Pulp and Paper Canada

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Drivers and Barriers for Implementation of the Biorefinery


June 1, 2010
By Pulp & Paper Canada

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The forestry industry’s current stalemate economic situation has led many companies to seek longer-term strategies that would transform their business models and improve their financial performance. O…

The forestry industry’s current stalemate economic situation has led many companies to seek longer-term strategies that would transform their business models and improve their financial performance. One potential strategy is the implementation of the biorefinery, in one of many possible configurations for revenue diversification to new products, however each of which implies unique technology, market and environmental risks. This paper identifies a set of high-level drivers and barriers related to the implementation of the forest biorefinery, whose goal is to understand better why companies are considering biorefinery implementation, and at the same time, what is slowing implementation of this strategy. With the help of an expert industry panel, the drivers and barriers were ranked. The results showed that overall the biggest driver among those considered was that “the biorefinery potentially offers an opportunity to overcome highly variable and insufficient margins, thus ensuring short-term profitability currently associated with forestry products”, and the biggest barrier was that “the industry’s risk-averse culture and marginal financial performance favours short-term decision making, which may not result in an emphasis on the identification of a longer-term product/market biorefinery strategy.”

The forest biorefinery (FBR) has been defined as the “full integration of the incoming biomass and other raw materials, including energy, for simultaneous production of fibres for paper products, chemicals and energy” (Axegrd, 2005). Perhaps a more practical definition for forest industry companies based on business objectives is to maximize the value from forest biomass in order to transform the forest industry through implementation of an improved business model. The biorefinery strategy of a company might consist of any number of a broad range of combinations of biomass feedstocks, processes, and products to be sent to market (Chambost et al, 2007). With the manufacture of new “green” products there is the opportunity for revenue diversification from the existing product portfolio, and if implemented well, better profit margins for forestry companies. For each biorefinery strategy the unique technology, economic, commercial and environmental risks must be identified and mitigated for successful implementation of the forest biorefinery.

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Why is implementation of the biorefinery not progressing more quickly? What are the drivers and barriers for forestry companies? In this paper, a set of such drivers and barriers is defined and their relative importance is evaluated according to the opinions of a panel of industry experts using a multi-criteria decision making (MCDM) method.

Methodology

The methodology applied in this study is based on the principles of multi-criteria decision making or MCDM (Figure 1). MCDM methodology includes pre-panel and panel phases. Initially, a panel was struck involving four forest industry mem- bers involved in biorefinery implementation at their company, a government scientist expert in the area, and a biorefinery design specialist.

During the pre-panel phase, the objective, the drivers and barriers, and the decision structure were defined, and the decision problem and weighting procedure introduced to the panel. A short list of four drivers and four barriers (Tables 2 and 3) was presented to the panel; these had been established from a long list of criteria related to biorefinery implementation. The long list of criteria was the result of analyses by the NSERC Design Chair at cole Polytechnique, based on our experience in biorefinery design. A short list of the most important four drivers and four barriers was identified in order that the MCDM process would be manageable without compromising the essential issues contained in the long list. For instance, the capital cost of implementing a biorefinery technology is a key issue for the forestry industry. This issue is not explicitly mentioned in one of the driver or barrier definitions, however it is implicit in several of the drivers and barriers (see Tables 2 and 3 under Elaboration). The short list of barriers and drivers was then compared against similar selections made in the literature sources.

The first step of an MCDM panel phase involves the discussion of the drivers and barriers by the panel. This discussion is critical in order to raise the awareness of the decision maker(s) about the criteria complexity and implications, and as a consequence the panel is better equipped to address decision uncertainty by understanding the different panel member perspectives. Following the panel discussion, the Analytic Hierarchy Process or AHP was applied (Saaty, 1980). AHP is particularly useful when qualitative criteria are compared, which was the case for the drivers and barriers. AHP uses pair-wise comparisons to determine the importance of each driver and barrier. The pair-wise comparisons are done using a number scheme from 1 to 9 and their reciprocals (Table 1), and the results are put in a pair-wise comparison matrix for the calculation of the weights and to calculate the consistency ratio. When the consistency ratio is smaller than 0.1, the values of the resulting weights are considered trustworthy. Furthermore, the consensus among the panel members for each driver and barrier weight was determined and the results shown graphically by constructing boxplots of the weights of each individual panel member.

Using an MCDM method for evaluating the biorefinery drivers and barriers can guide decision makers in making a balanced decision based on multiple and distinct decision criteria.

The definition and elaboration of the drivers and barriers and a summary of key points from the panel discussion is summarized in Tables 2 and 3. Initial discussion held with panel members indicated that all of these barriers and drivers were considered critical, and thus, the MCDM panel served to distinguish the relative importance of important factors.

