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THE IMPACT OF EMISSION TRADING ON THE COST SITUATION FOR PULP AND PAPER MILLS - RISKS AND OPPORTUNITIES

Authors

Magnus Titus1, Mats Nordgren2 and Karolina Boholm2

Companies

1The F Group, Stockholm, Sweden
2F-Celpap AB, Stockholm, Sweden

Keywords

Kyoto protocol, emission trading, energy cost, energy interactions, CO2 emissions

 

 

 

 

 

ABSTRACT

The application of the Kyoto Protocol within the EU, by the Emission Trading System coming into action by January 1, 2005, will have a significant impact on the energy cost situation for the European pulp and paper mills. This will also have some impact on the South African pulp and paper industry, indirectly as in the competitive position of the independent mills or directly by the price for energy, raw material and chemicals.

This paper gives a brief overview over the European situation as well as gives a short introduction to possible energy actions, especially at a regular pulp mill.


1. Introduction:

The application of the Kyoto Protocol and primarily its Emission Trading System will have a big impact on the energy situation for the pulp and paper industry.

Also the South African pulp and paper industry will be directly or indirectly affected through the overall energy and raw material cost increases as well as the probable political implications for the South African market.

This paper gives an insight regarding the energy situation within the EU, with focus on the possible consequences for the pulp and paper industry. Also examples of what measures that can be taken to improve the situation and possibly gain some advantages with new views on energy production at a regular pulp mill.


2. The Kyoto protocol and its applications in the EU:

In 1997 the 3rd meeting under the UNFCC convention (United Nations Framework Convention on Climate Change) was held in Kyoto, Japan. At this meeting a document was formed regarding how the greenhouse gases (GHG, primarily carbon dioxide) in the atmosphere should be stabilized at a level where the human impact on the climate system should not be harmful.

Today 122 countries, representing 44.2% of the world's carbon dioxide emissions, have ratified the protocol. The protocol states that the industrial countries (so called Annex 1 countries) should reduce their emissions with 5.2% from 2008 through 2012 based on 1990 years levels.

To become legally binding the Kyoto Protocol has to be ratified by at least 55 countries as well as that 55% of the Annex 1 countries' carbon dioxide emissions should be covered. Some countries have not ratified the protocol, or stepped out of the process, due to the effects on the local industry as well as the un-clarity regarding its practical application. Among these countries are the USA and Russia, of which one has to sign the protocol for that is should become valid.

The protocol describes three "flexible mechanisms" that should enable the countries to reach the targets; the Emission Trading Scheme (ETS, trading with emission allowances for companies with CO2 emissions), the Joint Implementation (JI, by making GHG reductions in other "Annex 1" countries companies can get permit compensations in their home country) and the Clean Development Mechanism (CDM, "Non-Annex 1" countries has the opportunity lower their emission levels and "Annex 1" countries can switch these reductions into allowances, so called Certified Emission Reductions (CER)).

During the 2006 should all the involved countries report to the climate convention the proven progress of GHG reduction in each country respectively.

The EU has made the decision to follow the Kyoto Protocol even if it is not formally ratified, which will have direct implications on the EU's industry.

 
3. Emission trading and its consequences for the European pulp & paper industry:

The definition of the EU Emission Trading Scheme (ETS) is that it is a system of allowances for emissions of CO2 from the industries concerned that can be bought or sold. Thus the CO2 emission levels should be stabilized. The allowances are defined to be based on tons of CO2 emission from fossil fuel and the amount of allowances is designed so that there is a price for the emissions as well as the level of emission is set.

The pulp and paper industry is directly mentioned as a subject to the ETS. All mills with a production of 20 t/day or more of pulp and paper will be included in the system.

A country or company that have reduced their CO2 emissions below their allowance allocation has the opportunity to sell their surplus emission levels to another country or company. This also concerns companies within "Non-Annex 1" countries, e.g. South Africa, which will have an opportunity to reduce their emission levels, which then can be transferred to a company in an Appendix 1 country where it is switched into an allowance as a Certified Emission Reduction (CER) under the Clean Development Mechanism (CDM) program. The system is designed so that it always will be a lower cost for a CER than an allowance, which means that emission reductions in Non-Annex 1 countries will be attractive.

The trading of emission allowances will start within the EU on January 1, 2005, regardless of the outcome of the ratification of the Kyoto protocol. The allowances traded will correspond to 46% of EUs total carbon dioxide emissions.

