Biomass Supply Chain Trade-Offs: Basis for Successful Bioenergy Businesses

Feedstock sourcing is a critical aspect in the development of cellulosic biofuel businesses.
By Rajdeep Golecha | January 21, 2016

Emphasis toward greenhouse gas reduction and massive availability of agriculture and forest residue has led to an increased interest in converting biomass into second-generation cellulosic biofuel or power. The U.S. alone could produce over 1 billion tons of biomass for bioenergy.

The U.S. EPA has a set a target of 16 billion gallons per year of cellulosic biofuel by 2022. A few commercial-scale cellulosic biofuel plants have been commissioned, and a few are under development. However, the industry is running significantly behind targets, and further reduction in cellulosic biofuel production cost is necessary.

Advancements in fermentation and enzymatic hydrolysis have reduced cellulosic biofuel conversion cost (biomass at factory gate to biofuel) by severalfold. Currently, conversion cost is less than 30 percent of the production cost of cellulosic biofuel, while more than 60 percent of the cost is associated with biomass supply. This involves harvesting, biomass collection, transportation, and management of biomass supply buffers. Despite biomass supply cost having a significant impact, there have been limited advancements in past 10 years. To bring significant reductions in cellulosic biofuel production costs, increased focus toward biomass supply chain is needed.

While biomass from agriculture or forest residue could be free, the characteristics of this biomass—low energy density and the inability to store the biomass long-term—lead to 60 percent of cellulosic biofuel production cost. Biomass transportation, collection and handling are major components of the cost. Removal of agriculture residue sometimes leads to increased fertilizer use, adding to nutrition replacement cost of biomass. Farmers expect an economic incentive to either remove agriculture reside, or convert acreage into perennial crops.

Additionally, recent studies have found that biomass supply based on agriculture waste has 20 to 30 percent year-to-year regional supply variations. Economically importing biomass over long distance is not possible. Therefore, if supply variations are left unmitigated, they lead to massive biomass supply shocks to the biorefinery. This exposes both the biorefinery and farmer to significant financial risk. To put this in perspective, a 30 million-gallon biorefinery will require about a half million tons of biomass. With average biomass cost ranging from $60 to $100, a 10 percent higher biomass cost, due to lack of optimization, would lead to $5 million per year of additional costs, or increased production cost of cellulosic biofuel by 15 to 20 cents per gallon. To reduce biomass supply chain costs and mitigate supply risk, a holistic understanding of supply chain and trade-offs is required.

Supply Chain Risks and Trade-Offs
While mismanagement of each variable could lead to massive impacts on biorefinery operations, it is important to understand the impact of each variable on risks and trade-offs.  Below, the impact of different variables on (a) exposure due to supply shocks, as well as the (b) proportion of biomass cost is qualitatively discussed. While biomass supply shocks are one-off events, their impact on business financials could be massive. In Figure 1, based on (a) and (b), the size of the bubble defines the importance of the variable to biomass supply chain management.

Market structure selection and contracting strategy: Market structure and contracting strategy defines the strategy to source biomass. The U.S. does not have a spot market for biomass, however, as the industry matures, regional spot markets are possible. Recent studies by Golecha and Gan, published in international journal Renewable and Sustainability Energy Reviews, have found that due to large variations in biomass supply and current limitations with long-distance biomass transport, fixed-price, quantity-inflexible-type, long-term biomass supply contracts under a derisked market structure are optimal. Spot market pricing structure would expose biorefineries to massive price variations. Study has found that setting up optimal contracting structures can reduce biomass cost by $5 to $10 per ton, and significantly reduce risks for both the biorefinery and biomass supplier.

Biomass transport cost: Due to the low energy density of biomass, transport cost is 15 to 30 percent of biomass cost. Change in availability of biomass impacts the area of supply, and as a result, transport distance of biomass. While the study by Golecha et al found that resultant variations in transport cost are less than the variations in biomass supply itself, optimal selection of biorefinery and evaluating trade-offs between biomass transport cost and incentives offered to biomass suppliers to improve their participation is important.

Alternative feedstock supply: Studies by Golecha and Gan have found that diversification and portfolio are important ways to mitigate biomass supply risks. Availability of alternative feedstock allows a biorefinery to diversify biomass such as corn stover, switchgrass, and wheat stover, instead of relying on a single source of biomass. Using a portfolio approach, biorefineries can significantly mitigate supply risks. Studies show that diversifying feedstock portfolio by combining multiple feedstocks could reduce biomass supply risk by as much as 40 percent. Unavailability of alternative feedstock could be a significant risk, and biorefineries should consider this in making investment decisions.

Incentives offered for biomass: Availability of biomass, i.e., farmer participation and incentives offered, are found to have a relationship. Increased participation of farmers can reduce transport cost by reducing the supply area. Incentives are linked with the market structure. Under a fixed-price, long-term market structure, incentives do not impact supply shocks, however, under a free market structure, biomass incentives could vary vastly, exposing both biorefineries and farmers to massive variations. Recent studies by Golecha and Gan provide strategies to identify optimal incentive structure. It is found that a $2- to $3-per-ton deviation from the optimal incentive could result in a $5 to $10 per ton increase in overall biomass cost.

Biomass collection and handling, storage: Variations in biomass collection and handling, and storage costs are considered to be small. However, they are 40 to 60 percent of biomass costs. In the event of biomass supply shocks, storage can play an important role in trying to mitigate risk.

Trade-Offs exist
Limitations with long-distance transport and long-term storage of biomass, combined with large variations in annual biomass supply, are major complexities in development of biomass supply chains. While these challenges cannot be completely eliminated, strategies are needed to mitigate their impact for sustainable development of bioenergy industry.

In developing biomass supply strategies, managers need to consider trade-offs between biomass price (incentives offered to suppliers), biomass transport cost, alternative feedstock availability, variation in primary feedstock availability, and biorefinery loss in the event of a supply deficit. Optimizing these variables independently, without considering the intricate relationship, will lead to higher biomass cost and expose both biorefineries and biomass suppliers to supply and price risks.

Managers also need to consider the trade-off between biomass cost and biomass supply variation (risk). Recent studies by Golecha et al have found that the operating framework that leads to the lowest biomass cost is not necessarily the point of lowest supply variability. Therefore, in developing a biomass supply strategy, managers should make composite decisions considering the impact of choices on biomass cost, the company’s risk tolerance, and impact of supply risk. Evaluating trade-offs between biomass cost over risk is a nice way to derive an ideal operating framework.
Biomass supply chains are a critical aspect in the development of cellulosic biofuel business, and in most cases, are the primary decision driver for investments and location selection. Therefore, it is important that biomass supply strategy be developed composite with the company’s strategy.

Author: Rajdeep Golecha
Bioenergy and energy expert