The largest risks to the early-stage project development of modern bioenergy plants—including the ability to raise the necessary capital and demonstrate profitability over time—are associated with identifying reliable, sustainable, affordable and bankable supplies of wood raw material feedstocks.
Reducing the risks associated with feedstock procurement can help bioenergy companies meet near- and long-term goals that ensure project success.
In general, sustainability and quality guarantees—as well as reliable deliveries—for wood chips, pellets and wood fuel come at a price premium. Because of the various risks to supply and costs, global biopower producers must require their biomass suppliers to utilize strong procurement strategies that mitigate risk, including supply chain risk assessments, cost analyses, sub-supplier diligence processes and contract negotiation strategies.
Because supply agreements cannot regulate the delivered volume of feedstock, the onus is on bioenergy companies to understand and manage the interplay of factors affecting feedstock availability and cost within individual supply basins. But even in a global economy, there is a catch: No two supply basins are alike! There are a number of important criteria that make some supply basins more favorable for bioenergy producers compared to others; currently, US South is the focal point of wood pellet production because it ticks the boxes on virtually all of these criteria.
Planning for Project Success
In the current economy, success for bioenergy manufacturers is largely determined by whether a company builds into its business plans a thorough understanding of the specific supply basin in which it will be operating. Essential guidelines include:
- Right-size the plant to the supply basin. There are two options: 1) choosing the size of the facility then finding a supply basin that will support the facility, or 2) finding a supply basin and then right-sizing the plant to the available supply in the area. In the case of the US South, wood pellet capacity is increasing as new facilities continue to come online to take advantage of the plentiful wood resources.
- Understand the competition. What traditional forest and wood products companies operate in the supply basin? Which classes of materials do they consume, and what classes of products do they produce? What is the cost structure of these businesses? Based on capacity, how much additional supply might a competitor use/produce in the future? From this perspective, choosing a supply basin that can accommodate both new facilities and traditional industries is essential.
- Design plants with receiving capacities large enough to weigh and unload the required amounts of feedstock.
- Design plants with inventory capacity large enough to accommodate the normal market ebbs and flow of material due to weather interruptions.
- Control price risk by indexing supply agreements to documented market prices. Just as companies manage the risk associated with variability in operational costs by indexing them to the producer price index, bioenergy projects that manage feedstock price risk in the same way will be more bankable.
Biomass feedstock price indexing is the single most accurate and balanced tool to meet the needs of all parties. Annually, millions of dollars tied to supply agreements are at stake. In order for an index to be acceptable to suppliers and buyers, both parties must have the highest level of confidence in the fairness of the index. In our experience, there are three fundamentals an effective index must possess.
1. Structure: The index must be structured so that it accurately reflects:
- The types of materials and the percentage weightings purchased by the manufacturing facility. For example, over time a production facility may change the balance of its feedstock mix to favor roundwood or chips. The index should reflect the changing total feedstock cost associated with the new mix.
- The actual biomass supply available to the production facility. For instance, it would be inappropriate to use an average delivered price for pine pulpwood from another geographic region rather than the pine pulpwood price a facility pays in its local market.
- The actual market. The share of the manufacturing facility’s procurement (when the facility’s own procurement staff contract directly with landowners or other facilities for the delivery of wood raw materials) must not inordinately influence the index pricing. The facility’s procurement must be a small enough percentage of the total purchases considered in the index to assure that it is not indexing against itself.
- Data Quality: The data used in developing and updating the index must accurately reflect the total local market. Because a broad sampling of the market must be included in the index, it is critical that the underlying data be continuously updated to reflect short-term market changes.
- Data Independence: The data used in the index must be based on actual market transactions and free of market manipulation. Surveys of market prices expose the index to manipulation; wood buyers may report the low end of their purchasing range while wood sellers may report the high end of their selling range. Both may be true, but neither is accurate. Only by collecting actual transaction data can an index be insulated from the market manipulation that undermines the confidence of the involved parties.
To assure the utmost confidence in the index, the organization that provides the index must be viewed by all parties as an independent market expert. Only a neutral, unrelated party with no economic interest in the transactions should be trusted to provide the data that has the potential to impact all parties throughout the supply chain.
Forest2Market meets these requirements. Forest2Market’s data is unique within the forest products industry, as it is the only comprehensive set of data that is collected at the transaction level; no survey data is used or incorporated. This transactional data provides a full-spectrum view of market dynamics and includes information supplied by forest products companies, wood dealers, loggers, consultants and landowners throughout the US South and beyond. Every year, an estimated 30 million tons of wood raw materials are referenced in supply and off-take agreements to Forest2Market indexes. The depth and breadth of this data allows for unparalleled insight into wood supply chains, from the source to final consumption.
The single most important factor for the success of a wood bioenergy producer will arise from how well it understands the nature and characteristics of the forest resources and industries within its supply basin, and how well it uses this understanding and actionable intelligence to its advantage.