Cow farts and wood boilers

Fonterra treads a risky path through an energy and political minefield.

The news last week is that Fonterra is investing $64 million to convert two boilers from coal to wood pellets.

The funding for this, from what I can establish, is a joint venture between the EECA, which is mostly taxpayer funded and Fonterra’s shareholders, the farmers.

Let’s unpack this and see if, on the balance of what we know, is this a good investment decision?

Governance.

Good governance is hard.

Risk assessment is a crucial element of good governance, and a key element of a board’s ability to strategic decisions.

This is especially important as a business gets bigger, the networks get more complex, and the organisational entropy increases. Things become increasingly unstable and the consequences of getting it wrong can be huge.

When you are New Zealand’s biggest export industry you also attract your fair share of controversy, with activists watching your every move very closely waiting for a miss step to pounce on.

Boards are continually looking for a good news story. Especially when they are besieged by bad news stories, like Greenpeace suing them for misleading consumers about 100% grass feed butter, or Smith vs Fonterra emissions reductions litigation.

Today’s good news story from Fonterra is that they are proud to announce that they are decarbonising by converting boilers at two plants to wood pellets.

A risky proposition.

Regular readers will recall I have written at length about the wood pellets plans of Genesis for the Huntly power station. Thats good background reading to this post and can be found here.

As a summary we can say with a high degree of certainty that this decision will achieve the following outcomes for Fonterra.

• Increase their energy costs - Wood pellets are more expensive by weight than coal, but have only about half the energy density, so they need to buy twice as much.

• Add logistical complexity - As well as needing twice as much of them they will need to keep the wood pellets dry. Unless they are going to build a massive under cover storage facility, they will need a lot more deliveries which adds up to a big increase in trucking.

But hey that’s a small price to pay if it reduces emissions, right?

Do they really reduce emissions?

Now we are getting into contentious territory.

This story begins a long time ago, 1997 to be exact. The year of the Kyoto protocol, the precursor to the Paris Climate Agreement.

It is the 1997 Kyoto protocol interpretation of woody biomass that guides both the NZ Govt. and Fonterra’s claims that burning wood pellets reduces emissions.

At Kyoto a very simplistic interpretation of biofuels was adopted. I’m sure it was well intentioned, but it was not particularly scientific.

The idea is that if you burn a tree, it emits CO2. But as long as another tree is planted it will take up the CO2 emitted and sequester it leading to a circular net zero. On face value it simple and is easy to understand.

This however leaves out two key aspects of the process:

• A tree will not fully sequester the emissions of its incinerated predecessor until it has reached maturity. In the New Zealand pine context this will be 20-25 years. This is commonly known as carbon debt.

• It does not account for the logging, logging soil disturbance, processing and transport emissions associated with this highly energy intensive manufacturing process.

On the day that they are burnt the wood pellets will emit ~150% more CO2, more particulates, and more nitrous oxide than coal on a per unit of energy basis.

The reason that wood pellets emit more CO2, particulates, and VOC’s (volatile organic compounds) than coal is simply a function of their lower energy density. More volume has to be burnt to produce an equivalent amount of energy.

The carbon accounting underpinning the wood pellet industry is loose at best. The context of the supply chain is important and needs to be very closely scrutinized to have any credibility.

Not very popular.

Wood pellets are losing their popularity quickly due concerns about to the harvesting and manufacturing processes primarily in the US and Canada. Environmental groups are mounting ever increasing opposition to the industry and the questionable carbon accounting that under pins it.

Governments are also seeing through this creative carbon accounting with Australia reversing the decision to classify woody biomass as renewable in 2022.

Unless the Fonterra board wants to find itself embroiled in more controversy it is of critical importance that they have full traceability of their supply chain.

This whole exercise only has credibility if the feedstock is derived from exotic forestry residues (offcuts, slash, sawdust, bark, etc).

Again, this is where definitions matter. The US and Canadian industries have been found to define residues as entire forests with low commercial value, not just timber processing byproducts.

Fonterra are claiming they will reduce their emissions by 155,000T CO2e annually.

A back of the fag packet calculation suggests this equates to ~55,000T of anthracite coal being replaced by wood pellets each year.

On an energy equivalency basis this will require ~110,000T of wood pellets.

It’s not easy to establish how much wood pellet fuel New Zealand produces annually but it appears to be in the order of 180,000T / year. So, on face value Fonterra would need a 60% increase in the current domestic supply to meet their demand.

Given that these boiler conversions are set to be complete by September 2025 I would suggest that Fonterra will be looking to import fuel until the domestic industry is able to scale up to meet their demand. That is if the price is right of course, which is questionable given wood pellet manufacturing is energy intensive and the price of energy in New Zealand is about three times that compared to the US and Canada.

From Fonterra’s perspective it is extremely risky to import pellets if they want to avoid getting embroiled in the DRAX power station controversies over wood pellet feed stock sourcing and the £ 25 million in fines they have been issued this year alone.

Fuel supply traceability and questionable carbon accounting, that due to political pressure could change at any time, make this a very risky investment for Fonterra that could easily result in stranded assets and a return to coal.

Confused.

What struck me as the most ironic thing about this wood pellet story is that on one hand Fonterra can believe in the biogenic carbon cycle of forestry, but not the biogenic methane cycle of ruminant animal agriculture.

These are literally the same ideas.

What’s more the ruminant animal biogenic methane debate, and associated carbon accounting was formally addressed by the IPCC years ago with the introduction of the GWP* metric to replace the GWP100 calculation for methane equivalency.

However, it seems that Fonterra’s board like gambling with their brand and instead of lobbying for the use of GWP*, to accurately calculate the industries emissions, they instead decided to flirt with the idea of feeding cows Bovear in 2021.

This culminated in social media storm last week which shows yet again that Fonterra’s board are not giving risk assessment any consideration in their investment decisions.

Wood pellets are a risky proposition too. It’s not often you find a product so controversial that the environmentalists around the world would prefer that you use coal.

The true irony is that if only Fonterra were able to convert these boilers to natural gas they would have half the emissions of coal and a third of the emissions of wood pellets.