Financing of Feedstock Supply
When developing biomass feedstock projects, there is one area that challenges the project through completion—feedstock supply and pricing. In some biomass electricity projects, the feedstock is compared to a fuel such as coal, for which risk is minimized by long-term contracts with large companies. There are multiple sources of coal, and large producers reduce or minimize counterparty risk. The energy in coal, or Btu that can be extracted, is typically within a predictable range.
Assuming adequate supply, key factors in sourcing feedstock are energy density and price.
Feedstocks that are produced for fuel tend to have more predictable energy densities, but also have higher pricing and production profiles. Many feedstock projects focus on waste feedstock because they are paid to take it or pay a low cost, and that can drive profitable projects. In financing such a project, there is a higher risk that needs to be addressed, related to production for an alternate purpose, lack of contractual consistency, price escalation for transportation and handling, and price risk, if there is competition for the waste.
A number of projects designed around feedstock waste streams have not been financed due to waste feedstock risk. Commercial waste for feedstock sourcing carries the inherent risk of no supply if the producing industry changes, as happened with housing market production and its construction waste. To counter that risk, some projects have sought consistent supplies through municipal wastewater and solid waste. While those waste streams require processing to become useful feedstocks, the constant supply of no-cost or low-cost feedstock can be contracted with little risk of the waste-producing industry failing. Further, as the use for the waste becomes more developed, brokers enter the market to capture supply and margin. While most recently discovered feedstocks carry some of that risk, the waste feedstocks can be more volatile in supply and price.
Biomass feedstock projects can be financed when the risk is approached strategically, with awareness of:
Multiple Feedstock Sources. Multiple sources of the same type of feedstock and different sources of different feedstocks reduce supply and counterparty risk. Feedstocks tend to have seasonal variances in availability and price that also should be addressed.
Processing and Output Capacity for Different Blends of Feedstocks. Tests should be performed and data collected on different feedstock blends and the impact, if any, on output capacity.
Counterparty Risk. The feedstock sources and providers, including the industry that provides the feedstock.
Impact of Regulatory Requirements. Regulatory issues concerning the source, handling, and storage of the feedstocks as well as the regulatory requirements that apply to the use of the feedstock.
Feedstock Requirements. For acceptable processing, the feedstock must meet the regulatory and processing requirements to produce the output capacity. Standards or requirements should be set that can be measured against the available supply.
Developers should be prepared for financiers to expect third party review and reports addressing the various risks of feedstocks. The following should be considered:
Feedstock Supply Agreements. At a minimum, use a form of purchase agreement acceptable to feedstock providers that sets out the feedstock requirements or standards, as well as remedies for not meeting the standards. For example, the presence of hazardous substances will likely cause rejection of the feedstock, but higher moisture may cause a price discount instead of rejection.
Feedstock Resource Assessment. A third-party assessment describing the availability of the feedstocks will need to be prepared, including competition for the feedstocks and pricing information.
Fuel Management Plan. A plan or agreement with a third party will be required, which will describe how the various feedstocks will be procured, handled and stored, and the working capital necessary to maintain a high-quality fuel supply.
Pricing Collars or Guarantees. Ultimately the best plans may not cover the perceived risks of feedstocks. Project developers should contemplate fixed-price guarantees or price collars (high-low) under which the project can be operated.
Many financing sources require a higher degree of project risk reduction. Feedstock projects should develop a focused approach to reduce the perceived risks relating to the feedstock, its providers, and long-term pricing. A strategic approach with properly negotiated agreements can cover many perceived risks.
Author: Mark Hanson
Partner, Stoel Rives LLP