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Orsted (OTCPK:DNNGY), the $50b European energy company best known for its market-leading wind business, flagged a shortage in the niche wood pellet market Monday. In addition to operating the world's largest wind business, Orsted (OTCPK:DNNGY) manages nine power plants in Denmark. Of those, six plants run on wood pellets, while two run on gas and one on coal. In an interview published by the FT Monday, CEO Mads Nipper said, "biomass is hard to get right now because everyone is looking for fuel." As a result, the company is planning for increased coal consumption.
Political fallout from the war in Ukraine has been a boon for European gas producers like Equinor (EQNR) and Shell (SHEL). Though coal investors have been quick to highlight that any shortage in gas would lead to elevated coal imports, benefitting producers like Peabody (BTU) and CONSOL (CEIX). However, few have drawn the line between the war in Ukraine and shortages in the "biomass" (wood pellet) market.
Many have questioned the environmental benefits of burning trees to generate power, nevertheless, wood pellets are deemed "renewable" and qualify for lucrative European carbon credits. In an environment of energy scarcity, rising carbon prices and rising fuel prices, wood pellet producers are well positioned to benefit.
Enviva (EVA) accounts for 14% of the global utility-grade wood pellet market, though the company is largely contracted. The UK's Drax (OTC:DRXGF) may offer more spot exposure to rising prices; however, the company is in the midst of restructuring legacy coal power generation assets. Regardless of near-term earnings, emerging trends towards energy security and low-carbon solutions will likely provide a tailwind to the sector. Trends flagged in this recent bullish note from a SA contributor.