Decreasing Biomass Project Risk with Supply Chain Standards

Biomass Supply Chain Risk Standards could boost investment in the bioeconomy by de-risking investment and accelerating capital flow to new projects. With adoption of the concept growing, support from industry and government appears to be growing.
By Jordan Solomon and Taylor Whitfield | May 05, 2020

The push to expand renewable energy development globally is undeniable, but without supporting mechanisms to de-risk investment and accelerate capital flow to new projects, renewable energy potential will never be fully actualized. This is where effective standardization frameworks come into play, and where the Biomass Supply Chain Risk (BSCR) Standards take center stage.

In 2017, the U.S. DOE funded this major step forward in the arena of biomass finance. With the support of Idaho National Laboratory and Los Alamos National Laboratory, Ecostrat developed the new Biomass Supply Chain Risk Standards. These standards help capital markets more effectively quantify biomass feedstock risk, allowing capital to properly structure around bioprojects and driving investment into the sector.

As the BSCR Standards is proven more efficacious, support and adoption from industry and government is accelerating. Recently, the Standards Council of Canada began the accreditation process for the Canadian BSCR Standards as an official national standard of Canada. Harmonized accreditation of the BSCR Standards by the American National Standards Institute is also on track for 2021.

A Proven Solution
We know that standards work to create efficiencies for capital markets and drive investment because standardized credit ratings are a staple of the modern economic infrastructure and support $10 trillion in investments and lending to new developments around the globe every year. At their base, credit ratings consist of a standardized approach to analyzing risk; a scoring system to calculate risk and alphanumeric ratings (i.e. AA, A, BB) to efficiently signal the credit risk to investors. This is exactly what we don’t have in the biomass sector –and it is a major reason why investment into biomass-based renewable energy is slower and more expensive than it could be.

The Next Step
By identifying over 125 common risk indicators across dozens of risk factors, the BSCR Standards offer something that has long been missing from the bio-industry: a reliable and accurate way for the capital markets to price feedstock risk. But this is only the first step towards achieving the more comprehensive goal of spurring capital flow to biomass projects. In order to do for the bio-economy what credit ratings do for capital markets, the BSCR Standards need to be combined with the world’s first Biomass Risk Ratings System. Biomass Risk Ratings will enable capital markets, insurance companies, and governments to take the array of information in a particular biomass project and translate it into a single alphanumeric score which accurately, reliably and efficiently “signals” overall biomass feedstock risk. In the same way any company’s credit worthiness can be understood simply by looking at the rating given to it by Moody’s or S&P, Biomass Risk Ratings will allow capital markets to understand a project’s feedstock risks through a simple rating.

Capital markets may not be able to easily understand the complexities and risks associated with a biomass supply chain, but they will certainly be able to understand that a clean fuel project with a AA Biomass Risk Ratings system is less risky than one with a B rating—and because the ratings methodology is transparent, investors can trust that suitable due diligence of feedstock risk has been carried out and no major pathway of risk missed.

Support from the finance sector for a better system to quantify and signal biomass feedstock risk is strong and lends credibility to biomass risk ratings. More than 50 top capital market players sit on the Risk Ratings Review Committee and collectively represent organizations with over $50 billion in deployable capital to the bio-economy. The Ratings Review Committee will help ensure that biomass risk ratings become a standard tool used by the finance sector in evaluating biomass-based investments.

This effective signaling of feedstock risk will create efficiencies in the market, allow capital to more effectively structure around feedstock risk and accelerate investment in biomass-based projects. Creating a better risk evaluation infrastructure will increase the size and scope of investments in projects that have previously been priced out of the market or dragged down by inflated debt costs of up to 100 to 250 basis points.

Putting it to the Test
To test the efficacy of the BSCR Standards, it was recently applied via case study to a wood-to-electricity plant in Florida. Using three feedstock reports from 2010, 2011 and 2017, perceived feedstock risk was evaluated before and after application of the BSCR Standards to the plant as it was prepared for sale. Ultimately, the case study showed that 41% of biomass supply chain risk factors and 34% of risk indicators were not previously addressed as part of due diligence efforts. In total, capital market perception of project risk was shown to decrease by 29% after application of the BSCR Standards.

For decades, risk misperceptions have inflated costs and slowed biomass growth to the tune of tens of millions of dollars at the expense of renewable energy development. As we head into a new decade, we will leave behind antiquated financing structures and move towards new mechanisms that enable more efficient funding of renewables and clean energy.

Authors: Jordon Solomon
President and CEO, Ecostrat

Taylor Whitfield
Project Manager, Ecostrat