William Byun, Greenpower Fuels
March 18, 2013 | 3 Comments
Emerging markets have tremendous biomass resources. Such fuels also enjoy commercial advantages due to grid and baseload power availability and a strong willingness from users to pay for electricity. Yet to become a corporate sector, biomass power has avenues to explore to take it away from being made up of mostly isolated one-off projects, captive-generation schemes or public policy/NGO projects. Biomass power needs to focus on the vertical logistics of the fuel business. Indeed, conventional fuel price rises and demand-side pressures from north Asia point to the adoption of such a logistics chain.
Biomass can compete favourably against fuel oil where incomplete grids exist. For example, Indonesia's 230 million people live on 17,000 islands, only three of which are part of a national grid tied to baseload power. Yet only 1600 MW of the country's 50 GW of biomass potential has been used, mostly in corporate captive-power plants, despite a critical shortage of electricity that is exacerbated by a high growth economy. Even in more grid-developed economies such as Thailand, social awareness has grown, making it virtually impossible to build baseload coal-fired plants, for example.
Ideal Reference Standard
So what kind of biomass plant would be financially feasible for independent power producers (IPPs) and investors? A reference model is useful here that would have preferred plant characteristics, financial profiles and attendant sensitivities, and actual strategies and operations dealing with such issues.
Creating an ideal reference standard (IRS) plant first involves looking at what is actually on the ground in existing programmes in Asia, or in those programmes being established: a biomass FiT of US$10 cents/kWh with a 20-year take-or-pay power purchase agreement (PPA), various tax incentives and transmission linkups. Also an established legal framework and standardised documentation, and hedging or matching for foreign exchange risks. Assume a 70/30 debt/equity finance package from local banks, a rising long-range marginal cost curve from at least $70/MWh and a dependable engineering, procurement and construction (EPC) contractor and operations & maintenance (O&M) operator with internationally bankable equipment and performance guarantees that would be arranged or are in place.
Second comes size. Small projects may fit specific social or policy goals but those below, say, 5 MW would see overwhelming transaction costs for developers and investors, while large plants, say above 20 MW, require a huge radius from which to draw biomass. Even a 20 MW plant needs a large radius of paved country roads on which a fleet of 10-tonne trucks would be expected to deliver a constant flow of biomass.
Third, new technologies are not a cure despite being seen as ways to increase efficiency and returns. They can simply add to development time because layers of cautious bankers, investors and local officials have to learn about them. They also concentrate risk factors and are typically more expensive by at least 30%. So the IRS plant should adopt a standard combustion boiler of the kind that has been established over 50 years-plus. These are arguably slightly less efficient, but they are efficient enough and cheap and easy to service locally.
The IRS plant also uses an old-fashioned oversized multi-fuel boiler that can burn whatever biomass waste is at hand. This avoids the risks over availability of fuel. Some real-world plants that have tried to reduce overall fuel transport costs by using biomass from nearby growth zones are taking an approach that is susceptible to the vagaries of crops or even farm management skills.This magnifies the risk of instability of fuel supply.
So here, the IRS plant should have a 10 year standalone total investment of $17 million with an internal rate of return of 24%, a net present value of $14 million and $12 million equity discounted cash flow valuation with a total plant value of $20 million. It should also break even within five years. Additional revenue may come from the sale of steam, ash and carbon offsets. Real-world biomass plants that fail these minimum criteria should be considered sub-standard by Asian market parameters.
Nothing in the IRS plant should be unrealistic. The financial profile should appear to be more than satisfactory for a 'bankable' renewable energy project. Why then aren't such plants more common?
Biomass power plant projects are not inherently 'unbankable'. Rather they tend to fail in the parameterisation of the risk variables when it comes to the sensitivities of the financial model, particularly to do with fuel. An analysis of fuel risk sensitivity makes plant investments much less certain.
For any biomass plant, including the IRS, the obligatory risk analyses of the financial model always shows the overwhelmingly critical risk factor to be the sensitivity analysis around the lifetime security of fuel. The cost of biomass fuel is more levelised than that of other renewables, which reduces the CAPEX shock for biomass plants to $1.5-2 million/MW. However, this also uncomfortably highlights the diffuseness of biomass as a fuel. Transport costs at biomass plants include the cost of shipping moisture in the fuel, the bulky nature of the biomass itself and the gathering of fuel over great distances. As biomass calorific values range from 2500-4500 kcal/kg for woodwaste and palm wastes, even the IRS plant would require 110,000 tonnes per year, or a catchment radius of some 50 km.
Biomass plants have therefore tended focus on a close radius transport. In the past, the small sizes and one-off nature of such plants has also meant an industry hasn't developed to effectively ship biomass fuel.
Fuel strategies have been seen to try to pack in more calorific value per unit of biomass weight, to secure supply contracts with individual farmers and industries or to customise a power plant based on the type and availability of feedstock within the region. But this strategy exposes the developer to significant risks in the price and security of supply of the biomass.
The plant depends on its location, which is often off-grid, and without local off-take counterparties, it depends on feedstock availability, which weather and seasonality can affect. Local farmers and industries can also control supply, and specific biomass fuel types and sources may face demand for alternative uses. So the most critical aspects of the biomass power plant are the source of biomass fuel and a robust strategy for its supply.
One way to deal with this problem is the corporate strategy of multiple defensive walls, in which a plant builds a store for biomass fuel, for example, employs tens of staff specifically for its procurement and forms a cartel with other nearby biomass plants. But while such strategies may be good for debt-related revenue streams unfortunately they also tend to quash equity investment interest, which relies on outward corporate growth and typically stronger financial returns.
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