Supply Chain Analysis of

Coconut Biofuel: Findings from Fiji

Conan Hales, CFA

Consultant to the World Bank

1

Introduction

• Island locations in the Pacific are heavily dependent on fossil fuel imports, which are exposed to increased global oil prices

• In 2011, I undertook research in the field of coconut oil used as biofuel as part of a postgraduate thesis for the Imperial College London

• This was sponsored by the World Bank and with the co-operation with the department of energy of Fiji

– Focus on the pilot operation on the remote island of Koro

2

About the Research

• Purpose of the study is to examine the economic aspect of the entire supply chain for coconut oil biofuel production

• Identify how value is shared by the actors involved in the production of biofuel

• Research may be used to form policy recommendations

• We are looking to answer the question:

– Does it make sense to replace diesel fuel with coconut oil?

3

Outline

Context of mini-mills on remote islands

Technical feasibility of coconut oil as a fuel

Supply-chain analysis

Financing the mill

Summary

4

MINI-MILLS ON REMOTE ISLAND AND GLOBAL PRICES

Setting the context

5

What is a Mini-mill?

6

Where is Koro island?

7

Global Price Comparison of Coconut Oil and Crude Oil

0.00

0.50

1.00

1.50

2.00

2.50

3.00

19

90

19

90

19

91

19

92

19

92

19

93

19

94

19

94

19

95

19

96

19

96

19

97

19

98

19

98

19

99

20

00

20

00

20

01

20

02

20

02

20

03

20

04

20

04

20

05

20

06

20

06

20

07

20

08

20

08

20

09

20

10

20

10

20

11

20

12

20

12

20

13

Pri

ce (

US

D/

L)

Date

Crude oil

Coconut oil

8

Approximate time of study is when CNO price >> oil price

Question

• Does it make sense to use coconut oil to replace diesel fuel on the remote islands?

• Answer depends on: – Total coconut resources available after food

consumption needs

– The cost of coconut oil production

– The landed cost of diesel on the remote island

– Non-economic costs or benefits associated with coconut oil production

9

FEASIBILITY OF COCONUT OIL (“CNO”) AS A FUEL

Fuel characteristics and engine modification options

10

Technical Feasibility of Coconut oil as a fuel

• Much research published that indicated coconut oil (“CNO”) is a viable alternative to diesel fuel

– “Coconut Oil Power Generation: A how-to guide for small stationary engines”, World Bank, 2009

11

Fuel Specific

energy

(MJ/kg)

Density

(kg/m3)

Cetane

number

Kinematic

Viscosity

(cSt 40°C)

Solidification

Temp. (°C)

Flash point

(°C)

Diesel fuel 42.6 828 40–55 2–4 -9 >62

CNO 35.8 915 60–70 27 22–25 200–285

Modification options of using CNO in diesel engines

• At least 3 options considered for using CNO as a fuel in diesel engines:

– Adapting Engines for 80% CNO and 20% Mineral Diesel

– Adapting Engines for 100% CNO Use

– Biodiesel

• First option most suited to remote island setting due to simplicity and cost

12

Mineral Diesel

CNO

Adapt Engine: Dual fuel system

Adapt Engine: Adapt fuel pump, fuel tank, filters,

injectors

Blend: 20%

80%

100%

Biodiesel (Unmodified Engine)

Transesterification

Co

mp

ress

ion

En

gin

e

Gen

erat

or

100%

Reference: Jan Cloin, “Cocogen: Feasibility Study Into The Use Of Coconut Oil Fuel In Epc Power Generation” 2008

Solutions to the challenges of CNO biofuel

Situation Problem that will arise Associated solution

High moisture content in copra (greater than

6%).

• Production rate of CNO drops.

• Moisture content in biofuel. This has a high

chance of affecting the power output of engine.

• Ensure moisture content in copra is

decreased by re-drying copra.

Large particles in settling tank entering the CNO

filter.

• CNO filter clogs and shuts down.

• Frequent shut downs and washing of filters

occur delaying oil production time.

• Ensure one or two days are allocated for

settling to allow the large particles in the CNO

to settle to the bottom.

