There is a solid business case for pellet production in Ukraine. Our analysis suggests that in the majority of cases pelleting is a profitable undertaking. However, pellet production remains just a profitable business instead of becoming an industry of national importance that can help to improve Ukraine’s energy security. This can be explained by a number of general obstacles associated with the country’s legislation and market development as well as specific factors relevant for the pelleting industry.
Pelleting is a way of making use of biomass residues that would otherwise remain unused. Pellets can re-place fossil fuels and, thus, cut greenhouse gas emissions and create the conditions for sustainable economic development. However, as of now a large share of the pellet production (about 85%) is exported. This is due to the low demand for pellets from local consumers. Indeed, competition from other, cheaper and often subsidised, fossil fuels used for heating explains why pellet producers derive the largest part of their income from exports. Nevertheless, the market for pellets has significant potential. Indeed, we estimate that about 20 mln t of grain straw, 2 mln cub m of wood residues and up to 1.5 mln t of sunflower husk are currently unused or underutilised. These inputs could be converted into at least about 11 mln t of pellets worth about EUR 1 bn – well above its current estimated size of 240 thd t per year.
The key question when determining if and what potential the market has, is to analyse if there is a business case for pellet production in Ukraine. To answer this question we have carried out a profitability analysis for a number of relevant production facilities. Interviews made with about 20 small Ukrainian pellet producers indicate that there seems to be a good business case for pellet production in Ukraine. This is supported by the results of our profitability analysis. The calculations show that all types of pelleting plants considered could pay back their initial investments in less than two and a half years and could provide returns in the range of 41 300% (measured as Internal Rate of Return). However, the actual profitability depends on the kind of the feedstock used and the capacity of the plant. For example, profitability increases significantly for larger plants. Also it is strongly affected by a list of special conditions that must be met in order to make this business profitable. The majority of these conditions we have accounted for as assumptions in our calculations.
While the results highlight the profitability of the pelleting business, there are some major barriers and bottlenecks on the way of making use of this potential. First of all, the pelleting industry is held back by the poor investment climate in Ukraine. To be more specific, although legislation provides some supportive measures such as VAT and income tax exemption, accessing these is difficult. Second, unstable and unpredictable governmental policies together with the absence of long term goals deter investment in modern equipment which is required for high quality pellets. Instead, modernised soviet technologies are used in the majority of pellet production facilities in Ukraine. Besides, the pellet industry faces other obstacles such as difficulties to obtain feedstock in sufficient quantity and quality. This is partly caused by a lack of collection, transportation and storage infrastructure. Furthermore there is a lack of qualified staff to operate and main tain the operations.
Therefore, the first and the most important recommendation is to develop and enforce a long term strategy and supportive legislative acts that will create a stable basis to develop large scale and high quality pellet production in Ukraine. This should include transparent targets and a clear communication of the instruments in place to achieve the objectives. It is important not to introduce any export restrictions and develop the internal market. As our analysis shows, and as opposed to other types of renewable energy, there is already a good business case for pellet production in Ukraine. What potential investors need is therefore legislation that provides certainty for planning and long term investments. Finally, it is important to develop rural infrastructure in the context of collection, transport and storage of feedstock to stimulate business development in regions.
