The importance of biomass supply chain dynamics

By Bryan Sims | March 25, 2011

The idea of becoming an active participant in the biomass supply chain to provide feedstock for biorefineries and power plants may be difficult to grasp for many suppliers on the outside looking in.

Timothy Baye, a business development professor at the University of Wisconsin-Extension, is actively engaged in such contracts and intends to share his expertise at the 2011 International Biomass Conference & Expo, May 2-5 in St. Louis, about how a mutually beneficial working relationship can work if both parties perform proper due diligence, and both are open to understanding how available federal incentives can be leveraged in order to gain maximum return on investment.

“It’s all about risk,” Baye said. “It’s all going to be about managing the perceived risk, especially in response to the due diligence requirements of commercial debt. Commercial debt is still going to drive the process.”

“Recognize that you may have drunk the Kool-Aid,” Baye said, “but the equity and debt markets haven’t necessarily come from the same punch bowl.”

With commercial debt, in addition to equity potentially coming back as a hedge to help finance biomass projects, prospective developers will likely lean on federally driven incentives, such as the Biomass Crop Assistance Program, which encourage greater volumes of biomass to enter the supply chain and increase the various types that can contribute to downstream products. Created in the 2008 Farm Bill and swiftly implemented as pilot program, BCAP was initially designed to stimulate new crops for renewable energy feedstocks. The biomass industry has since seen several revisions and amendments specifically as it relates to guidance on what types of biomass qualify under the program, how suppliers and biomass conversion facilities (BCFs) are paid, including other measures such as appropriate land stewardship practices for aggregating various types of feedstock.

Daniel Simon, partner with Washington, D.C.-based law firm Ballard Spahr Andrews & Ingersoll LLP, will explain in a timely presentation in St. Louis where BCAP stands in terms of how biomass suppliers and their customers can capitalize on the prescribed benefits.

“Details still need to be hammered out regarding what the guidelines are going to be on forest stewardship plans that need to be followed,” Simon said. “For matching payments or established matching payments for forest land, it has to satisfy forest stewardship guidelines. The USDA is still creating their internal guidelines about what the underscores the true definition of forest stewardship.”

Simon said he’s optimistic that as matching payments continue to be forged between suppliers and BCFs that conform to BCAP guidelines, more material should begin to trickle into the supply chain, which should breed competition and lead to lower prices. “But, you can’t simply say, ‘I’m going to pay you half of what you’d sell me otherwise because you’re going to make up the difference in matching payment,’” he said.  

Baye noted that a vibrant infrastructure exists to accommodate moving various types of biomass, and is encouraged to see more biomass suppliers enticed to provide different feedstock biorefineries, specifically those producing renewable chemicals.

“The market analysis tends to be a more manageable task for the biobased chemical sector,” Baye said. “There’s an expectation that if you can perform, you can get a longer-term contract. On top of that, then, if the producers are willing to assume a certain degree of risk, I’m seeing that there’s at least a fairly good opening for equity participation in some of that supply chain.”

As the BCAP continues to undergo provisional changes, Simon said he’s optimistic that the USDA has learned from the mistakes it made with how the BCAP pilot program operated three years ago.

“[The USDA] appears to be determined to not repeat those mistakes,” he said. “That’s an encouraging sign.”

To learn more about the 2011 International Biomass Conference & Expo, or to register, click here.

(This story originally appeared at www.biorefiningmagazine.com.)