“Power and Heat from Peat – Peat in Finnish Energy Policy” (Part 5 of 6)

While most of the publication “Power and Heat from Peat – Peat in Finnish Energy Policy” is written in the Finnish language, the following six English summaries give valuable insight into this largely unknown energy source. Vapo Oy is the largest producer of Peat Fuel in Finland.

The Energy Peat Market in Finland – Summary

In the late 1960s and the early 1970s the decision makers in the Ministry of Trade and Industry and the management of the State Fuel Centre wisely foresaw that it was necessary to create a functioning market for peat. Small-scale producers, inconsistent peat quality and reliance on one customer (the Finnish State Railways) were factors that sowed the seeds of destruction for sod peat production in the 1950s. Admittedly the sector had also been depressed by exceptionally cheap oil. It had become clear that without state subsidies the peat industry could not compete against oil and coal because the imported fuels had a higher thermal value and prices in the 1960s were heading downwards.

Peat had to make up in price and security of supply what it lost in thermal value. A price comparison was made with oil in the 1960s and the early 1970s. Essentially peat was, and still is, a good fuel in terms of security of supply because the production, supply and usage chains are all within Finland.

The government’s decisions to increase peat production many fold were in principle a strong guarantee of continuity of supply. Responsibility for increasing peat production was given to a state-owned company, the State Fuel Centre, thus avoiding the risk of operators using fluctuations in the market to make quick profits, which had been a problem with subsidised sod peat production in the late 1940s and early 1950s. The state guaranteed the financing and long-term viability of peat production. In the 1970s the State Fuel Centre was above all a strategic commercial enterprise.

The state also increased other forms of state regulation
so as to ensure the viability of the new sector. Fuel taxation
on oil and coal was raised in the 1970s, whereas peat
was exempt from fuel taxation and also benefited from
a primary production deduction until the 1990s, when
energy taxation was reformed to comply with Finland’s
EC membership conditions. Oil began to rule itself out
of combined heat and power generation in the 1970s
because of its increased price instability. In local, smaller
scale heat generation, on the other hand, oil maintained
its position right up until the 1990s.

The whole range of state regulation was deployed in the
1970s and 80s: state capital financing, taxation, investment
subsidies, soft loans and transport tariffs. Regulation was
designed to create new markets and displace oil from heat
generation. In that respect it succeeded.

After the early 1990s using such a broad range of
regulation was no longer possible for any form of energy
generation. Since the mid-1990s energy generation has been
subject to EC state aid regulations and EC competition
legislation.

The corporatisation of the State Fuel Centre in 1984
exposed the company to more intense market competition.
Vapo Oy expanded the commercial potential of peat
production in the 1980s by moving into garden and
environmental peat and expanding internationally. Vapo
Oy established a presence in the US, Indonesian and
Malaysian garden peat markets in the 1980s. Operations
were based on subsidiaries, which were set up in the US
and Asia. However, the different operating culture in
these far-off markets, with different types of peatland
than in Finland and a lack of established brands, caused
problems. Vapo closed down its overseas activities in the
1990s, when the second phase of Vapo’s internationalisation
began. This has centred on the Baltic garden peat and
biomass fuel markets, which have picked up following the
dissolution of the Soviet Union and the liberalisation of

trade. The horizontal integration of Vapo Oy was based
on the acquisition of recognised brands and companies
in Sweden, Denmark, the Baltic countries and Poland.
Compared to the first phase of internationalisation, the
second phase has been successful. Vapo Oy has grown
into the leading peat industry company and one of
the leading producers of wood pellets in the Baltic Sea
region. Vapo’s heating business, based on local fuels, also
expanded into Sweden and Estonia post-2000. In Finland,
Vapo’s heating business had started life in the late 1980s
as a way of bolstering the company’s vertical integration.
It was relatively straightforward to integrate Vapo’s peat
production and sawmill output into nearby heating plants.
In the 1990s Vapo Oy also entered the electricity business
through Mäntän Energia Oy and Forssan Energia Oy. The
heating plants owned by Vapo Oy or its subsidiaries have
used milled and sod peat, forest chips, wood pellets, reed
canary grass and recovered fuels.

The most recent strategy to grow the business has
been in the field of transport biofuels. Vapo Oy and the
Technical Research Centre of Finland (VTT) launched
a research project in the middle of the 2000s to produce
biodiesel from forest biomass and peat using Fischer-Tropsch
synthesis. Vapo’s partner in the project is Metsäliitto.
The advantage of peat over competing primary fuels
– fuel oil, coal, natural gas and forest chips – has been its
stable price. Compared to other domestic-origin fuels, the
price of forest chips, for example, has been considerably
less stable between the 1970s and the 2000s.

