Japan's sudden withdrawal from the biomass subsidy regime is exposing a market that was never built to stand on its own.
For more than a decade, the international wood pellet trade has operated on a simple and precarious premise: that governments would keep paying. In the UK, Drax Power Station - the world's largest biomass facility - collected nearly a billion pounds a year in public subsidies to burn imported wood. In Japan, a generous feed-in tariff launched after the Fukushima disaster drove wood pellet imports from 72,000 metric tons in 2012 to nearly six million metric tons by 2023, creating a supply chain that stretched from Canadian old-growth forests to industrial ports along the Japanese coast. That chain was built on policy guarantees, not market economics. Now, with Japan pulling back from new subsidy commitments and the UK halving its support for Drax from 2027, the architecture of the global biomass trade is beginning to fracture - and those cracks are showing up in Drax's balance sheet, British Columbia's pellet mills, and the ambitions of an industry that assumed the money would always come.
The Financial Times reported in late January 2026 that Drax's ambitions to become a major wood pellet supplier to Asia were in serious jeopardy as Japanese policymakers wound back subsidies for the biomass sector. The message from Tokyo was unusually direct. "The real intention is quite simple: no new government support, phasing out. We don't see any clear path of bringing down costs in the foreseeable future," one Japanese government official told reporters.
Japan's trajectory had been one of the most remarkable in global energy. After the Fukushima Daiichi nuclear disaster in 2011 crippled public confidence in atomic power, the Ministry of Economy, Trade and Industry launched a feed-in tariff in 2012 offering fixed rates for renewable energy, including biomass, for 20 years. Hundreds of power plants were approved and built to burn wood pellets, palm kernel shells, and other organic material. By 2023, Japan had 240 operational biomass power plants and more than 290 nationwide, with capacity expected to grow by a further 6,000 megawatts by 2030. Japan was on track to surpass the United Kingdom as the world's largest importer of industrial wood pellets by 2027.
But Tokyo's enthusiasm for subsidizing the sector has curdled. Japan has already cut support for new large-scale biomass projects above 10 megawatts, effectively ending the financial case for building more. The problem, as Japanese policymakers concluded, is that the economics of imported biomass never improved. Wood pellet power remains profitable only as long as governments underwrite it. A 2024 academic study applied to Japanese conditions confirmed the diagnosis: the high selling price under the feed-in tariff, not material quality or sourcing efficiency, was the most critical factor in economic feasibility. Remove the tariff, and the business case dissolves.
For Drax, the Japan reversal is the second major policy blow in rapid succession. The UK government signed a new low-carbon dispatchable contract for difference with the company in November 2025 that covers all four biomass units at Drax Power Station from April 2027 to March 2031 - but at dramatically reduced output. The deal limits contracted biomass generation to roughly 6 terawatt-hours per year, about 30 percent of Drax's historic baseload, and the company has acknowledged this implies a substantial reduction in wood pellet demand from its own UK operations going forward.
The combined pressure of lower UK biomass burn and Japan's pivot produced a major write-down. In its full-year 2025 results released on February 26, 2026, Drax booked a total of 378 million pounds in non-cash impairment charges. The largest portion - 337 million pounds - was attributed to its Canadian pellet business and the paused Longview project in Washington State. Drax had proposed a 450,000-metric-ton-per-year pellet plant in Longview, which it has now indefinitely halted. The company cited lower expected margins, a constrained Canadian fibre market, and reduced future demand from Drax Power Station as driving the write-down.
CEO Will Gardiner also launched a formal strategic review of the Canadian pellet operations. British Columbia had been the flagship of Drax's Canadian supply chain, with its forests feeding pellet mills that shipped product across the Pacific to Japan and across the Atlantic to the UK power station in North Yorkshire. The company closed its Williams Lake plant in BC and two smaller US satellite facilities, signaling a retrenchment that would have been unthinkable when pellet exports from Canada to Japan were growing at a compound annual rate exceeding 15 percent. Drax also wrote down a further 48 million pounds on its planned bioenergy with carbon capture and storage project at the UK station, citing the absence of sufficient policy and commercial support for carbon removals.
What Drax is confronting is not merely a business setback - it is the exposure of a structural contradiction at the heart of the biomass trade. The industry grew precisely because wood combustion was classified as renewable energy, making it eligible for the same subsidies as wind and solar. Critics argued for years that this accounting was flawed: burning wood releases carbon at the point of combustion, and the decades-long process of forest regrowth needed to recapture it makes biomass a poor short-term climate tool. But the subsidies kept flowing.