Results and Discussion

A comparison of the short list of drivers and barriers was made with the results from a study on the identification of industry-and company-level factors that are most likely to influence the Finnish bioenergy sector (Ptri, 2010), as well as a study on the viewpoints regarding where the pulp and paper industry is moving in the bioenergy arena (Patrick, 2010). The comparison of Ptri’s results showed good agreement with the short list of drivers and barriers. However, Ptri’s study focused on the Finnish bioenergy sector context and it was necessary to align the drivers and barriers with the North-American context. Patrick identified impediments for progress in biorefinery implementation, which were largely related to the forestry industry’s financial situation.

Drivers

Calculation of the driver weights revealed that the drivers directly related to the economic health of the company are the most important (Drivers I and IV, Figure 2). It was not surprising that the short-term economic Driver I was considered more important than the long-term economic Driver IV, which reflects that the panel members understood the importance of company transformation over the long term due to implementation of the biorefinery, however that this was less important in decision making than short-term financial metrics. One interpretation of this result is that the industry panel members may require that high returns are needed for biorefinery projects. However, they may be less likely to implement fast payback return projects such as pellet mills in favour of viable strategies that are less profitable in the short term but would lead to added-value products that are more sustainable in the longer term.

Issues related to the procurement of raw materials (ability to pay for biomass feedstock and better guaranteed feedstock for traditional forestry products) were regarded as the next most important issue. Of particular importance to the panel members was the forest industry’s competitive adv
antage by having an infrastructure already in place for the supply of biomass. Interestingly, the policy-related driver was least important according to the panel members. Although policy drives markets, especially in the case of renewable biofuels, it was clear that the panel industry members preferred not to rely on government policy for the economic viability of their biorefinery strategy except for the shorter term where it was felt that capital cost assistance was essential to mitigate technology risk.

The consistency ratio of the pair-wise comparisons was below 0.10 and therefore the weighting results can be considered trustworthy overall. However, the consensus among the panel members for each of the driver weights varied. Larger boxes in Figures 2 and 3 indicate a lower consensus between the panel members. The boxes show the interquartile range which is the difference between the first and third quartiles of the individual panel member’s weights. There was a low consensus among the panellists for Drivers I and IV, the economics-related drivers. In the case of Driver I there was a tendency to assign a higher weight, but two panel members assigned lower weights to this driver. In the case of Driver IV there is a tendency to assign a lower weight, but the same two panel members assigned a higher weight to this driver compared to the other panel members. Because the consistency of the panel members’ pair-wise comparisons is high, the differences in opinion concerning these two economic drivers are significant. Regardless, Drivers I and IV took up between 69% and 87% of the total weight based on the range of individual weighting results. Interestingly the consensus concerning the low weight for the policy-related driver (Driver III) was found to be high.

Barriers

Consistent with the drivers analysis, the forestry industry’s risk-averse investment culture was found to be the main barrier for implementation of the biorefinery (Figure 3). The barriers related to technology uncertainty and risk as well as securing “quality” biorefinery partnerships (Barriers II and III, respectively) had similar importance according to the panel members. Lastly, the policy-related barrier (Barrier I) was judged the least important. Its weight is significantly higher however than the weight for the policy-related driver. Although the industry wants to minimize its reliance on government policy, these policies need to be clearly defined to assist the forest industry set a clear path forward for the biorefinery.

The consistency ratio of the average pair-wise comparisons for determining the barriers was higher than 0.10 and therefore the weighting results need to be considered with more caution than the case for the drivers. One reason for this may be that the barriers were found to be more difficult to interpret for each panel member individually. The consensus among the panel members for each barrier weight was similar (except for the policy-related barrier) and was generally higher than for the driver weights (i. e. the boxes in the barrier box plot were generally smaller) (Figure 3). However, Barriers I and III (policy-related and partnership-related driver, respectively) each had one outlier, i.e. one panel member who weighed the barriers significantly differently than the other panel members.

Conclusions

A group of experts was asked to weigh a set of drivers and barriers related to the implementation of the forest biorefinery via an MCDM panel using the Analytic Hierarchy Process. The weighting results for the drivers showed a more profound difference of opinion between the panel members about the relative importance of the drivers most related to the short-term survival of the forestry industry versus the longer-term. However, the survival of the industry was still the biggest driver according to all panel members. The weighting results for the barriers should be considered with caution because of the low consistency of the pair-wise comparisons of the barriers. Nevertheless, the biggest barrier to biorefinery implementation was risk (technology, financial, market, policy) and the forestry industry’s risk-averse culture.

Acknowledgments

The authors would like to thank the panel members for their participation in this study. This work was supported by the Natural Sciences Engineering Research Council of Canada (NSERC) Environmental Design Engineering Chair at cole Polytechnique in Montral.

References

Axegrd, P. (2005). The future pulp mill -A biorefinery. In First International Biorefinery Workshop. 1st International Biorefinery Workshop, Washington DC

Chambost, V., Eamer, B., and Stuart, P.R. (2007). Forest Biorefinery: Getting on with the job. Pulp and Paper Canada, 108(2), 19-22.

