BioCycle June 2005, Vol. 46, No. 6, p. 53
With energy crops and other biomass projects, investors need confidence in the feedstocks, process and product markets for financing to occur.
GROWING our own energy is an attractive concept which is becoming a reality. Dedicated cellulosic energy crops (CECs), produced specifically and exclusively for conversion into various energy products, will soon become a cornerstone of our renew-able energy future. CECs are consistent in quality and can be used to produce large quantities of electricity and liquid fuels (and other forms of energy that are generally not available from other renewable sources)
The many benefits that will accrue from commercial-scale energy farms and associated bioenergy facilities – agricultural, economic, environmental, and energy security – are increasingly being recognized and appreciated. But as we pursue deployment of such systems throughout the United States and worldwide, it will be important to recognize and understand several basic principles and considerations that will affect commercial deployment success.
These operations will be big…and big business. As such, energy farms and bioenergy conversion facilities will only be established if each project’s economics are attractive and its risks are considered acceptable, particularly to those investing the necessary equity and debt capital. In other words, investors must have sufficient confidence in each of the principal components of the enterprise – feedstocks, processing, and product markets – for project financing to occur.
EVALUATING EACH PROJECT
We seek renewable energy systems that are economically feasible, environmentally acceptable, and technically viable.
o Economic feasibility: In order to be deployed, commercial-scale bioenergy enterprises have to compete economically with large-scale systems using fossil fuels (e.g., on a $/kilowatt-hour or $/gallon basis). It’s not good enough to just break even…the economic performance and profit margins of a bioenergy enterprise must be sufficiently high to attract the necessary capital investment.
o Environmental benefits: Dedicated energy crops and associated bioenergy facilities are closed-loop, i.e., they are carbon-neutral. Carbon emitted to the atmosphere during processing will be recaptured by energy crops during plant growth, thereby entailing zero net atmospheric carbon contributions.
o Technical viability: First, all system components must actually work, i.e., the technological risk (at both farm and processing levels) should be minimal. Second, the net energy balance of the enterprise must be positive and should be as high as possible.
Overall enterprise performance should be optimal, and can be measured in megawatt-hours per acre per year (MWh/ac/yr) or gallons per acre year (gal/ac/yr) for electricity and biofuels production enterprises, respectively. These units essentially reflect the net yield of the enterprise and the efficiency of use of production and processing assets.
The two primary bioenergy products are electricity and biofuels (other bioenergy products include thermal energy, solid fuel such as pellets, gaseous fuels, animal feed, fertilizer, and various chemicals for further value-added refining). An energy farm and associated bioenergy processing facility essentially constitutes a manufacturing and sales enterprise. As such, product sales are essential for the operation’s success and a basic creed applies: “Don’t make it, if you can’t sell it.”
For commercial-scale operations producing electricity, long-term Power Purchase Agreements should be secured for 100 percent of the output, which reduces market risk to near zero. Although similar long-term sales contracts are typically not available for biofuels, potential demand for biofuels is almost unlimited, provided that product prices are competitive with hydrocarbon fuels and are compatible in use.
Financiers want to see long-term contracts for 100 percent of production and for at least the duration of debt service. The extent to which such product sales are not secured up front represents increasing uncertainty and market risk, and the higher the market risk the more difficult [and expensive] it is to arrange project financing.
Processing is simply a means to an end…conversion of biomass feedstocks into marketable products. Numerous processing technologies have been developed or improved during the past 25 years for cellulosic feedstocks that are now ready (or almost ready) for commercialization. These technologies considerably enhance our ability to effectively and efficiently convert biomass into usable forms of energy. While information regarding bioenergy processing technologies is widely available from numerous sources, some fundamental principles need to be emphasized:
o Process efficiency or process yield, e.g., in kilowatt-hours out (or gallons out) per ton of feedstock in, can have a significant impact on economic performance. For electricity, IGCC (Integrated Gasification Combined Cycle) systems will likely be more efficient (perhaps double) than traditional combustion + steam cycle systems. For biofuels, systems using hydrolysis processes or gasification followed by syngas catalysis or fermentation will provide attractive yields (gallons per ton of feedstock) using cellulosic feedstocks. Examples of process yields for several biofuels are shown in Figure 1.
