European Industrial Bioenergy Initiative Financing Needs and … - WS... · Brussels, 21 June 2011 Workshop on financing the SET-Plan Barriers / risks • Uncertain policy environment

Brussels, 21 June 2011 Workshop on financing the SET-Plan

European Industrial Bioenergy Initiative

Financing Needs and Bottlenecks

Graham Rice, INEOS, Michael Persson, Inbicon,

Markku Karlsson, UPM, Max Jönsson , Chemrec


Outline

1. EIBI: Background and objective

2. 7 Innovative value chains

3. INEOS Bio case study

4. DONG Energy / Inbicon Bio-refinery

5. UPM biodiesel project

6. Chemrec black liquor gasification


EIBI: Background and objective

BackgroundBioenergy will play a key role in the long term energy strategy for all applications andespecially the transport sector, contributing up to 14 % of the EU energy mix and up to10% of energy demand in transport in 2020.

ObjectiveEnabling commercial availability of advanced and sustainable bioenergy at large scaleby 2020 and strengthening EU world technology leadership for renewable transportfuels.

Core activitySelection and funding of demonstration and flagship plants, with a potential for largescale deploymentVariety of feedstocks, processing technologies and products


7 innovative value chains: thermochemical value chain


7 innovative value chains: biochemical value chain


INEOS Bio case study – project information (technical)

Thermochemicalvalue chain (type 1)andBiochemical valuechain (type 5)


INEOS Bio case study - project information (financial)

Phase A – industrial demonstrator

• 24,000 tpa bioethanol

• ‘Spade ready’ project on ideal site*

• €130M

• SPV created for A and B

• Equity + grant funding (EU + UK)

Phase B – 1st of kind commercial

• 144,000 tpa bioethanol

• Site and utilities secured

• €250M

• Debt, equity + grant funding

• 12 (2+10) year tenure for debt

• Potential for 10 more plants by 2020

* Existing petrochemicals site with all OSBL provided,FEED completed, Planning consent awarded, feedstockcontracts negotiated, site services and utilities in place,ethanol off-take agreed, EPC bid pack prepared


INEOS Bio case study – barriers and needs

Barriers / risks

• Project finance market failure (risk appetite and need for solid guarantees / liabilities)

• Global competition for project funding

• Higher incentives in USA and China than Europe

• Uncertainty over RED transposition into National legislation & interim targets to 2020

• Uncertainty over biofuel taxation and market demand for / value of bioethanol

Needs

• Both EU and National grant support (quasi investment) to de-risk for investors

• Provision of debt / loan guarantees for first 5-6 plants

• Mandated target for advanced biofuels underpinned by EU grant / loan programmes

• E85 cost competitive for consumer (Euro cent / km) - taxation linked to energy & GHGemissions across EU27

• Alignment between waste & renewable energy Directives – waste biomass supply chain

• Ability to secure long term contracts (length of tenure) for feedstocks and bioethanol


Number of Projectsat commercial scale

Pilot

Demo

1st Commercial (Flagship)

Ca plant 6 to 8

Cost per tonne biofuel

Financing market accepts as “demonstrated”

INEOS Bio case study – Scope of SET Plan support

SET Plan needs to beable to support first 5plants in Europe


DONG Energy / Inbicon Bio-refinery – Deployment status

In operation since November 2009


Commercialization Phase

1st of kind commercial

• 98 million liter bioethanol

• + lignin solid biofuel

• + C5 molasses

• Possible sites identified in Denmark

• Feedstock collection in place

• €320M

• Debt, equity + grant funding

• Solid market incentives required

• Potential for many plants across theEU by 2020

DONG Energy / Inbicon Bio-refinery – Commercial deployment

Arbejdsløshed og fordeling af biomasse

Arbejdsløshed

Ålborg

Herning

Ensted

Odense Vordingborg

Asnæs


Arbejdsløshed

Ålborg

Herning

Ensted

Odense Vordingborg

Asnæs


Arbejdsløshed

Ålborg

Herning

Ensted

Odense Vordingborg

Asnæs


Barriers / risks

• Uncertain policy environment (RED implementation – targets - FQD)

