Bioenergy Calling the Shots on Asian Fuel Supply

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.

Financial Characteristics

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.


Reducing Risk

The IRS plant should employ a flexible, multi-source fuel strategy. It should procure biomass locally from as many diverse sources as possible, but also regionally, even cross-border, to avoid dependence on a particular region, fuel type or group of suppliers. For corporate growth, the consideration of transporting fuel over great distances needs to be revisited.

So what can help biomass overcome the fuel hurdle? The transport and logistics of biomass fuel could be structured to augment the stability of end-users rather than being an aggravating sensitivity risk factor; coal provides a lesson. Coal is also abundant, but coal power plants are not necessarily near coal mines. Coal logistics is a business by itself. Coal power plant managers need not be distracted by assuring fuel supply but can instead focus on their core competency. Coal producers and transporters are also robust businesses, so long-term supply contracts can be arranged, and the procurement chains can be financed, reducing costs. Is such a chain possible in the Asian biomass sphere? The palm oil agricultural sector may already have many of the necessary characteristics.

Palm oil production has risen in Indonesia, Malaysia and Thailand, which annually generate roughly 35 million tonnes of palm waste such as empty fruit bunches (EFBs). This is simply discarded for reasons such as the government regulations that prohibit its incineration in Malaysia and Indonesia.

The feasibility of palm biowaste as a fuel depends on its economical transportation. Empirical studies have shown that transporting this waste does not materially degrade it. Drying and compacting enhances calorific value and transportability by reducing volume and moisture. The costs vary but are not an impediment. Also, renewable energy requirements in Korea, and Japan’s move away from nuclear, have forced demand prices to surge to over $200 per tonne in north Asia. These kinds of prices make the logistics of biomass itself a potentially viable, independent business.

The IRS plant could potentially reduce its net biomass fuel cost by about $50 a tonne. It would use transported EFB and establish in-house capacity to process and transport the fuel and a store it. The additional capital cost would be $1.5 million plus annual operating expenses of $0.4 million, but the net biomass fuel cost would fall by over $1.4 million per year.

Price determination would then be done in line with standard commoditised methodologies, including long-term supply contracts with regular price adjustments based on EFB/fuel pricing; ground transport; sea transport; customs and import duties; taxes and imposts; and loading and unloading costs. Loan capital and other commercial payment and financing options also then become available, further reducing costs and risk. Generally, by juggling the calorific value, moisture/bulk and other factors, transport costs break even as long as the short-run marginal cost is less than $80/tonne, a figure which implies shipping transport oil is more than $250/barrel.

Vertical Supply Chain

Once such a vertical supply chain for commoditised biomass is made, the power plants could get their fuel from a combination of local and overseas sources. It would also mean that clusters of plants could be built around shipping ports, where electricity is usually in demand. Such clusters of replicable IRS plants would provide economies of scale when it comes to costs such as those of EPC and O&M. This modular approach would avoid having to ‘hand craft’ the development of each biomass plant in terms of development, allowing quick rollout instead. This growth potential would also heighten equity investment interest.

Furthermore, because each cluster would also be near localised biomass areas, it could cross-ship for an additional safety web for fuel. For example, if one cluster area has a drought, it could import from another area. In addition, scale access to biomass fuel in different localities would break the potential stranglehold local millers and farmers have on supplies.

Individual plants risk becoming too narrow geographically in operational sustainability. This actually raises the risk sensitivity for fuel. Also, by becoming so inward and defensively oriented, any corporate growth strategy is lost as each plant ends up living and dying by itself.

By establishing a vertical supply chain for bulk commoditised biomass, fuel security is enhanced, locality concentration is diffused, and a much more robust growth story is created, thereby attracting equity investment.

In today’s market the supply of palm waste is plentiful, available and economically feasible for organising a market that includes companies that concentrate on the transport of bulk palm biomass. These companies do not yet exist. But, as alternative base fuels such as petroleum oil rise in cost and their supply becomes increasingly strained, opportunities are emerging. The market is changing as Asian regulatory systems converge towards more fuel security through renewables.

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