Each country within the EU trading area has to define the allocation of allowances to the local industry through a National Allocation Plan (NAP). They will also respectively be responsible for the handling and control of the allowances. Every NAP will be checked and confirmed by the EU Commission before implementation. This means that all countries will be compared based on the same principles.

However the EU Commission will not evaluate how the NAPs can affect the same industry differently in different countries, thus not taking into account differences between countries when it comes to the competitiveness of certain industries. This could potentially have a big effect on the competitiveness of the pulp and paper industry in different European countries.
 
The European pulp and paper industry will be affected in four different areas:

  • There will be a direct additional cost (or value) for the pulp and paper mills due to the cost of emission allowances for the CO2 emissions from the fossil fuel used based on historical levels. The price for emission allowances is very difficult to forecast, prices between EUR 5 and EUR 50 per ton CO2 has been mentioned. EU has forecasted that the allowances will be in the range of EUR 30, however most experts expects an "over-allocation" of allowances within each EU country which will press the price below this level, most likely in the range of EUR 15 - 20. Also the impact of the Russian industry situation may have some effect on the price level if they sign the Protocol.
  • The price for electrical power is expected to rise. A major part of the electrical power in continental Europe is today made from coal, thus the effect of the cost for CO2 allowances will be significant. This will also affect the Scandinavian industry even if the electricity there is primarily based on hydro-power generation. The level of price increase of external electrical power is though unclear, but is expected to be in the range of 20 - 30% over the next 8 - 10 years. A ten-year-option for electrical power in Europe is today trading at 40% higher price than today. However, there are also other factors involved regarding the expected future price levels; the expectation for the oil price to increase on a long-term basis and the uncertainty regarding the future of the nuclear power in Europe.
  • The price for raw material, both wood and recycled fibers, is expected to rise due to a competitive situation regarding an expected growth in the bio-fuel area.
  • The price for chemicals to the pulp and paper industry is expected to rise to cover the cost increase for electricity also within the chemical industry as well as costs for direct emission allowances.

As described above, the most significant impact on the pulp and paper industry is likely to come from the increase in the cost for electrical power. However, there is still a big degree of uncertainty on how the situation will look like. This causes the European industry to be very cautious at the moment.

It is also worth mentioning in this context that the Swedish Government has made the decision to apply a system with certificates on the electricity production, so called "Green Certificates". This to boost the development of electricity production based on renewable energy sources, for example bio-mass from wood. Also other countries in Europe, e.g. Belgium, Holland, Norway, Great Britain and Austria, are looking at similar systems. In the future it is a probable scenario that a new common "Green Certificate" market will be developed within the EU, in parallel to the Emission Trading system. This will in such case have a significant effect on the pulp and paper industry.


4. The energy situation for the independent mills:

In general terms the usage of electricity within the pulp & paper industry has significantly increased following the increased production rates at the individual mills. At the same time the specific usage of fossil fuels has drastically been reduced. Energy savings in the process as well as co-generation production of electrical power is today common procedures within the industry.

However, the pulp and paper industry has a very good potential to further improve the situation. It was stated from the Swedish Forest Industry Association that the Scandinavian P&P industry has an opportunity to overall save the external specific electricity need for the mills with more then 10% until 2020. The expectation is now that this process will go faster than expected due to the forecasted cost increases.

The effect of these cost increases will be very different depending on each specific mill's situation and infrastructure. It could even be so that this could be an opportunity for some mills to create better profits than today by focusing on energy production.

The main issues for the specific cost effects at the mills are the dependency of external electrical power (and how it is produced and taxed), the raw materials used and the direct usage of fossil fuel. This has to be carefully investigated and analysed in each specific case. However, there are two examples calculated by F that could highlight the risk or opportunity for the mills, in this case strictly from an energy situation point of view:

  • A DIP versus a TMP based newsprint paper mill. The DIP based mill will have a clear advantage by using significantly less electricity to produce the pulp compared to a TMP based mill. This will give the DIP based mill a very cost competitive position on the market. However, the effect could in most cases be dampened to some extent since the DIP mill will most probably get higher costs for emission allowances due to more fuel consumption to create process heat/steam.
  • A modern market chemical pulp mill has normally an excess of energy, both electricity and heat. By utilizing the energy situation efficiently by installations of highly efficient boilers and turbines the mill can create a possibility to sell power to external consumers with a good profit.

The typical chemical pulp mill is a good case to study more in detail, since there is room for some actions that could enable a more cost and income efficient overall energy situation.