o Feedstock quality: There is a direct correlation between the quality (including consistency) of feedstocks and process yield or system cost. Systems designed to accommodate a wide variation in feedstock types and/or qualities typically do so at the expense of process efficiency. A significant advantage of dedicated energy crops is that a processing system using a single feedstock can be designed and operated at optimal performance levels and process yield.
o Intermediate/transportable fuels: Energy is often produced in one location but consumed elsewhere. Instead of transporting biomass to consumers as harvested, transport costs can be reduced by converting the material into a form with higher energy density. Figure 2 compares the volumetric energy density of various biomass derived materials (along with several fossil fuels for comparison purposes). We need to recognize that it takes energy to transport energy, and that transport of energy needs to be energy efficient.
o Facility size: The principle of economies of scale certainly applies to commercial bioenergy systems. It’s the reason why feedstock requirements for biorefineries are often projected to be at least 2,000 dry tons per day. The capital cost per unit of output (e.g., $/MWh, $/gallon) for a large (10x) system is about half that of a small (1x) system.
o Technology risks: Newer, higher-efficiency technologies may be relatively complex, may entail scale-up of smaller systems, and/or may be unproven at commercial scale. Each of these factors increases technology risk. Even the integration of existing technologies into a new system design may present performance uncertainty. In these instances, extra efforts may be required to secure project financing (e.g., obtaining efficacy insurance).
Energy crops enable us to utilize nature’s process of photosynthesis to extract carbon from the atmosphere and create and store energy in chemical “batteries” (biomass) until the material is converted into usable energy products. Most perennials will also sequester additional carbon (relative to traditional crops) in below-ground root mass. Plus, mineral nutrients taken up during plant growth will be recycled at the farm level…captured in the nearby bioenergy processing facility and returned to production fields.
Yields for soybeans and corn reflect grain yields only; yield for CECs (Cellulosic Energy Crops) reflect total cellulosic biomass harvested.
A critical factor in the selection of an energy crop is the projected crop yield (dry tons per acre per year). This factor, probably more than any other for cellulosic biomass crops, has a profound impact on enterprise economics. Figure 3 compares the crop yield of various energy crops for associated biofuels products.
Two recent reports (Growing Energy – How Biofuels Can Help End America’s Oil Dependence, December 2004; and Biomass as Feedstock for a Bioenergy and Bioproducts Industry: The Technical Feasibility of a Billion Ton Annual Supply, February 2005) emphasize the opportunities for cellulosic energy crops. The first report focused its discussion primarily on switchgrass as a feedstock, with average near-term crop yields projected to reach 8 dry tons per acre per year. However, an average yield of 8 dt/ac/yr reflects a range of, say, 2~14 dt/ac/yr, with the latter achievable today under certain conditions (including use of prime quality farmland). Both reports also recognized the existence of other high-yielding energy crops.
In fact, there have been numerous other woody and herbaceous energy crops evaluated for many years in the United States and Europe (and elsewhere), with some species and varieties currently attaining yields in warmer climes in the 15~20 dt/ac/yr range (even greater yields – over 35 dt/ac/yr – can be achieved in tropical and semitropical climes). For example: Assume Farm A produces an energy crop for $320/acre, which is $40/ton at 8 dt/ac/yr. If Farm B produces an energy crop which achieves 16 dt/ac/yr at a marginal additional production and harvesting cost of, say, 25 percent more per acre (i.e., $400/acre), then the net production cost for Farm B is $25/ton…a 37.5 percent drop in feedstock cost. Clearly, the economic impact of crop yield is significant, and this example underscores the need for additional resources to support more energy crops research and development as recommended in the aforementioned reports.
Another critical feedstock-related concern is access to the feedstock supplies needed (both quantity and quality) to achieve target operation for a large-scale bioenergy facility. In order to reduce fuel supply risks, financiers of large-scale operations will want to see long-term Fuel Supply Agreements (in place before financial closing) that are ironclad and enforceable and include contingency plans for supply disruptions or shortfalls. Probably the best strategy for establishing operations in the near term is for the bioenergy enterprise to own or lease the required farmland. Such a vertically-integrated business structure ensures enterprise-level control over crop production and fuel supply, thereby reducing feedstock risks. Other fuel supply strategies – e.g., production contracts with individual farmers through local cooperatives – will be easier to arrange once privately owned commercial energy farms have been successfully demonstrated. In time, farmers will consider perennial CECs very attractive…reduced operating costs (e.g., avoided planting expenses) will increase their profits while long-term contracts for crop sales to bioenergy facilities will greatly reduce their risks.
