Socio-economic effects of the use of bioenergy

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2 This document should be cited as: Sikanen, L., Nivala, M. & Prinz, R. (2014). BioPAD:. Available online from Socio-economic effects of the use of bioenergy Introduction Bioenergy at its best is decentralised energy production based on local fuels. Local energy production generates significant socio-economic impacts. These impacts are important for most of regions but especially rural areas and peripheries. Socio-economic effects are generated by the investment project usually involved to establish bioenergy system, employment effect of fuel supply and running the plant and the money circulated in local economy instead of paying it to fossil fuel supply companies from elsewhere. In many cases, especially in heat production, bioenergy can also be a cheaper option for consumers and so release more money for other uses in the local economy. Direct savings on energy bills and business opportunities for local people have often been factors in launching bioenergy investments for public or governmental stakeholders. Socio-economic effects in general Traditionally, socio-economic effects or impacts are divided into three categories, direct, indirect and induced impacts. Direct impacts are immediate consequences of the project. Typically building and purchase of needed inputs and project implementation. Indirect impacts are changes in 2

3 production and employment effects which are created for people and businesses serving and supporting the project. For example, a workshop selling services to a timber harvesting company. Induced effects are consequences of spending money earned or saved by the project. This spending benefits other businesses, not directly involved in the project. For example, a city uses energy bill savings to renovate a library. Quantifying of impacts is usually done by multipliers per unit or output. Two scientific main approaches have been used in the quantification calculations. Keynesian Multiplier Theory was introduced by Richard F. Kahn in 1930 s (e.g. Kahn 1931). This approach is based on the circulation of money in society. If, for example, local municipality invests tax based money for energy production unit, wages will be paid and raw materials bought, which gives more money for workers and suppliers to consume. Multipliers are created based on percentages of sawed and consumed money. Another approach is regional input-output modelling originally introduced by Leontief (1966). Inputoutput-modelling is an application of the neo-classical theory of general equilibrium. It studies regionally connections between economic sectors. In addition to two main approaches, many other calculation models have been done based on real-life data sets and creativity of researchers. In wood energy production, the multiplier is roughly 1-2 in Europe and North-America. Multipliers can vary a lot case by case. Due to this, professional discretion is advised for using multipliers in case studies. On the other hand, it is important to remember indirect and induced effects and mechanisms affecting to surrounding society, how the added value is created and how it will be disseminated to partners and stakeholders. Employment effect Economics of scale are also important in bioenergy business. The employment effect per unit is bigger in small scale production than in large scale production. For example, Thule Institute studied three different scales of wood energy plants in Finland (2 900 m3/a, m3/a and m3/a woodchip consumption). While the smallest generates 1.4 WTE (whole time equivalent personnel years) per m3 the corresponding figure with the biggest plant is 0.3 WTE per m3 (Hakkila 2004) (Figure 1). 3

4 1,60 1,40 Labour effect per ,20 1,00 0,80 0,60 0,40 Indirect elsewhere Indirect local Direct local 0,20 0,00 Large scale CHP usin harvesting residues Small scale heat entrepreneur Figure 1. Employment effect is higher per volume in small bioenergy set ups than in large scale solutions. Another example, Eno Energy Cooperative, probably the most followed and studied heat entrepreneur concept in the world, needs directly 5 WTE workers and 2-5 indirect WTE workers to run annual loose-m3 (about solid-m3) fuel procurement and supervise of its 3 own and 3 other heating plants ( 2014) Eno Energy Cooperative 2014). The Fortum CHP- and pyrolysis oil plant produces heat and electricity for the city of inhabitants. It uses, as a part of the fuel mix, m3 of local woodchips. The direct employment effect is 142 WTE, i.e m3 per WTE. If this amount of fuel would be substituted by the most appropriate fossil fuel, coal, it would redirect about 130 WTE outside from the region. Employment effect varies according to project size and selected bioenergy approach. Wood based systems seem to have smaller employment effect than, for example, agro-based alternatives. (Table 1). Table 1. Comparison of employment effects in different bioenergy options (Hector 2000, Hakkila 2004). Project type Country WTE/MWh Biogas big Denmark Biogas small Austria Mischantus heat Belgium SRC gasifier UK Logging residue heat Sweden Small scale wood heat Finland Large scale wood CHP Finland