• Unclear incentives / policy signals to invest big scale in advanced biofuels

• Translates into unclear value for advanced biofuels to value superior sustainability profile

Reluctance to invest in cellulosic biofuels

No capacity build-up

Needs

• Specific mandatory target for advanced/cellulosic ethanol

• Production support, fixed premium for first 1 billion liters per plant (wind mill model)

• Other support measures (e.g. grants, loan guarantees) for production plants

• Incentives for creation of value chain also for by-products and collection of residues

DONG Energy / Inbicon Bio-refinery – Barriers and needs


ePURE WG on Cellulosic Ethanol – production cost estimation

Source: ePURE working group on cellulosic ethanol


UPM BIOFUELS – BIODIESELUPM's Second Generation BTL Concept

14

Wood

sourcing

Gasification

& purification

FT-synthesis

& up-grading

Water

treatment

CHP

plant

Pulp & paper mill

H2+COBiomass

drying

Pulpwood

Bark

Stumps

Residues

Paper mill units

Additional units

Material flow

Energy flow

Syntheticbiodiesel

CHP = combined heatand power plant


UPM BIOFUELS – BIODIESELPilot plant is for testing of gasification and gas cleanup

15

• The Pilot Plant facilities are located atthe Gas Technology Institute in Chicago.

• Pilot Plant sections include BiomassGasification Plant and Gas Cleanupand Processing.

• Main characteristics of the Pilot Plant:

- Oxygen blown pressurized fluidized bed gasification

- Catalytic tar reforming, cold gas cleanup

- Capacity 7 MWth biomass input

• Piloting is done in co-operation withAndritz-Carbona.


UPM BIOFUELS – BIODIESELIntegration to existing pulp or paper mill facilities

16

• The biorefinery would use wood 2,9 Mm3/a and produce appr. 100 000tons/a of transport biofuels and 500 GWh/a energy as well as biochemicals.

• The greenhouse gas emission reduction over a lifetime of the producedfuels will be significant, at least 85 % compared to fossil fuels. The first plantwill save 300000 t/a of CO2.

• Location will be adjacent to the existing paper and energy facilities isimportant in utilizing the heat generated in the process and thus maximisingthe integration benefits.

• Estimated total cost of single project is 400 million Euros.

• Financing plan for the first plants would be 50-70% shareholder Equity/Debtand 30-50% Grants.

•In the second phase UPM is considering to utilize this first BTL kind of plantfor the coming investments.BTL = biomass to liquids

Brussels, 21 June 2011 Workshop on financing the SET-Plan17

UPMUPM RaumaRaumaUPMUPM StracelStracel

• UPM has two possible BTL-biorefinery locations: Rauma and Stracel mill sites

• Piloting and technical concept to be finalized by September 2011

• Environmental impact assessment has been completed atUPM Rauma mill site in Finland

• Environmental healt and safety permit will be completed at UPM Stracel mill duringQ3/2011

• Detailed lay-outs are being conducted for Rauma and Stracel site

• Budgetary invitation to tenders for Oxygen plant, Hydrogen plant and feed stockpretreatment

UPM BIOFUELS – BIODIESELUPM BTL Development Status


New cellulose mill: Via Chemrec black liquor gasification, biomassis efficiently converted to high-value 2-gen biofuel

350 MEUR investment at Domsjö Fabriker AB. 50 MEUR Swedish Energy Agency grant

100/140 Kton BioDME/BioMethanol/yr from Chemrec gasification of cooking liquor,

equivalent to 2200 heavy trucks; 200 Kton/yr CO2 saving,

Done: Detailed feasibility, budget quotes, EIA, off-take term sheet. Feasible at current rules

DG comp approved. No overcompensation at current pricing levels under current rules


2nd gen biofuels: not food-competing, high CO2-saving & EU-produced. The price is a longer value chain.