The mill F Pulp & Paper has studied has a common mill structure that could be a good representative for an average kraft pulp mill. Some basic data about the energy situation at this specific mill:

  • The recovery boiler is a standard boiler with 61 bar(a) pressure and 450 C steam temperature.
  • The existing co-generation steam turbine gives a possible electric power production of 710 kWh / ADt. The calculated electricity production is based on that the turbine is running at the optimum process point, thus the average production could be somewhat lower.
  • The medium pressure steam net is a 12 bar(a) system and the heat usage from this net is 3.2 GJ / ADt.
  • The low pressure steam net is a 4.5 bar(a) system and the heat usage from this net is 9.8 GJ/ADt.
  • The feed water temperature is 120 C.

Figure 1

Following actions will increase the possibility to produce more electricity:

  • A lower pressure in the low pressure steam net from 4.5 to 4.0 bar would give + 25 kWh / ADt.
  • Increased feed water temperature from 120 C to 140 C, which increases the circulation of steam through the boiler and turbine, + 33 kWh / ADt.
  • By using steam for pre-heating the combustion air it is possible to increase the circulation of steam through the boiler and turbine, + 53 kWh / ADt.
  • To go from 84% to 90% isentropic (internal) efficiency by upgrading the turbine, + 77 kWh / ADt.
  • Using turbine bleeding steam in soot blowing , + 18 kWh / ADt
  • Other un-specified activities to increase production of electricity would be to:

    o Identify and change from medium pressure steam to low pressure steam for users that are not requiring the high temperatures.
    o Where possible, increase the pressure of low pressure steam by steam ejectors instead of using, or completely switch to, medium pressure steam.

This means that the combined calculated possibilities at this mill would be to increase the electrical power production with close to 30%, from 710 kWh / ADt to 915 kWh / ADt.

Another direction the pulp mills are looking at is the latest technology regarding recovery boilers. E.g. in Sweden the normal recovery boiler is running at 60 bar / 450 C. Since some time back there are new recovery boilers on the market designed for much higher steam data, e.g. 135 bar / 515 C.  In combination with new systems including reheat cycle in the superheater (common in power production facilities) would give a possible increase of electrical power production of 40% or more from today's levels, which is very attractive.

Figure 2

5. Comments and Conclusions:

The basic conditions for running efficient pulp and paper mills in Europe is on its way to drastically change.

The application of the Kyoto Protocol and its Emission Trading Scheme will primarily have a big impact on the cost for external electric power to the mills, thus affecting the preconditions for efficient investments and production. It will also affect the price and availability for fibers and chemicals in many instances.

It is however very important to underline that the future situation will be very specific for each mill. Current and dynamic models on how to investigate the sensitivity of each mill due to the location, raw material availability, local fuel sources etc will be critical to make the right decisions about a mill's future structure.

It is also so that not all energy savings and investments to reduce fossil fuel usage are profitable. It depends on the long-term price development and complexity of the system of prices of oil, electricity, emission allowances, energy taxes etc Careful calculations and sensitivity studies have to be made to fully understand the financial return on such actions.

Another perspective that might be interesting for the South African pulp and paper industry in the future, is to study energy savings and investments due to the positive effects of Clean Development Mechanism projects (CDM). It is possible that it will be a lower cost for an EU company to develop a CDM project in South Africa to create CER certificates (Certified Emission Reductions) than to buy ETS allowances within the EU. The possible cost effective emission reductions are larger in "Non-Annex 1" countries than in most EU countries.

The conclusion is that the energy situation within the pulp and paper industry world-wide will become more and more important, and that it will become very difficult to make the right decisions without a good basis. Excellent understanding of the pulp & paper processes and in-depth knowledge of the preconditions for our industry, combined with knowledge of the energy market and policies, will become strategically necessary for the industry.


References:

Karolina Boholm, Student, KTH / Royal Institute of Technology, Stockholm, Sweden - Literature Report part of Master Thesis, Stockholm, Sweden (to be published), Royal Institute of Technology, Stockholm Sweden

Rolf Wiberg, F-Celpap AB, Stockholm, Sweden - "Green" Certificates for Electric Power - New Preconditions for Co-generation Power (The Recovery Boiler Conference - Nov. 13, 2003, Stockholm, Sweden)

R. Wiberg, AM Carlsson, J Nygaard, A-M Hjalmarsson et al - Excerpts from Internal Reports re Energy Policies in Europe and Scandinavia during 2003 - 2004, F-Celpap AB, Stockholm, Sweden

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