Julian Critchlow and Arnaud Leroi, Bain & Company
February 15, 2013 | 23 Comments
RWE has also invested in several energy crop plantations to secure a long-term supply. In the UK, Drax has built its own straw pellet facility with a 100-kiloton per year capacity near one of its plant sites. Drax has also actively secured long-term contracts with pelletizers in North America and has built dedicated transport, unloading and storage facilities for its pellet supply chain.
Investments like these signal the start of a truly global biomass supply chain, and they would not have been likely without the safety net of sufficiently high and long-term committed subsidies yielding an appropriate rate of return (an internal rate of return greater than a general hurdle rate of 10%). We don’t expect this vertical integration to last: Within the next five years, we expect the entire biomass industry to mature, resulting in specialization across the supply chain that will push generators back downstream — a trend we have seen in the development of other renewables, including wind and solar photovoltaic.
Prepare to Win in Biomass
To make the most of the biomass opportunity, utilities need a clear strategy and a deep understanding of operations. Based on our work with large and small utilities, biomass generators need to get these four things right.
Embed biomass strategy into overall strategy. Leading utilities define the role biomass will play in reaching their renewable targets. They calculate how biomass affects their overall abatement cost and carbon emissions footprint. They also evaluate and compare potential investment opportunities, including converting existing plants and finding the best locations for new plants.
Secure feedstock supply. Securing a reliable and affordable supply of feedstock to keep plants running cost-effectively isn’t easy. But utilities cannot afford to wait for subsidies to stimulate the market; they should start to secure their sources today. Where possible, they should limit involvement and investment by contracting for spare capacity from existing or planned pelletizing plants. When necessary, utilities can invest in new pelletizing plants or even, as a last resort, purchase or build pelletizing plants.
A balance of local and global suppliers can help utilities ensure a reliable supply. Local suppliers offer several advantages that complement the economic benefits of a large global supply. They can help insulate against global price fluctuations, since local farmers and foresters have fewer options for distribution. Maintaining a local supply also helps with community relations, generating local jobs and business, thus increasing the perception of being socially and locally responsible. Dalkia, the biomass leader in France, set up regional entities for sourcing exclusively with local suppliers and developed several local facilities to transform raw wood residue into wood chips to feed its biomass plants.
Build up operational capabilities. Utilities will need to supplement their current skills with new capabilities. Pellet storage, for example, represents a significant risk that must be managed carefully. The fire that damaged RWE’s Tilbury Power Station in the UK in February 2012 started in a storage area containing more than 4,000 tons of wood pellets. As utilities ramp up larger plants, storage requirements will grow and so must their capabilities for managing this storage safely. For plant engineering and operations, utilities can employ former coal engineers to run biomass plants, though they will need to be trained in upgrading and maintaining biomass boilers.
Improve communication with regulators. Two issues tend to dominate communications for utilities working in biomass: subsidies, and local supply and generation. For subsidies, utilities should work with regulators to ensure the right incentive schemes are put in place. They can learn lessons from wind and solar, where lower subsidies would have been more effective. In several countries, such as Germany and Italy, too much support caused bubbles that ultimately damaged long-term development and the public’s perception of those sectors, which undermined governmental energy objectives.
In supply, strong relationships with local authorities are the key to securing local feedstock supply from forest owners and farmers. Utilities should clearly communicate that biomass creates more local jobs than wind or solar. The sustainability of biomass is also important to emphasize: Responsible feedstock growing poses no competition with food crops or fuel regeneration.
The unique advantages of biomass to reach governmental energy objectives yield an opportunity for utilities to create value for their shareholders. Securing a reliable and cheap supply of feedstock sufficiently early is the critical requirement for utilities to win.
Julian Critchlow leads Bain & Company’s Utilities practice in Europe. Arnaud Leroi is a Bain partner in Paris.
This article was originally published on Bain & Company's website and was republished with permission.
Lead image: Biomass pellets via Shutterstock
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