Feeling The Burn

One of the major concerns is that second-generation biofuels produced from wood debris remain relatively costly. However, in the May 1, 2008, edition of Renewable Energy World in an article titled "Biofuels: the Good, the Bad and the Unusual," Dr. Ralph Sims of IEA concludes that "…major deployment of commercially viable second-generation biofuels (technology) may be just a few years off."

Sim’s conclusion is consistent with our own findings in a study we undertook for a proposed cellulosic ethanol plant, where two such technology providers had processes that were being successfully built to commercial scale.

Our firm had previously been engaged in evaluating biofuels project proposals and performing due diligence reviews of business plans being used to obtain funding. In almost every biofuels engagement in which we were involved, we found that these projects all had fatal flaws that could not be remedied easily in a timely way. As a consequence, we undertook an initiative to develop a biofuels project that could prove to be technically and financially viable. Our basic research indicated that we should concentrate our efforts on defining wood debris to ethanol projects, focusing on the Southeast to attract participation from among the many pulp and paper mills that operate in that region.

The following arguments were presented to interest mill managers in this region and, ultimately, mill owners:

The presentation of these arguments was instrumental in getting the go-ahead from one mill manager to conduct a pre-feasibility study. This study was to provide sufficient information for determining whether participation in a cellulosic ethanol project could generate a high enough "value stream" to be of interest to mill owners. The study was also to consider whether it would be financially feasible for the mill to obtain a sufficient share of project cash flows with little up-front investment. This was a tall order, but we agreed to conduct the study.

It was then agreed that this pre-feasibility study would provide information and analysis to demonstrate that:

The major finding of this study was the indication that a new significant value stream could be generated for the host mill if the proposed project were to be undertaken. A number of prerequisites justified considering this project. The mill was near a port with rail access, close to abundant untapped supplies of scrap wood and strategic to serving PADD 1 markets using cheap modes of transportation. The mill site was big enough to accommodate an ethanol plant. Mill owners indicated they could "guarantee" additional environmental permitting needed could be obtained without undue delay. The mill had excess boiler capacity to supply the steam requirements of the ethanol plant. Additionally, the mill could provide the ethanol plant’s waste treatment, water and power needs at little or no cost. The mill’s wood procurement department was willing and capable of obtaining wood waste for the ethanol plant and could guarantee a waste stream of at least 1,000 dry tons per day. The mill’s owners were willing to consider making a $1 million investment in infrastructure upgrades to support the "partial integration." They also were willing to provide partial integration support during a five-year period in return for approximately 25 percent equity in the ethanol plant. The mill’s owners would even consider co-signing on ethanol plant debt or providing debt financing.

The proposed project’s viability was demonstrated by obtaining proprietary "metrics" and cost estimates from technology providers and consulting engineers and by selecting a process best suited to converting wood debris into ethanol; obtaining mill engineering estimates on how best to perform the partial integration, what such integration measures would cost and what value should be placed on partial integration support that would be provided each year; and confirming past and current ethanol prices and projecting future prices.

Additionally, the viability of the project was demonstrated by developing fixed and variable operating costs for ethanol plant operations; developing alternative financing schemes; and developing a financial model to project revenues, earnings, cash flows and return on equity for small, medium and large cellulosic ethanol plants. That financial model would then be used to run sensitivity tests reflecting optimistic, likely and pessimistic assumptions.

Data was also developed for each plant size to reflect partial integration of the plant to the host mill. Mill engineers provided estimates of amounts of steam the mill could supply the plant. A plant site was identified on land available at the mill. Estimated infrastructure upgrades were identified and cost estimates made.

Lease values were then placed on acreage to be used by the plant. Cost estimates were made for process steam, electricity and water to be supplied the plant. Fair value estimates were made for support services that the mill would provide, including waste treatment and disposal, wood waste procurement and materials storage and handling.

Using these data, a financial model was developed and projections run for each plant size. Sensitivity tests were performed using a variety of expected ethanol prices and costs and yields for various mixes of wood debris and wood chips.

To meet the mill manager’s requirement to minimize the mill’s investment, it was estimated that up-front capital outlays for infrastructure improvements to support the partial integration would cost approximately $1 million. It was also estimated that the "value" of the partial integration support to be provided by the mill would run between $1.1 million per year for a small plant, $2.1 million for a medium-sized plant and $5.1 million for a large plant. It was envisioned that the mill would forgo collection of partial integration support costs for five years in return for equity in the ethanol plant.

The study indicated that, in recent years, ethanol prices were highly correlated to gasoline prices, staying in a range of plus-or-minus 35 cents per gallon of observed gasoline prices. It was also found that during a three-year period, although ethanol prices had varied widely, they had been trending upward, and the upward trend was expected to continue in light of the MBTE phase-out and increases in gasoline prices. Although a recent average rack price for ethanol was at $2.33 per gallon, a lower ethanol price of $2.23 was used in evaluating the economies of scale for the three ethanol plant sizes.

With respect to evaluating economies of scale, the sensitivity tests performed indicated that partial integration to a mid-sized plant appeared to be the most economic of the three sizes being considered. Because the mid-sized plant requires only 1,000 dry tons per day (dTPD) of wood debris, no expensive woodchips would be needed, giving a mid-sized plant a 24-cents-per-gallon direct cost advantage over a large plant. Further, because the large plant’s feedstock requirement is 1,500 dTPD higher than a mid-sized plant, the mill procurement department expressed concern that to acquire this additional amount of feedstock, it would run the risk of driving up the cost of the mill’s 8,000 dTPD "wood basket."

It was also estimated that the mid-sized plant had a 15-cents-per-gallon direct cost advantage over a small plant, reflecting its operating economies of scale.

As can be expected, the mid-sized plant exhibited the highest income per gallon and a higher cash-on-cash return than the other alternatives.

The bottom line is that the pulp and paper mill could receive a significant value stream, with a minimum investment, if it participated in partial integration with a resident cellulosic ethanol plant.

The implication of extending a project of this type to 21 other pulp and paper mills in the Southeast would be significant. It is estimated that at least six of these mills have similar attributes to the mill that has been studied. If each of these mills could host a mid-sized resident cellulosic ethanol plant, 120 million gallons per year of ethanol could be produced in four years, enough to meet 24 percent of the EISA Renewable Fuels Standard cellulosic ethanol mandate for 2012.

In fact, there may be enough wood debris to support 24 large (55 million gallons per year) stand-alone plants. A recent independent study by Clemson University, Clemson, S.C., estimates South Carolina has enough untapped wood debris to support 39 mid-sized plants.

If extrapolated for all 22 mills in the Southeast, 3.432 billion gallons per year of ethanol could be produced from this untapped wood scrap. This equals the ethanol capacity of 62 large plants, which is quite a bit of untapped potential.