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Experts explain feedstock supply chain intricacies

| October 13, 2011

Ask J.D. Lindberg, principal and CFO for Resource Recycling Systems Inc., about the intricacies of feedstock supply contracting, and he would most likely tell you that “glass time is money.” Lindberg spoke during a feedstock supply discussion during the 2011 Northeast Biomass Conference & Trade Show, and to illustrate why some contracts work and others don’t, he explained the story of two biomass power facilities in Michigan that are only miles apart, “practically co-located,” he said, yet one has signed a much more favorable contract compared to the other. Why? Because, Lindberg said, the feedstock truckers for one company were more efficient at loading their woody biomass and could get in and out much quicker than the other facility’s transport team. Because of the ability of the quicker drivers, that particular plant was considered a preferred customer, or more favorable contractor, and earned a better price for its feedstock and supply agreement.

Add to all of that that an individual for the “preferred” facility was constantly in the field and in the surrounding communities working to promote it and educate others about it, and Lindberg was able to illustrate the intricacies of feedstock supply contracting to a level beyond just insinuating that long-term contracts and quality feedstock matter.

The story of the Michigan facilities was only one of Lindberg’s examples of how biomass feedstock supply agreements have gotten done. For any project developer looking to utilize woody biomass for CHP or as a feedstock for a biobased fuel or chemical, he also noted that “In many cases there is complimentary reason for biomass…where it might just only break even.” To explain his statement, he described a biomass utilization facility that began using biomass as a way to solidify a logging industry and community, and persuade the loggers in the area that their services would be needed for the long-term. Providing incentives through acquiring additional biomass from logging companies helped solidify the community surrounding the biomass plant, even if it wasn’t in the business to make money using it.

While Lindberg was able to provide several examples of why feedstock supply contracts have been signed in the past, Kate Bechen, an attorney with an extensive background in feedstock contracting and supply chain issues from Michael Best & Friedrich LLP, told the crowd on hand for the discussion about some of the trends she sees in the supply chain. “We are not seeing moves with lending from banks,” she said, but, “we are seeing lending from companies with spinoffs and strategic investors.” Bechen explained that some strategic investors are looking for more than just returns—they are looking for strategic access to technology.

In the actual feedstock supply contract, she said, a project developer needs to understand the “boilerplate issues,” or as she explained the backend of the contract that includes aspects such as liability, insurance and other often overlooked issues that could help the developer shift risk away from the project in an event of a negative situation.

Another area of emphasis from Bechen was the need for project developers to define specific markets for each product when entering into project finance, and that if there is a debt financing agreement, that agreement needs to be as long as the feedstock supply agreement and vice versa.

Along with the trends in project finance, she also explained that in the future the likelihood of satellite centers that densify biomass or preprocess that material near the harvesting site, is good. And, she said, regional processing centers that are affiliated with larger biomass users could also play a role.

Terry Godwin, forester and project manager for GFR Forestry Consultants PLLC, may have summed up the atmosphere surrounding feedstock supply agreements. “It’s not always what’s out there, it’s how much you can capture.”

 

 

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