Bio-Business 101

There are more variables than constants in bioenergy today, and anyone looking for long-term success had best deal with that fact. This was the main take-home message for the more than 300 attendees at the sixth annual Canadian Renewable Fuels Summit held in early December 2009 in Vancouver.

CIBC World Markets’ Don Roberts has been studying the possible role of biomass and biofuels in the forest sector for the past year, and cautions that with so many variables up in the air, investors will be leery. “Investors don’t like uncertainty, and there is a lot of uncertainty here.” (Photo: Dave Roels)

Of course there was also plenty of good news, mostly involving the industry’s continued growth despite a struggling economy. Speakers celebrated how far the biofuels sector has come, how much it brings to regional and mostly rural economies, and the technological advances in conversion technology that will improve profitability and reduce the carbon footprint even further. Several speakers even looked to the forest sector as the next best fibre source for expanding ethanol production to meet rising global demand. Still, for those considering an investment in biomass in Canada, there was plenty else to ponder over the two days.

Friendly industry
Canadian Renewable Fuels Association (CRFA) president Gordon Quaiattini opened with a national status report on ethanol and biodiesel. He told delegates that the sector is delivering the renewable fuels and greenhouse gas (GHG) reduction that Canadians and our policy-makers expect, performance that he went on to measure in several ways.

Survey says: Quaiattini unveiled a brand new Praxicus Public Strategies public opinion poll showing that Canadians are overwhelmingly supportive of the sector. Findings include:

Clearly public support for biomass is the industry’s to maintain or lose.

Building communities: The CRFA also revealed an impact study quantifying the economic effects of producing biofuels in Canada. Given that the overwhelming majority of gasoline used in Canada is imported, the contrast is stark. The Doyletech study of the Integrated Grain Processors Cooperative ethanol plant in Aylmer, Ontario, found that just building this plant resulted in a net job creation of 1,152 person years, saw direct investment in the region of $276 million, and increased tax revenues and reduced government costs of $7.8 million (municipal), $44.2 million (provincial), and $70 million (federal). Ongoing, the plant brings 55 person years of employment each year, $53.7 million in local spending, and a combined net benefit of $11 million per year at all levels of government.

Reducing GHGs: The environmental effects of any renewable energy source should always be measured versus its alternatives. In the case of biofuels, that alternative right now is petroleum-based gasoline. Putting geopolitical effects aside, a recent Cheminfo Services Inc study found that the current mix of ethanol reduced GHGs by 62% compared to traditional fossil fuels.

Cold water
If this was the good news, several of the next speakers brought delegates back down to earth. Bob Dinneen, president of the U.S.-based Renewable Fuels Association (RFA), recounted some of the ongoing public relations battles his industry faces south of the border. Much more so than our smaller biofuels sector here, RFA members have been battered by attacks on their public image, attacks that Dinneen says are in part sponsored by competitors in the fossil fuel sector and are driven by the sector’s own success. At over 50 billion litres and 8% of the nation’s fuel supply, biofuels are big enough in the United States to draw the ire of big oil.

Dinneen spoke mostly about two campaigns: the well-known food vs. fuel debate, and the more recent, and possibly even more threatening, indirect land-use change (ILUC) issue. Dinneen says that the food vs. fuel debate is a red herring that the U.S. sector is starting to make headway countering. However, he cautions Canadian producers that this issue will emerge in Canada as the sector’s production levels grow and competitors start to see biofuels as a threat, rather than a complementary supply source. Bring on another spike in oil prices, watch food prices increase as a result, and look out when politicians and oil public relations hacks look for culprits.

Still, it is the ILUC issue that keeps Dinneen awake at night. The premise behind ILUC is that any land used to grow biofuel crops in Canada or the United States automatically demands that a similar area of land be deforested elsewhere in the world and planted to replace the grain diverted to biofuels. As a result, the carbon footprint of North American biofuels must now include this vague global link. The real world economy is more complex than this. The overly simplified ILUC calculation makes for some very dangerous and counterproductive assumptions, Dinneen concludes.

Forest-based biomass and bioenergy are in many ways exempt from these issues. As long as forest-based biomass is grown and extracted as part of a sustainable forestry operation, and the land remains forested over time, forest biomass holds some public relations and marketing advantages over agriculture-based fuels. Still, it is just as likely that both renewable fuel sources will be tarred by the same brush in the public mind. Dinneen urges Canadians to get out in front of these issues and to keep the debate at the local or national level when it comes to comparing GHG emissions.

“If you do that, the total environmental impact of renewable fuels is already 40 to 60% lower than gasoline and will get better as we improve our systems and conversion technologies. But if you include vague concepts like ILUC on a global scale, our impact advantage vanishes.”

The reality is that regardless of what we do in Canada, the world is demanding and producing more biofuel. In fact, Tammy Klein of the Global Biofuels Centre counted at least 30 countries that will be implementing biofuel use targets in 2010. Most of these are developing countries, and the drivers are economic as much as environmental, but the end result is the same. As these countries consume and produce greater volumes of biofuels, and as Europe and the United States adopt regulations and incentives that favour the carbon footprint of some types of biofuels over others (i.e., sugar cane ethanol over corn-based), the global import and export flows will start to change. Klein even sees the United States becoming an ethanol exporter as fuels deemed less desirable on the domestic market find markets elsewhere.

Conference participants discuss the day’s take-home messages during a networking session. (Photo: Dave Roels)

Follow the money
If all this policy uncertainty makes you nervous, you’re not alone. Don Roberts of CIBC World Markets looked at the bioenergy sector from a forestry and investor perspective and said that such issues make investors look twice. Sustainability issues like ILUC, soil quality, and forest sustainability are key to attracting financial backers, he agrees, but there is more. In all, Roberts lists five variables that shape bioenergy economics: the price of fossil fuels, the price of carbon, the conversion technology, feedstock cost (as high as 80% of variable costs), and public policy.

“Right now, all five of these variables are in a state of flux, and investors don’t like uncertainty, so you have a problem,” Roberts told delegates. “Oil prices are high, but not so with natural gas. Carbon prices are all over the map. There is a lot going on in conversion technology – I’ve tracked nine pathways for forestry alone – but there are also a lot of snake oil salesmen. Biomass prices are volatile, which is not good, and assessing delivered costs over the long-term is complex.” In short, if you have any hope of attracting larger sums for biomass and bioenergy projects, you’d better have all five of these variables nailed down over the life of your financing. When it comes to biomass feedstocks, Roberts suggests that investors in larger projects are looking for 15-year minimum volume agreements with transparent pricing policies. He also stresses that transport costs, and thus yield per hectare, will become increasingly important factors as the easy fibre becomes scarce.

In the long run, Roberts feels that, subsidies aside, the forest sector will continue to produce a mix of traditional products as well as a stream of speciality bioproducts and biomass (combined heat and power and wood pellets), whereas the agriculture or plantation-based sector will win the race to next-generation ethanol.

Regarding subsidies, Roberts questions the economics behind Ontario Power Generation’s drive to replace coal with wood pellets. “In general, your end game with biomass can’t be to replace natural gas or electricity in Canada. Given current coal prices and an assumed pellet price in Ontario based on purpose harvesting of $200 per oven-dried tonne, we’re implying a price of $120 per tonne on reductions in carbon dioxide emissions. In comparison, these [carbon credits] are currently trading for around $20 per tonne in Europe and $5 in Montreal.”

As we feel our way through the biomass economy’s many unanswered questions, there is the potential for costly mistakes, bad press, and unintended consequences. That’s even more likely once subsidies and political initiatives are tossed into the mix. It’s best to temper our enthusiasm with careful, objective analysis.