By the end of 2027, when Drax's Renewables Obligation scheme concludes, the company will have received more than 14 billion dollars in UK government support across its biomass operations, according to the climate think tank Ember. Over the years 2018 to 2022, Drax received a mean annual subsidy approaching 785 million pounds for its biomass-only generation, with estimates for a future BECCS project running as high as 1.7 billion pounds per year. Those numbers underpinned the critics in the UK and Japan who argued, with growing force, that public money was propping up an industry that could never compete on its merits.
South Korea, the world's third-largest wood pellet importer, delivered an earlier warning. In early 2025, Seoul announced it would strip most woody biomass of green subsidy eligibility, citing deforestation and cost concerns. Hansae Song of the South Korean think tank Solutions for our Climate captured the sector's dependency plainly: "A lot of the industry stakeholders assumed perpetual government support. But this move by South Korea shows that without support, there won't be any more biomass." Japan's decision echoes that analysis - no path to cost reduction, no market mechanism to sustain it, just a policy that ran out of patience.
The downstream consequences are landing hardest in British Columbia, whose forests have quietly become the backbone of Japan's biomass import system. Canadian wood pellet exports to Japan grew eighteen-fold between 2014 and 2024 - from roughly 62,000 metric tons to 1.7 million metric tons per year - driven almost entirely by BC and Alberta mills shipping through Prince Rupert and Vancouver ports. Japan was Canada's single largest pellet export market by value in 2024, with purchases exceeding 151 million Canadian dollars compared to 136 million from the UK. That trade was built on a supply chain with its own compounding controversies. Research published by Stand.earth's Forest Eye project in late 2025 documented that Drax received at least 90 truckloads of confirmed old-growth whole logs from British Columbia in 2024, sourced from cutblocks classified as over 250 years old. Additional truckloads from high-probability old-growth stands raised the total substantially higher. The UK's Financial Conduct Authority opened a separate investigation in August 2025 into whether Drax made misleading statements about biomass sourcing - a cloud that remains over the company even as it publishes updated sourcing policies committing to 100 percent sustainably sourced wood.
That credibility problem adds another layer of difficulty for an industry trying to survive the subsidy withdrawal. Japan's major banks have updated their policies to exclude investments in biomass sourced from primary forests, defining acceptable biomass as wood not derived from virgin forests. For BC suppliers whose fibre baskets overlap with primary and old-growth timber, this shrinks the eligible supply base at precisely the moment demand is softening.
Drax's pivot away from biomass growth is striking in its velocity. As recently as 2024, the company maintained an active office in Japan and publicly committed to supporting the country's decarbonization journey through biomass. Its February 2026 results presentation reveals a different architecture: the company is accelerating battery energy storage system development, exploring a 1.2-gigawatt data centre opportunity at its North Yorkshire site, and targeting structural cost savings of more than 150 million pounds per year from 2027. Post-2027 adjusted EBITDA is targeted at 600 to 700 million pounds - a significant step down from the 947 million pounds recorded in 2025. The wood pellet industry's trade bodies are not conceding defeat. The Wood Pellet Association of Canada hosted its largest-ever customer dinner in Tokyo in late 2025, with BC and Alberta government ministers meeting Japanese utility partners. The association's own outlook, citing analyst firm Hawkins Wright, still projects Japanese biomass capacity growing by 6,000 megawatts by 2030, sustained by the long tails of existing feed-in tariff contracts. Existing plants with 20-year FIT agreements will continue to burn pellets through the 2030s regardless of what happens to new project approvals.
But the forward pipeline is closing. No new large-scale biomass projects in Japan above 10 megawatts will receive government support. The UK's bridge policy curtails Drax's volume. South Korea has begun its exit. The global pellet market research firm FutureMetrics, writing in February 2026, identified the coming UK demand shock as the single dominant negative factor for the global market through 2030 - a drop steep enough to overwhelm projected Japanese growth. The net trajectory is contraction.
What the Japan phaseout makes undeniable is that the biomass trade was always a policy construct rather than a market one. It rose when governments decided wood burning counted as renewable. It is declining as those same governments decide the math no longer works. The supply chains - Canadian forests to Pacific ports to Japanese coal plants, BC pellet mills to Yorkshire boilers - were assembled in the expectation that political will was a durable commodity. It turned out to be the most fragile raw material of all.