• Fossil fuels are already refined by nature & time = lower cost

• Value chain is 100x larger than that for biofules = economy of scale

• Limited environmental criteria imposed, externalities not fully paid for = subsidy

• 2nd gen biofuels: have to ”manufacture the oil” in many steps=higher cost

• Sustainability criteria imposed=actually ”paying” for many externalities

• Avoids food-competing feedstocks which are already ”refined by nature”

• Very energy efficient, but new technology, intially capital intensive. Long-term.

• Security of supply, EU jobs & value add

EU targets can only be met with 2G fuels technology.This requires meaningful long-term support for first plants.

2G

Fossil


If revenues supported byregulation are lost, the projectcannot service debt & equity

Investment Yearly cash flow,1st 10 yrs

10-year debt finance

Short-term & unpredictable rules for biofuels mean that capital seesprojects with political risk of losing >100% of cash flow.

Debt service

CO2-tax exemption

Energy tax exemption

Operating margin at fossil-equivalent price

Investment

• Investment in projects serving debtover 10-12 years and equity over 20years is not possible withoutguarantees of regulatory stability ofsimilar tenor. 2023 is a short horizon.

• Discipline: green incentives have tomake limited recourse work, notcorporate finance. Cash flow is onlysecurity.


Sample regulation/legislation Positive effect atfirst sight

What it actually means to capital provider is risk andinability to finance

2 G 2x factor for renewable quotacompliance

Price support for2G visavi 1G

Unpredictable, value based on relative price of 1G and fossil +risk of lower-cost production. Of very limited value.

EU ETD opens for energy tax onall fuels although possible toexempt biofuels until 2023

Exemption ofbiofuels improvesrelative position

Political risk of worsening relative position of biofuels as itallows member states to apply energy tax on all fuels. Horizonshorter than minimum 10+2 years for debt=not bankable

EU ETD opens for linkage to ETSfor CO2 emissions price

CO2 tax on fosssilfavors biofuels

Volatility, artificial market, risk of race to the bottom(ETS CO2is 1/6 of Swedish level). Risk of worsened relative position ofbiofuels

EU ETD slated for 2013implementation (at best)

- VCs need add’l 3-5x multiple on money back (70% IRR), justfor waiting. The existence of the draft increased risk.

Transposition of RED to memberstates unclear in form & time

- Unknown timetable, not a unified EU market for biofuels

Competition law Level playing field;optimal resource

allocation

Regulatory risk, delay. Competition law supersedes RED. DGcomp applies corporate finance lens, limited recourse financedifficult. Member states and the EU pass the buck.

Directives need to consider impact on financing, or they can becounterproductive. The devil is in the detail.

Companies’ job is to handle market- and execution risk, but largenew investments just can’t carry excessive political risk


Price of oil and CO2

Cost for biofuels production

• 1st projects works at currentSwedish levels of CO2 & Energytax exemption, but these are atrisk due to ETD & political risk

• CAPEX reduced >40% from 1stto nth plant. Source: Princetonstudy, 2006

• nth plants don’t need energy taxexemption, with increasing oil andCO2 prices, even more robust

• 1st plant investors need to be”protected” from lower cost nthplant investors, otherwise no 1stplant

Green incentives are needed to bring transformative technology tomarket. The payback is sustainable biofuels, also economically so

To get there and avoid failure of NER300, SET, RED and current projects:

Recognize levels, form and tenor of green incentives required for 2G limited recourse finance

Fix political risk through EU- and member state through instruments which guarantee levels &tenor for green incentives and which survive future directives

Recognize urgency, solve issues in months, not years. Fix:Conflicting objectives between DGs, directives and laws, consider member state waivers

from competition rules or DG comp fast trackEU and member state organization issues – task force reporting to EU president?

Documents

European Industrial Bioenergy Initiative Financing Needs and … - WS... · Brussels, 21 June 2011 Workshop on financing the SET-Plan Barriers / risks • Uncertain policy environment