• Avoid sudden movement of the settling tank

or stirring of the settled CNO during decanting

for filtering.

• Frequent cleaning of the settling tank.

CNO in settling tank has high viscosity (or

solidifies) in the colder months.

• CNO filter clogs and shuts down. • Use heater installed in the settling tank to

heat CNO. (Care must be taken not to overheat

CNO, which may result in a fire hazard)

Large particle sizes in biofuel • The large particles will quickly clog the

generator fuel filters. Clogged fuel filters result

in reducing the flow of fuel to the combustion

chamber in the biofuel engine resulting in a

breakdown or ‘choking’.

• Ensure that the CNO filter is frequently

cleaned.

• Biofuel blending tanks are covered at all

times.

• Avoid any dust/particles entering

exposed/open areas in storage and blending

tanks.

13 Reference: Singh, R. (2010) Economic Feasibility Of The SOPAC-CATD Biofuel Project, Nadave, Tailevu, Fiji Islands.

Sustainability of Feedstock

• Total resource assessment crucial to ensure feedstock sustainability after existing consumption

• Satellite imagery technique may be used to count trees – E.g. On Rotuma island the estimated production is 7.5

million nuts per year using this technique, of which the harvestable number is 5 million and after consumption of 1.5 million leaves 3.5 million for biofuel stock or about 690,000 litres of biofuel. This is about 3x the diesel consumption

• Coconut palms typically intercropped with other food sources, reducing competition for land

14 Reference: Gerhard Zieroth with Leba Gaunavinaka and Wolf Forstreuter “Biofuel from Coconut

Resources in Rotuma”

SUPPLY CHAIN ANALYSIS OF CNO FUEL PRODUCTION

The economics of the biofuel

15

•Cultivates •Collects •Cuts

Farmer •Transports •Dries

Dryer

•Crushes •Expels •Filters •Settles

Mill Electrification Generator

Electricity Generation on a Remote Island

16

Process Cost Price Actors

Coconut palm

• Cultivation

Whole coconut

• Collect

Whole coconut

• Split

Green copra • Carry

Green copra • Dry

Dry copra • Transport

Dry copra • Crusher

Dry copra • Expel

CNO + solids

• Settle

CNO + particles

• Filter

CNO • Blend

Biofuel • Store

Biofuel • Distribution

Biofuel • Engine

cf

cv

cm

Land users

Farmers

Copra driers

Decentralised Copra Mill

Transportation

Distributor

Energy service end user

cc

cd

pv

pm

pf

pd

C

pc

Overview of the process and prices

17

Farmers and electricity fund

Village co-operatives

Decentralised mill in Koro

Niu Industries

Centralised mill in Savusavu

Village electricity committees

Middleman

Mobile Telecommunication

Operators

Truck

Land user

Cf = $17+$20

Cv = $71

Cm = $461

Cd = $16,831

Pv = $850

Pm1=$715

Pf = $657

Pd = $17,545

Pc = $182

Pm2=$484 Pm3=$242

Costs Value of product

Supply chain of Koro Mill

18

Share of estimated profits (/T of dry copra)

Farmers 43%

Fund 2%

Village co-op 12%

Mill 31%

Oil offtaker 12%

19

Estimated Market Share of Biofuel End-users

Excess CNO 59%

Koro villages 30%

Telecommunication 11%

20

FINANCIAL ANALYSIS OF THE MINI-MILL

Cost of production of CNO fuel

21

Economics of the decentralised mill Copra (kg) Diesel (L) 70% Bf (L) 80% Bf (L) CNO (L) Meal (kg) Costs Rebate

Production (CNO vol) 74 176 397

Input 1,000 76

Daily production 105 220 397 350

Price $850.00 $2.38 $2.30 $2.20 $1.80 $0.52

Wages $148.75

Catalyst $40.73

Overheads $69.72

Truck $32.17

0.13c on diesel (/L) $9.82

Subtotal -$850 -$180 $242 $484 $715 $182 -$291 $10

Profit/Loss $311 /day or $6,738 /month

Cost of production (/L) $2.03 $1.96 $1.70

Implied CNO price (/L) $2.27 $2.16 22

Sensitivity of Mill’s Profit to Diesel and Copra Prices

0.48

1.14

1.81 2.48

3.14 3.81

-200

-100

0

100

200

300

400

500

600

700

800

17

27

2

37

4

47

6

57

8

68

0

78

2

88

4

98

6

10

88

11

90

12

92

13

94

14

96

Mineral diesel price ($/L)

