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Tips for investing in the bioeconomy

Biofuels are more attractive to strategic investors than biomass electricity, said Don Roberts in a keynote address at the BioEnergy Exhibition and Conference, held in Toronto on May 20-21. Roberts, an expert on financing the bioeconomy,...


May 26, 2015
By Pulp & Paper Canada

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Biofuels are more attractive to strategic investors than biomass electricity, said Don Roberts in a keynote address at the BioEnergy Exhibition and Conference, held in Toronto on May 20-21. Roberts, an expert on financing the bioeconomy, commented that “the relative attractiveness of biomass-based electricity is going to going to get worse,” compared with other forms of renewable electricity. With advances being made in power storage, the competitive advantage that biomass has as an “on-demand” power source is diminishing. “There is a role here for biomass, but we need to focus on what’s unique about biomass. Liquid fuels and chemicals, that’s where the game is.”

Roberts is president and CEO of Nawitka Captial Advisors Ltd. He has been an analyst of the resource sector and financial services executive for many years, and was a key contributor to the Forest Products Association of Canada’s Future Bio-pathways project, which evaluated paths for the Canadian forest products industry to participate in the bio-economy.

Roberts suggested to that companies seeking investors should focus on technologies that create “drop-in” biofuels which use the existing petrochemical refining and fuel infrastructure. Choose technologies that use multiple feedstocks, because investors want flexibility, he said. Avoid ethanol, because of the blend wall and the high cost of biomass relative to non-wood feedstocks.

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Roberts’ firm has continued to do the type of analysis that characterized the FPAC biopathways project. This type of analysis is highly localized, and examines the return on capital employed (ROCE) of various technologies and combinations of technologies. Using the example of an analysis for the B.C. Interior region, Roberts concluded that stand-alone kraft pulp mills could improve ROCE by about 50% by integrating selected biofuels technologies.

In his view, there are four key variables that drive investment in the bio-economy:

  1. the price of the substitutes,
  2. cost and quality of the biomass,
  3. efficiency of the conversion technology,
  4. public policy.

Consider all of the above when choosing your pathway, he advised.

Roberts suggested that the biomass cost must be less than about $60 per ODMT for a bioenergy project to succeed. This can likely only be achieved by mixing a variety of sources. Sawmill residue and chips, for example, doesn’t even come close to this cost. Forest residues and hog fuel come closer, but to really bring the costs down, it will likely be necessary to bring municipal solid waste or fast-growing energy crops, such as miscanthus, into the mix.

Speaking as an investment counselor, he said, “If you don’t have a weighted average cost less than $60, I won’t look at it.”

He reviewed past investment trends in the bioeconomy. Since 2004, he said, there has been about $250 billion invested in bioenergy. The peak occurred in 2007-2008, and the total has been declining since then. The share of  investment directed toward biomass for power is going up, but this avenue doesn’t add a lot of value to the biomass from the seller’s point of view.

The current estimate is that the UK will increase its consumption of biomass for power by 13 million ODMT by 2016. However, Roberts noted that this estimated amount would have been significantly higher if made a few years ago, so he cautioned the audience that estimates are subject to changing conditions.

Sustainability of the biomass used for power has become a real concern for utilities, says Roberts. A new regulation states that 70% of the pellets consumed in the UK must come from sustainably managed sources. This stipulation favors Canadian exporters of biomass because of our strong history of certification.

Roberts also noted that China, Japan and South Korea have all stated their intentions to move toward co-firing of biomass and coal in order to boost their production of renewable power, but he is skeptical that China will follow through because of the high cost of biomass-based power relative to other renewables.

Roberts concluded with a checklist of how to make your biorefining project happen.

  1. Have a significant volume of low-cost feedstock.
  2. Produce a drop-in biofuel. (Producing an intermediate product is probably the way most companies will go, instead of a direct-to-consumer kind of drop-in replacement.)
  3. Have a strategic partner. Preferably one above and one below you in the value chain.
  4. Off-take agreements. These are critical to securing private debt.
  5. Ability to leverage regulatory support (i.e., are you eligible under RFS2 rules, or California’s low-carbon fuel standards?)
  6. Have a credible management team with a track record.