Ptri, S. (2010). Industry-and company-level factors influencing the development of the forest energy business -insights from a Delphi Study. Technological Forecasting and Social Change, 77(1), 94-109.

Patrick, K. (2010). Survey finds optimism and skepticism about future of integrated biorefineries. Online: http://www.tappi.org/content/enewsletters/ahead/2010/issues/2010-01-20.html.

Saaty, T.L. (1980). The analytic hierarchy process. New York, NY, USA: McGraw-Hill.

Matty Janssen and Paul Stuart are affiliated with the NSERC Environmental Design Engineering Chair in Process Integration, Department of Chemical Engineering, cole Polytechnique Montral, Montral.

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PHOTO CAPTIONS:

#1 – Table 1: Pair-wise comparison values used in Analytic Hierarchy Process (AHP) Value Definition 1 3 5 7 9 2, 4, 6, 8 Intermediate judgment values Equally important Moderately more important One driver/barrier is judged moderately more important Strongly more important Very strongly more important Extremely more important One driver/barrier is judged extremely more important Explanation Drivers/barriers are judged equally important One driver/barrier is judged strongly more important One driver/barrier is judged very strongly more important When a compromise is necessary to give an intermediary judgment between the previous values

#2 – Table 2: Definition and elaboration of biorefinery drivers I II III IV Driver The biorefinery potentially offers an opportunity to overcome highly variable and insufficient margins, thus ensuring short-term profitability currently associated with forestry products. Future access to raw materials at competitive prices for the core forestry business may be better secured through biorefinery implementation. There is an opportunity resulting from emerging government policy related to climate change, land use, taxation and other issues which can result in financial support for biorefinery implementation. The biorefinery provides the potential for transforming the business model of a forestry company and increasing its market value. Elaboration This driver is related to short-term free cash flow, essential for forestry companies to pay debt, dividends and to make capital investments. By implementing a biorefinery strategy leading to improved margins, the financial risk of such a strategy is mitigated and the strategy will be more feasible. Furthermore, other strategies such as partnering with other companies can be instruments for success. Based on the experience in Europe where there is more advanced energy policy and carbon trading, large increases in the prices of white wood and forest residuals can be expected in the coming years in Canada. At the same time, several provinces are examining land tenure policy which may make access to forest biomass increasingly competitive in the future. By implementing the biorefinery and re-assessing forest harvesting techniques there may be significant potential to a) reduce overall biomass cost in the short term, and b) create the potential for paying more for biomass when this becomes necessary in the longer term. Implement
ation of a biorefinery strategy implies significant market and technology risk. It is critical that government mitigates significant biorefinery technology risk by policies and programs that mitigate capital cost and its associated risk. At the same time, carbon trading systems and other policy tools may render green products to be more cost competitive by moderating the higher operating costs expected to be associated with early-generation biorefinery technologies. This driver is related to long-term valuation of the company as this is related to strategic planning. If the biorefinery is implemented successfully, the stock market will recognize this valuation thus providing the forestry company a stronger competitive position over the long term. Panel Discussion Currently, having good assets that produce commodity products efficiently does not guarantee financial viability of forestry companies. Rationalization of production capacity is thus necessary in order to survive in the short term (” last man standing” strategy). Other revenues are needed to ensure the competitive position of the forestry industry, and commodity products may not be the best strategy for such a diversification. Therefore, value-added products should be preferred for the longer-term implementation of the biorefinery. As demand for biomass increases due to biorefinery implementation, it is expected that prices will also increase. The competition for biomass leads to the search for other types of biomass. The biorefinery can also use agricultural biomass, energy crops and municipal solid waste (MSW). The location of a facility may in this case be a significant advantage. The pulp and paper industry’s advantages regarding access to biomass are: 1) certified forest management techniques are used to a great extent, and 2) pulp and paper mills already have access and know-how for forest resources. The biorefinery business model should be viable without operating cost policy-related considerations, which may change in the long-term. However, the mitigation of investment risk during the years of operation provides an important incentive for companies to embark on the biorefinery. Nevertheless, government policy should be consistent over the long term and should not change from government to government. The public image of the pulp and paper industry can improve thanks to government policy. Having a green image will be beneficial to the industry and may indeed assist with government funding. This strategic driver is pertinent at the corporate level and is less likely to be a mill-level driver. Nevertheless, value creation is essential for the survival of a company. The sustainability of the production facilities should increase with biorefinery implementation. While improving operating margins, as well, biorefinery facilities should be environmentally benign and have a positive impact on the social fabric in the surrounding areas.

