Densification: Associated Legal Challenges and Opportunities
Densification technologies aim to reduce the inefficiencies associated with transporting, handling and storing bulky biomass materials. Whereas the energy densities of coal and petroleum reflect the historical benefits of geologic densification, biomass has not been similarly subject to millions of years of heat and pressure. Instead, technology must be developed and employed to reduce the volumes of water and air contained in a biomass unit and improve its overall energy density. This need is made more dramatic by the fact that economies of scale continue to suggest that future facilities will be quite large and require significant amounts of biomass, which exacerbates the associated transportation, handling and storage risks. Contracting parties must continue to carefully consider these risks in conjunction with the densification technology being implemented, and the risks/benefits of the technology itself.
Supply agreements address both security and availability of a continuous supply of feedstock, as well as the quality of that supply. The greater the feedstock requirements, the greater the potential exposure to risk of quality, supply and transportation costs. Even the same feedstock (corn stover) can vary widely in composition from simple variances in soil and moisture in a particular area. Thus, the farther the project reaches to ensure long-term supply and availability, the greater the chance for variability in fuel feedstock specifications. Some densification approaches, particularly those that include thermochemical technologies such as torrefaction, are uniquely suited to accept a wide variety of lignocellulosic materials and create a much cleaner, homogenous product. This is highly valued by the power generator because it reduces operation and emission risks.
In addressing exposure to increases in transportation costs in power purchase negotiations, the power generator may want to pass through the delivered cost of the biomass feedstock or subject the power price to an inflationary adjustment reflecting the market price of transportation costs. The power off-taker will want to limit its exposure. This can be a critical negotiation, particularly for larger facilities pulling resources from long distances. If densification technologies can reduce transportation costs and exposure to transportation price fluctuations, the change may have dramatic implications for negotiations and project economics.
The introduction of densification into the process can also add significant complexity and additional legal issues to consider. Pyrolytic oils, for example, are somewhat caustic and tend to degrade quickly, creating additional transport, storage and liability concerns. Processes that aim to create a cleaner feedstock may have associated waste to deal with, implicating federal or state hazardous waste statutes and rules. Further, emerging processes may introduce new technology risks that create project financing complications.
There are also fundamental transaction elements to consider. Where and how will the densification happen? Will it be in one or more centralized facilities close to suppliers, will it be in many small or mobile units utilized on-farm or will some of it happen in the field or as part of the harvest process? If much of the process is on-farm, do state right-to-farm statutes add protection, or are federal or state feedstock utilization incentives more accessible? Does the developer, feedstock supplier or another third party own and operate the densification equipment? Do title and risk of loss transfer from the supplier to the densifier and then to the developer, and at what point? Who maintains ultimate responsibility for the feedstock specifications?
All of these issues are project and technology specific and cannot be easily addressed without an identified set of facts. While adding a densification step can add complexity and introduce additional legal challenges, those challenges will most often be variations of those already dealt with in other biomass transactions, and may be easily outweighed by the significant benefits the right densification process could bring to a particular project.
Author: Joe R. Thompson
Partner, Stoel Rives LLP
Associate, Stoel Rives LLP