Firstly peat has been a local fuel. Its reference price
has been the world market price of oil and coal, with the
difference that peat does not compete in world markets
in the same way as oil or in large geographical markets
like coal. Between 1900 and the 1990s, Finnish energy
peat was used in Finland, Swedish energy peat in Sweden,
Irish energy peat in Ireland, Soviet energy peat in the
Soviet Union, etc. There have been significantly fewer
components contributing to price instability than for
fossil fuels, which are subject to truly global markets of
supply and demand.

On the other hand, energy peat has been crucially
dependent on being lower in price than comparable
imported fuels. This is because the commissioning costs of
a peat-fired plant in the 1960s and 1970s were somewhat
higher than for oil or coal, and peat has a lower thermal
value than fossil fuels. Producers have made great efforts
to maintain stable prices for peat. State regulation also
helped to ensure price stability, either directly through
taxation or indirectly through other measures affecting
the price.

It has been possible to forecast peat consumption very
accurately already at the planning stage of power and
district heating plants, when annual supply contracts to
meet baseline requirements have been concluded. There
has been a good balance between supply and demand up
until the present day. Supply contracts have been long –
5 to 10 years – because this has been in the interest of
both parties. Heating plants cannot build their fuel supply
future on a short-term basis. Then again, the prerequisite
for stable supplies is predictable demand. For example,
setting aside and preparing productive peatlands is a long
and expensive process for which there must be a future
payback. In particular, large producers like Vapo Oy and
Turveruukki Oy need to know their basic delivery volumes
well into the future. The situation is different for small
producers, who mainly provide back-up supplies.

Peat pricing practices were improved in the 1970s,
with a move from cubic metre pricing to energy content
pricing. Energy content pricing is fairer for all concerned.
The energy content of peat fluctuates depending on the
moisture content and the properties of the peatland. Peat
producers and the Association of Finnish Peat Industries
introduced common peat quality standards in the late
1970s. This also helped to increase confidence in the
quality of the fuel.

Energy peat had no fuel tax component before the
1990s. Nonetheless the price of energy peat has remained
stable even after the imposition of carbon dioxide-based
taxation. The feed-in tariff for electricity generated in
condensing power plants from fuel peat introduced in
2006 has improved its competitiveness against coal.
Peat has always been seen as an alternative not only
to oil but also to coal. This trend has reinforced in the
1990s and 2000s. Peat has been favoured since it is a
domestic-origin fuel, which enhances energy self-sufficiency,
improves security of supply, supports the development of
combustion technology adapted to domestic-origin fuels
and provides employment in regions with population
outflows. Peat production can also be integrated into forest
chip production, thus providing contractors with a better
spread of work over the seasons. Peat production takes
place in summer, whereas forest chips have traditionally
been produced in winter.

The after-use of peat production areas also opens up
opportunities to cultivate important forest and crop biomass.
The overall carbon dioxide emissions from transporting
peat are lower than for coal, which is imported by cargo
ships.

The fact that enough peatlands were brought on
stream in the 1970s and 1980s with support from the
state and regional planning councils also contributed to
price stability. Supply levels were known very precisely.
Peatland surveying by the Geological Survey of Finland
(GTK) and the State Fuel Centre in the 1970s and
1980s contributed significantly to price predictability,
smoothing the transition to energy content-based pricing
and maintaining price stability.

The rental agreement in the early 1980s between the
peat industry and the Central Union of Agricultural
Producers and Forest Owners (MTK) also promoted
price stability. It harmonised rental practices throughout
the country.

The main factor contributing to peat price stability
has been the active research and development activity of
the largest peat companies, Vapo Oy and Turveruukki
Oy, and the professionalism of peat contractors. Annual
peat yields have improved, there has been a major focus
on quality, harvesting methods have been developed for
Finnish peatlands and the contractor model has reduced
the heavy labour cost structure of the 1970s. Use of the
shortest possible routes from the production site to the
usage site has contributed to stable logistics costs.

In the 1990s and 2000s Vapo’s terminal system has integrated
forest chip production into peat production fields, which has
improved the profitability of mixed fuel consignments.
Until the late 1990s it was possible to maintain a good
balance between supply and demand. Environmental
permits are a home-grown factor representing a major
change process. The slowness of obtaining environmental
permits has impaired supply-side predictability and more
generally affected the security of supply of domesticorigin
fuels. The liberalisation of electricity markets, the
establishment of a Nordic electricity exchange and growing
sales of biomass-based fuels in the Baltic Sea region are
external factors affecting energy peat markets. Since the
establishment of the Nordic electricity exchange, fuel
demand for heating plants with condensing power capacity
has been particularly difficult to forecast. Requirements
have shifted rapidly.

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