Wood Bioenergy: The Rise and Fall of Wood-Based Biofuels, Part II

20 07 2013

This post includes an excerpt of the feature article in the May/June/July edition of Wood Bioenergy US (WBUS) written by Brooks Mendell, Ashley Barfield, and Amanda Lang. It is the second part of a two part series on liquid biofuels.

Investors in wood-based biofuels must keep in mind how ethanol investments have generally lost their luster.  John Eligon and Matthew Wald of The New York Times summarized the struggle of hundreds of corn ethanol plants built throughout the U.S. Corn Belt with government subsidies and mandates (“Days of Promise Fade for Ethanol”, 3/16/13). According to the article, “thousands of barrels of ethanol now sit in storage because there is not enough gasoline in the market to blend it with…”

Regardless of the quality and status of individual technologies and plants in development, analysis of public firms active in the wood biofuels sector confirms how they continue to face extreme economic and market challenges.  First and foremost, ethanol-related production efforts operate in an over-supplied, low-demand market.  The U.S. is flush with excess ethanol production capacity and, thanks to blending walls and other logistic limitations, is holding the bag for a product with few customers.  This is economics 101.  Second, high production costs for wood biofuels, even as firms show progress and improve yields, actually can look worse on a relative basis as the prices for alternative fuels, such as natural gas, decline.  Through no fault of the U.S. biofuels sector, it remains subject to external benchmarks and exogenous forces that erode progress and diminish the attractiveness of wood biofuel investments.  Third, time works against wood biofuel projects in the U.S. when evaluating wood feedstock strategies and alternatives.  With an improving economy, demand for wood raw materials from traditional forest industry users such as building product manufacturers and pulp and paper producers is increasing.  In addition, wood bioenergy projects with existing markets and ready technology, such as wood pellet producers, are increasing production and investment in new capacity.  All of these factors push potential wood biofuels projects to the back of the line for securing woody feedstocks.   As a group, these firms have shrinking relevance to timberland owners and wood raw material competitors.

WBUS Market Update:  As of July 2013, WBUS counts 459 announced and operating wood bioenergy projects in the U.S. with total, potential wood use of 128.6 million tons per year by 2023.  Based on Forisk analysis, 296 projects representing potential wood use of 78.5 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.





The Rise and Fall of Wood-Based Biofuels, Part I

16 04 2013

This post includes an excerpt of the research in the February/March/April edition of Wood Bioenergy US (WBUS) and is the first part of a two part series on liquid biofuels.

In May 2011, Forisk and the Schiamberg Group evaluated the viability of 36 wood biofuel projects in the United States.  The study emphasized the unlikely and problematic development of the wood biofuels sector while singling out projects with drop-in fuels and specific technology types as having investment potential for investors.  As of April 2013, 13 of the original 36 projects have been cancelled and 12 remain in the planning or construction stages.  Four have been shut down.  Since the 2011 study, ten new wood biofuel projects have been announced.  New projects emphasize feedstock flexibility beyond wood raw materials and focus on multiple, existing end markets including diesel, sugars and industrial chemicals.  Analysis of potential wood use highlights the minimal relevance of the biofuels projects to timberland investors in the U.S. today and over the next ten years (Figure 1).  

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Newly announced wood biofuel projects have become increasingly less ambitious and less relevant to forest industry firms and timberland investors.  Analysis comparing projects in 2013 to those from 2011 find that current projects use less wood and scale at smaller production levels.  Meanwhile, the traditional forest products industry is reopening closed plants and building new capacity in response to increasing housing demand.   

In the bioenergy sector, wood pellets provide a ready, realizable market.  The enthusiasm for wood biofuels from a few years ago has been replaced with well-earned skepticism and caution. For timberland investors, potential demand and wood-based revenues from biofuels have been discounted.  For traditional forest industry firms, biofuel worries have been replaced by demands to be treated fairly in legislation or mandates that could affect wood raw material costs.  And for biofuel investors and project developers, the needs to produce product for existing markets that can produce cash today have strengthened business models and modified expectations for potential growth in the next five years. 

WBUS Market Update:  As of April 2013, WBUS counts 456 announced and operating wood bioenergy projects in the U.S. with total, potential wood use of 125.0 million tons per year by 2023.  Based on Forisk analysis, 293 projects representing potential wood use of 75.4 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.





How Financing Signals Viability and Risk for Wood Bioenergy Projects

6 02 2013

This post summarizes research from the January 2013 edition of Wood Bioenergy US (WBUS).

Viable wood bioenergy projects can secure competitive financing.  In U.S. capital markets, primary sources of financing for these projects include private equity, project finance, grants, loans and bond issuances.  Decreased availability of financing represents one of the top three responses – along with legislative uncertainty and low natural gas prices – from managers of idled or failed wood bioenergy projects tracked by Forisk from 2009 through 2012.  Bioenergy plants must compete with other bioenergy projects for financing, as well as with projects of all types in different industries. Of the 164 projects that fail Forisk’s viability screening, at least 41% explicitly lack sufficient access to capital to advance towards construction.

Figure:
Reasons Announced Wood Bioenergy Projects Fail Viability Screening

20130206 wood bioenergy

Recent announcements regarding financing for projects indicate how investors view different bioenergy technologies and markets.  Financing cannot be ordered at the drive-thru window. The ability to secure financing from a lender indicates some level of confidence and manageable risk in the eyes of investors.  It requires project developers to demonstrate a robust business model or ongoing concern with a proven track record.  For wood bioenergy projects with unproven technologies, developers must turn to government funding sources or to private equity investors with appetites for higher risk.  The wood pellet industry, while facing uncertain growth, has established its viability; a track record of operational success is the best proof of creditworthiness, affirmed by the sector’s access to cheaper, traditional debt financing. Cellulosic ethanol and other biofuel projects remain high risk with a challenging road to commercialization.  These projects rely on government funding, such as programs through the Department of Defense, and costly private equity.

WBUS Market Update:  As of January 2013, WBUS counts 461 announced and operating wood bioenergy projects in the U.S. with total, potential wood use of 132.9 million tons per year by 2023.  Based on Forisk analysis, 296 projects representing potential wood use of 76.2 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.