#3 – Individual driver weights 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Driver I Figure 2: Average values and consensus among industry panel members for driver weights The average of the individual weights (indicated by the cross) are calculated using the panel members’ set of weights (which were calculated using each individual member’s pair-wise comparisons) Driver I : The biorefinery potentially offers an opportunity to overcome highly variable and insufficient margins, thus ensuring short-term profitability currently associated with forestry products Driver II : Future access to raw materials at competitive prices for the core forestry business may be better secured through biorefinery implementation Driver III : There is an opportunity resulting from emerging government policy related to climate change, land use, taxation and other issues for financial support for biorefinery implementation Driver IV : The biorefinery provides the potential for transforming the business model of a forestry company and increasing its market value Driver II Interquartile range Average of individual weights Driver III Driver IV

#4 – Table 3: Definition and elaboration of biorefinery barriers I II III IV Barrier Government policy that may affect biorefinery implementation strategies remains uncertain in North America. Early implementers may incur higher technology risk by implementing inefficient early-generation technologies and be unaware of emerging or not yet identified biorefinery technologies that may be more cost effective. Identification of a quality (non-forestry sector) partner and collaborative structure (joint venture or otherwise) will be critical for success in most cases, and is difficult to establish at this early stage. The industry’s risk-averse culture and marginal financial performance favours short-term decision making, which may not result in an emphasis on the identification of a longer-term product/market biorefinery strategy. Elaboration Government policy related to the content of renewable fuels in gasoline has driven the development of 2nd generation ethanol production processes in North America. However, what about policy that may drive the implementation of processes that lead to added-value green products and the potential for an improved business model for forestry companies? This question is critical and still needs to be addressed by North-American governments at the federal, provincial and state levels. To our knowledge there still is no implementation of commercial-scale 2nd generation biorefinery technologies at this time, even for the case of bio-ethanol (considered to be about 40 MMgal/ year at the present, and undoubtedly larger capacity in the future). Scale-up and various other technology risks are significant until commercial scale technologies have been implemented, and even then subsequent generations of these processes will benefit from significant capital and operating cost efficiencies as they further mature and are optimized. As a separate issue, the continuous stream of announcements and press releases about new biorefinery technologies make companies wary that new more cost-effective technologies have yet to be identified which may render strategies established today to be ineffective. There are many appropriate biorefinery process/product strategies for every forestry company depending on such factors as their existing supply chain, product portfolio and geographical location. However, it is likely the case that there is only a small number of quality partners for success in transforming the business model of forestry companies. How do forestry companies secure these partners? What kind of agreements can be put in place that are acceptable to the partners, and at the same time are flexible for changing technology and market conditions in the future? Unlike the case of capital spending in relatively low-risk technology associated with the core forestry business areas, for successful investment in the biorefinery, a longer-term strategy is essential that will result in transformation of the business model in such a manner that risk is mitigated over the course of several years of implementation. Without this strategy in place, forestry companies will naturally embark on immediate payback projects which are at risk of being unsustainable over the long or even intermediate term. Panel Discussion The panel members felt no need to discuss this barrier after having discussed in-depth about Driver III (Table 2). The current forestry industry culture and a resistance to change are the real barriers. On the other hand, distinct to usual investment practice, certain companies consider it to be a competitive advantage for being on the cutting edge of biorefinery development. The choice of implementing an early-generation technology is closely linked with product selection. This creates opportunities, but may be risky because the appropriate business models have yet to be defined. Partnering is a critical biorefinery strategy needed for sharing technology, commercial and financial risk, especially in the case of non-commodity products. Partnerships are a critical component of forestry companies’ biorefinery strategy. Howe
ver it may be difficult for them to identify the right partner because partnerships are not part of their culture. The forest industry has historically not generated adequate returns from capital spending. As a result, the forestry industry mindset today requires that short-term value is essential for capital spending. However, strategic long-term investments are likely needed for successful biorefinery strategies if the company vision is to transform. Furthermore, a product-centric development culture needs to be adopted in order to sustain value from implementing the biorefinery.

#5 – Individual barrier weights 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Barrier I Interquartile range Extreme utlier Outlier Average of individual weights Barrier II Figure 3: Average values and consensus among industry panel members for barrier weights The average of the individual weights (indicated by the cross) are calculated using the panel members’ set of weights (which were calculated using each individual member’s pair-wise comparisons) Barrier I : Government policy that may affect biorefinery implementation strategies remains uncertain in North America Barrier II : Early implementers may incur higher technology risk by implementing inefficient early-generation technologies and be unaware of emerging or not yet identified biorefinery technologies that may be more cost effective Barrier III : Identification of a quality partner (non-forestry) and collaborative structure (joint venture or otherwise) will be critical for success in most cases, and is difficult to establish at this early stage Barrier IV : The industry’s risk-averse culture and marginal financial performance favours short-term decision making, which may not result in an emphasis on the identification of a longer-term product/ market biorefinery strategy Barrier III Barrier IV