ECONOMIC AND FINANCIAL REALITIES
Increased process yields (refer to Figure 1) combined with increased crop yields (refer to Figure 3) have a compound effect on enterprise performance and economic feasibility .
Figure 4 compares the net yield (gallons/acre/year) of several different biofuels, based on the projected yields shown in Figures 1 and 3. Going a step further, Figure 4 also shows net energy production (in MMBtu/acre/year) after applying the volumetric energy densities of the various biofuels from Figure 3 to the net yields in Figure 4. While these figures do not reflect differences in production costs for the different biofuels, the projected net yields from cellulosic feedstocks are clearly attractive.
Again, only those projects that can secure financing will be deployed, and only those projects that have attractive economics and acceptable risk levels will be able to secure financing. For commercial-scale bioenergy enterprises estimated to cost $150M ~ $300M (or more), even small percentage changes in key performance criteria (in the farm and/or processing components) can have significant impacts on economic performance of the overall enterprise.
Reflecting their inherent environmental benefits, energy farms and associated bioenergy facilities can realize other sources of income such as Renewable Energy Certificates, carbon sequestration credits, and on-farm nutrient recycling. These additional revenues and/or avoided costs can significantly enhance project economics and could be essential for achieving economic feasibility, at least in the near term.
PUBLIC SECTOR SUPPORT (OR LACK THEREOF)
Deployment of energy farms and associated bioenergy facilities will be undertaken by and within the private sector. However, the public sector can facilitate commercialization by reducing deployment risks through economic support (e.g., tax credits, production incentives, capital expense offset grants) and/or other support programs (e.g., loan guarantees, bioenergy product purchases by government agencies).
For example, the Section 45 Closed-Loop Production Tax Credit could be a powerful incentive. Unfortunately, Congress’ on-again/off-again extensions of this support program during the past ten years has, so far, precluded that program’s ability to support (and stimulate) deployment of bioenergy operations using dedicated energy crops (such projects typically need at least a three-year horizon for planning, design, financing, construction, and start-up). Renewable energy policies and support programs are urgently needed but to be effective should be consistent, reliable and long-term.
SO, WHERE TO FROM HERE?
We need to start deploying commercial-scale energy farms and cellulosic bioenergy operations. Now. But no such business will be deployed unless it can secure financing, and no such financing will be secured unless the economics are sufficiently attractive and the risks are considered acceptable. So for each new project pursued in the near term, it may be prudent to follow the KISS rule: One crop. One process. One product. One market.
We need to do everything we can to ensure success. We need to maximize crop yield, which means we need to use prime farmland (at least for near-term projects) and select the highest yielding perennial crop from those candidates most suitable for that particular location. We need to maximize process yield, which means we need to utilize the most efficient technology possible. We need to ensure product quality and negotiate a long-term contract(s) for sale of that product. We must ensure technical viability…the fledging bioenergy industry simply cannot afford commercial-scale failures.
Large-scale operations will be more cost-effective, but capital costs will be high. In order to secure financing, we must be able to show economic feasibility and attractive margins through detailed pro formas, and identify key risks and develop strategies to address those risks (as well as uncertainties and other surprises that almost always appear during implementation). We need to get credit (and, more importantly, we need to receive income!) for net-zero carbon emissions and, where possible, extra credit (and extra income) for additional environmental benefits such as below-ground carbon sequestration and nutrient recycling.
It’s easy to get excited about the forthcoming opportunities to deploy commercial-scale energy farms and bioenergy facilities. Many events in recent times have increased awareness of energy issues and the need to reduce our dependence (and vulnerability) on imported oil and other fossil fuels. And no other renewable energy option can offer the spectrum of energy products and benefits available from biomass. Yes, the road ahead will be challenging, but it’s time to start aggressively pursuing home-grown energy. We have been supporting bioenergy activities for a long, long time – we can now look forward to the day when bioenergy activities will support us.
Jim Wimberly is an independent bioenergy specialist and past president of the U.S. Composting Council. He can be contacted at: email@example.com.
June 15, 2005 | General
PURSUING REALISTIC OPPORTUNITIES IN HOME-GROWN ENERGY
BioCycle June 2005, Vol. 46, No. 6, p. 53