5 Income effect The income effect can be divided into two categories, direct savings and increased local economic activity. Direct savings are a consequence, if bioenergy is cheaper for the user than alternative energy source. Prices of fossil fuels have been increasing during last decade, and quite often bioenergy can offer a cheaper option. Nevertheless, the use of bioenergy usually requires an investment and the length of pay-back time can vary and are case-dependent. Biofuels can be a solution to fuel poverty, which has been created by increasing prices and simultaneous low economic activity. If we take Eno Energy Cooperative again as an example, the customers of the cooperative save annually a total of by using wood energy. The alternative would be light heating oil, which was costing in /MWh while wood heat was sold by the Cooperative by the price of 79 /MWh including all taxes. In Eno, public services are the biggest customer for the Cooperative. Their annual savings in energy means lower taxation for local people and more money available for other public procurements. Other income effect comes from wood material bought from local forest owners and salaries paid for local people. At least part of the money earned by local forest owners and entrepreneurs will be consumed by buying local products and services (Figure 2). Figure 2. Use of local fuels increases local economic activity. This has been important motivator to change from imported fossil fuels to local bioenergy. 5

6 In the case of Fortum in Joensuu, the use of wood fuels creates 142 WTE jobs and by that, generates about euros annual salary income for workers. The appropriate multiplier for indirect and induced effects is 1.5 (adopted from Lindgren 2004 and Männistö et al. 2012). It means that 142 WTE jobs created by bioenergy scheme gives 7.5 M annual input for regional economy and at the same time replaces tonnes of oil from energy generation. In recent years, local energy production from biomass has even been of interest in countries with abundant and cheap domestic fossil energy reserves (e.g. Borsboom et al. 2002). Many areas in Russia and Canada are in the middle of forest, but energy production is based on heavily subsidized, transported, oil or coal. Instead of spending public funding on subsidies, local forest resources could be utilized for energy production and fossil fuels could be sold on global markets. This is win-win situation for both communities and national economy. Some other induced effects In Iceland, Scotland and in Italy the use of wood fuels has created interesting induced effect for forestry. Earlier those areas were lacking limited use of forest biomass and especially in Scotland and Iceland, silvicultural operations were neglected because of high costs for forest owners. Too dense stands were biologically threatened. Energy use gave customer for forest owners to sell their wood. This enabled financially desperately needed cuttings and helped forests to grow healthy. Similar development existed also in Finland during last decade. In Northern Italy, single spruce logs can be extremely valuable because of the superior quality wood material. Sawmills are buying those trees, but other wood material was not used that much before wood energy era. Harvesting of single trees is very difficult and many forest owners did not utilize their renewable and growing resources at all. The use of wood chips for energy opened areas for forest operations again. When lower quality trees can be profitably used for energy, also more supreme trees and logs were supplied for markets. The situation created more vitality for whole forestry in some regions of Alpine Italy. 6

7 References Borsboom, N.W.J., Hector, B. McCallum, B. & Remedio, E Social Inmlications of Forest Energy Production. Pp In: Richardson, J., Björheden, R., Hakkila, P., Lowe, A.T. & Smith, C.T. (eds.) Bioenergy from Sustainable Forestry Guiding Principles and Practice. Kluwer Academic Publishers. 344 p. Hakkila, P Developing technology for large-scale production of forest chips. Wood Energy Technology Programme VTT Technology Programme Report 6/2004. Helsinki p. Hector, B Forest fuels-rural employment and earnings. Department of Forest Management and Products, SLU, SE , Sweden. Kahn, R.F The Relation of Home Investment to Unemployment. The Economic Journal Vol. 41, No pp Lehtonen, O. & Tykkyläinen, M Potentials and Employment Impacts of Advanced Energy Production from Forest Residues in Sparsely Populated Areas. Engineering Earth Leontief, W Input-output economics. Oxford University Press. 440 p. Lindgren, L Alueen tuotantorakenne ja aluekehitys - Panos-tuotostutkimus Keski-Suomen maakunnasta 1995 ja In Finnish. University of Jyväskylä. Department of Economics. Master s Thesis. 94 p. Okkonen, L. Heat entrepreneurship and local economic development. EUBIONET2 - International training programme. Training materials. Männistö, T., Törmä, H. & Jylhä, P Metsän arvoketjujen aluetaloudelliset vaikutukset etelä- ja keski-pohjanmaalla puurakentaminen ja yhdistetty lämmön ja sähkön tuotanto. English Abstract : Regional Economic Effects of Forest Based Value Chains in Middle-Ostrobothnia Wood Building and CHP Production. University of Helsinki. Ruralia Institute. Reports p Eno Energy Cooperative www-pages and annual report

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