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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
7 innovative value chains: thermochemical value chain
Brussels, 21 June 2011 Workshop on financing the SET-Plan
7 innovative value chains: biochemical value chain
Brussels, 21 June 2011 Workshop on financing the SET-Plan
INEOS Bio case study – project information (technical)
Thermochemicalvalue chain (type 1)andBiochemical valuechain (type 5)
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
DONG Energy / Inbicon Bio-refinery – Deployment status
In operation since November 2009
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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 og fordeling af biomasse
Arbejdsløshed
Ålborg
Herning
Ensted
Odense Vordingborg
Asnæs
Arbejdsløshed og fordeling af biomasse
Arbejdsløshed
Ålborg
Herning
Ensted
Odense Vordingborg
Asnæs
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
ePURE WG on Cellulosic Ethanol – production cost estimation
Source: ePURE working group on cellulosic ethanol
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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.
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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.
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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
Brussels, 21 June 2011 Workshop on financing the SET-Plan
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?