Mil

l's

ne

t m

arg

in (

$/T

dce

)

Price of dried copra paid to the village co-ops ($/Tdce)

700-800

600-700

500-600

400-500

300-400

200-300

100-200

0-100

-100-0

-200--100

23

5 6

7 8

9 10

11 12

13 14

15

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

20% 30%

40% Term of lending (years)

Inte

rna

l R

ate

of

Re

turn

of

eq

uit

y

Equity holding (%age of total capital)

50%-60%

40%-50%

30%-40%

20%-30%

10%-20%

0%-10%

-10%-0%

-20%--10%

Return on Equity for Mill Financing

IRRs for various tenors and leverage were calculated assuming debt can be financed at 9% All the profit goes to equity as excess cash-flow after paying interest on debt

Equity holding

Term (yr) 20% 30% 40%

5 -42% -18% -10%

6 0% 3% 5%

7 18% 15% 14%

8 29% 23% 20%

9 37% 28% 24%

10 42% 32% 27%

11 46% 35% 29%

12 50% 37% 31%

13 52% 39% 32%

14 54% 40% 33%

15 56% 41% 34%

24

Supply-chain analysis of larger mills

• Centralised milling operations exist in some Pacific island countries (E.g. Fiji, Vanuatu)

• Centralised mills benefit from economies of scale for CNO production, however, fuel prices may be expensive if cost of delivery is expensive to remote locations.

• Needs further investigation on a case-by-case basis

25

SUMMARY OF FINDINGS

26

Summary of Findings

• Remoteness of the island is a key factor for high diesel prices and lower costs of production

• Farmers are significant beneficiaries in the supply chain

• Koro mill should be profitable, and should benefit the island’s economy

• Access to the outside market for the coconut oil is important

• The current distributor is exposed to falls in diesel price, so it is important to find a more reliable oil off-taker

• New mills on other islands could be financed on commercial terms

• Regular quality control of the biofuel is important for consumer confidence and avoiding long-term technical issues

• There is potential to improve traditional copra methods in the supply chain – E.g. Use of solar drying instead of thermal drying which can contaminate the copra

– Poor handling of the wet copra increases aflatoxins and FFAs

• Once a mill is established, there are potential upgrade opportunities for production of higher quality oil for human consumption and use of other parts of the nut such as the husk and shell

27

Findings from Other Case Studies in the Pacific Islands

There is a consensus that CNO used as a fuel is technically feasible based upon Taveuni, Vanua Balavu, Koro, EPC Samoa, ENERCAL Ouvéa, Vanuatu island fuel and PNG Fisheries case studies. Despite the technical feasibility, the four categories of issues which have either prevented or caused pilot projects to fail are:

Policy

• Subsidies are preventing economic biofuel production in Kiribati and Rotuma

• Laws are preventing sale of biofuel for vehicles in Vanuatu

Technical

• Non-trivial techniques of refining fuel for transport engines in PNG fisheries and Vanuatu cases.

• There was no engineer to fix the generator in Welagi, but that was subsequent to the decision to run the generator on mineral diesel

Feedstock

• Competition from dalo was the primary issue in Welagi

• Supply and quality issues existed in Ouvéa

• There is also a potential feedstock risk from cyclones

Socio-economic

• There was a failure to understand the community structure in Vanua Balavu, and farmers sold copra for a better price to the central mill as they did not receive benefit from the local mill 28

Benefits of CNO biofuel

• Potential to reduce fuel import bills

• Reduces total greenhouse gas emission balance if it displaces mineral diesel

• Compared to solar PV, the levelised cost is cheaper – F$0.73/kWh versus F$0.86/kWh

• Relies on basic, proven and affordable technology

• Remote islands benefit from energy security by relying less on imports

29

Reference

• The research is publically available on the Linked-in profile under Conan Hales

31