Press information News

The Competition Council (the CC), taking into account the relevance of issues in the energy sector and the significant increase in the wood chip price in 2021 and 2022, conducted a wood chip market study to establish the reasons underlying the notable growth in wood chip prices. The CC did not obtain any evidence of the existence of a possible anti-competitive agreement, and it was prima facia established that no market participant is in a dominant position in the wood chip market in the territory of Latvia. However, the CC points out that heat energy producers must carefully assess each requirement they impose against wood chip suppliers. This can be explained by the fact that the imposition of disproportionate requirements may restrict competition in a wood chip procurement and, consequently, reflect in heat tariffs and adversely affect heat users.

The increase in the wood chip price has a significant impact on the costs of heat energy producers who use wood chip as fuel. Thus, the rise in the costs of heat energy producers after the change in tariffs is also transmitted to users of heat energy. In order to make sure that there are no violations of competition law in the wood chip market, the CC, at the invitation of the Ministry of Economy and the Energy Security working Group, started monitoring the wood chip market until in July of this year. The market surveillance process was concluded before the heating season.

No violations of competition law were found

Having assessed the information collected during the market surveillance, the CC did not obtain any evidence of the existence of a possible prohibited agreement, and it was prima facia established that no market participant is in a dominant position in the wood chip market in Latvia. The CC concludes that the price increase is explained by geopolitical conditions, import restrictions, inflation, and the inability of market participants to adapt quickly enough to the existing market situation.

The CC calls on wood chip buyers to monitor the situation regarding the offers received and to report in case of suspicion of a possible infringement of competition law. Also, the CC invites the wood chip market participants to submit evidence if they are involved in any prohibited agreements: they will have the opportunity to obtain full or partial exemption from the fine as well as exemption from the prohibition to participate in public procurement within the framework of the Leniency Program.

Reasons for rise in prices

When explaining the reasons for the price increase, first of all, account should be taken of the general elevation in energy prices. Energy prices began to rise significantly in the second half of 2021. As oil and gas prices grow, prices of other energy resources, including biomass, have also risen due to a general shortage of energy supply.

During the market surveillance the CC found that geopolitical conditions as well as restrictions on imports of wood chip and other timber from Belarus and Russia, resulting from the war initiated by Russia in Ukraine, are one of the most important reasons for the jump in chip prices in 2022. As imported volumes and supply on the market decrease while demand remains at the same level or increases, pressure is exerted on the price of wood chip, resulting in an increase in price.

The wood chip production process has also been affected by inflation, for example, the price of fuel, prices of spare parts and services have increased as well as wages and other costs have risen, so that the cost of wood chip production has currently risen significantly which has also affected the price of wood chip.

So far, wood chip companies have not invested sufficiently in the purchase of wood chip crushers and other equipment necessary for the wood chip production. Thus the increase of the wood chip production volumes requires time to make investments and deliver this equipment.

According to the CC, all of the above factors have contributed to the rise in the wood chip price. Overall, the growth in wood chip prices should, in the CC's view, be seen as a problem that the market will solve. As the profits of wood chip producers rise, conditions for increasing production volumes are encouraged, but increasing production volumes needs time, since, for example, the supply of wood chip production equipment may even take more than a year.

Wood chip export

In connection with the public calls to limit the export of wood chip, the CC points out that this type of restriction could theoretically reduce prices in short term. At the same time, this could reduce the interest of wood chip producers in increasing production volumes, which may have a negative impact on the wood chip price in long term. In long term, such bans have other negative effects, such as reduced confidence of foreign investors and buyers in wood chip producers in Latvia, resulting in a decrease in potential export volumes in the future. Thus, the CC considers that a restriction on the wood chip export would not be an appropriate instrument to reduce the price.

Conditions of heating companies for the purchase of wood chip

In the course of the market surveillance carried out by the CC, various conditions have been identified in the relationship between wood chip suppliers and heat energy producers, which may reduce the desire of wood chip sellers to participate in wood chip procurements and price surveys. These conditions may be laid down both in contracts between wood chip suppliers and heat energy producers as well as in procurement regulations, technical specifications, price surveys, or elsewhere thus regulating relations between wood chip sellers and heat energy producers.

The CC concludes that the conditions, such as the conclusion of long term contracts without providing for a price indexation mechanism, the right of heat energy producers to unilaterally withdraw from contracts if price reductions are found, high security amounts and fines, long payment terms, as well as additional obligations provided for in contracts, which in some cases may be problematic, can serve as a reason for a small number of applicants for wood chip procurements. When heat producing companies impose unfavourable or difficult conditions on wood chip sellers, the interest of wood chip sellers to participate in these procurements decreases, while the likelihood that they will sell their products to other wood chip consumers increases.

The CC calls on heat producers to carefully evaluate every requirement they make to wood chip sellers. The imposition of unjustified quality requirements can both limit competition in chip purchases and make offers more expensive. Thus, setting unreasonable and ill-considered requirements can also have a negative impact on heat users.

We encourage anyone to report information about potential competition infringements, such as prohibited agreements or abuse of market power by dominant companies. Reports can be submitted anonymously on the institution's website

The CC draws companies’ attention to the possibility to apply for the Leniency Program: companies involved in the cartel can confess to a violation and receive full or partial exemption from the fine as well as exemption from the prohibition to participate in public procurement for a year. The competition law provides that a company may be punished for an prohibited agreement concluded several years ago; therefore, the CC calls companies which, for deliberate or unconscious reasons, have entered into an prohibited agreement, not to be silent and use the opportunities offered within the Leniency Program.