital if energy wood from early thinnings are desired Figure 5. Wood chip grading in Solsona, Spain. Photography: Michel Noussan

15. Conclusions II • Based on the minimum unit costs and the optimal operation scales it can be stated that: • Supply chain with chipping at the roadside is always the least expensive supply chain. Its costs are minimized with medium operation scale and the costs are least affected by the increasing operation scale. • Due to expensive chipping equipment, the supply chain with chipping at the end-use facility needs the largest operation scale for optimal cost efficiency. • Terminal chipping is the most expensive supply chain used for early thinning energy wood supply. It reaches its minimum unit costs with the lowest operation scale. Terminal chipping can be justified if the value of improved security of supply is larger than the difference in the energy wood prices. Figure 6. Roundwood loading operations in Solsona, Spain. Photography: Michel Noussan

16. References I • UNFCCC. 1998. Kyoto Protocol to the United Nations Framework Convention on Climate Change. Available at: http://unfccc.int/resource/docs/convkp/kpeng.pdf • European Union. 2009. DIRECTIVE 2009/28/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC. Official Journal of the European Union. • The Ministry of Employment and the Economy. 2013. Kansallinen energia- ja ilmastostrategia: Strateginen päivitys 2013. Taustaraportti. [National energy and climate strategy: A strategic update 2013]. Available at: http://www.tem.fi/files/35609/Energia-_ja_ilmastostrategian_taustaraportti_LUONNOS.pdf (In Finnish). • Ylitalo, E. 2012. Puun energiakäyttö 2011. [Wood energy use in 2011] Metsätilastotiedote. Metsäntutkimuslaitos. Metsätilastollinentietopalvelu. 16. (In Finnish). • Hetemäki, L. and Hänninen, R. 2009. Arvio Suomen puunjalostuksen tuotannosta ja puunkäytöstä vuosina 2015 ja 2020. [Assessment of the Finnish wood processing industry and use of wood in 2015 and 2020]. Working Papers of the Finnish Forest Research Institute 122. Available at: http://www.metla.fi/julkaisut/workingpapers/2009/mwp122.pdf (In Finnish). • Kallio, A. M. I., Anttila, P., McCormick, M. & Asikainen, A. 2011. Are the Finnish targets for the energy use of forest chips realistic—Assessment with a spatial market model. Journal of Forest Economics 17(2): 110-126. • Laitila, J. 2006. Cost and sensitive analysis tools for forest energy procurement chains. Forestry Studies 455-10. • Oesch, P. 2012. Uusiutuvat energianlähteet, edistyminen vs. tavoitteet vuoteen 2020 - Energiateollisuuden näkökulma. [Renewable Energy Sources, Progress vs. Targets to year 2020 - The Perspective of the Energy Industry]. Energiateollisuus ry. (In Finnish). • Laitila, J. 2008. Harvesting technology and the cost of fuel chips from early thinnings. Silva Fennica 42(2): 267-283. • Laitila, J., Leinonen, A., Flyktman, M., Virkkunen, M. & Asikainen, A. 2010. Metsähakkeenhankinta- ja toimituslogistiikanhaasteet ja kehittämistarpeet. [The challenges and development needs of forest chip procurement and logistics]. VTT. Research Notes 2564. (In Finnish).

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