Value chain of bioenergy and socioeconomic

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2 This document should be cited as: Sikanen, L. (2014). BioPAD: Value chain of bioenergy and socio-economic contributions. Available online from Value chain of bioenergy and socioeconomic contributions Introduction Bioenergy systems create value for biomass like any other industries using biomass as a raw material. In bioenergy, biomasses are often bulky and low quality materials. Harvesting, moving, sorting and storing of materials are creating added value. Biomasses are often scattered and operations require human effort more than per corresponding amount of fossil fuels. Bioenergy at its best is decentralised energy production based on local fuels. Local value chains or value systems are important to understand especially when comparing feasibility of different energy production alternatives. It is important to understand how added value is created and how it will be divided in order to support sustainable development and welfare. Equally important this understanding is, when developing new businesses and bioenergy systems. Value chain in general The idea of value chain was introduced by Michael Porter (1985) in his book Competitive Advantage: Creating and Sustaining Superior Performance. Since that, value chains have been used widely in literature and theories of competitiveness and process development. The idea is that all phases and 2

3 steps of production are creating value for the product. It can be based on costs and labour input but finally value will be defined by customers, i.e. markets. Porter s value chain in original and simplest form fits well for industrial processes of manufacturing. It starts from raw material logistics and ends to after sales. This most simple description of value chain works well also with bioenergy system and, it helps to understand the value creation in processes. Supply chain or value chain? In forest energy studies terms supply chain and value chain are used quite freely and clear distinction is seldom done (e.g. Shabanin et al. 2013). When forest biomass is used for energy, supply chain in common form has 5 main steps. Biomass growing and delivery can be included as well to the process (Figure 1). Figure 1. Forest energy supply chain in universal form. This supply chain is changing to value chain, when added value is described in each step. Added value is a combination of costs and selling price. Every step in the process is generating costs. Steps are also changing the form of the product and making it worth of paying for the next step. The optimum situation is, that all generated costs and profit margin can be claimed from the next stakeholder of the process. In Figure 2 the average situation for Finnish heat entrepreneurs value chain is described. Added values are adopted from statistics and studies. 3

4 Figure 2. Forest energy value chain. (Typical heat only case in Finland). The value chain is closely connected also with selected business model. If you have decided to concentrate on one specific phase of the value chain, e.g. harvesting and forwarding, you do not need to pay attention to the purchase price of the stand or will your transportation distance be too long to the mill. You are only focusing to take care of the harvesting and forwarding of trees so effectively, that the negotiated price paid by your customer covers all your costs and profit margins. (And that quality meets the expectations). The another end of business models could be that large scale forest owner establishes heating plant for local customer and takes care of all phases by himself. (These cases exist in Finland and Sweden). Then the whole value chain is controlled by one stakeholder and it can sell the most valuable product, heat+service. It does not matter, how effectively single phases are done. The added value created in chain can be shared, however preferred. Socio-economic contributions in value chain When studying value chains in energy production, it is important to pay attention also for the distribution of added value among society and stakeholders. Especially this can be done, when different fuels and energy conversion techniques are compared. If the development is supported by public funding, it is important to understand, how subsidies effect on different value chains. In Figure 3 the distribution of added value is described in each phase of the chain. 4

5 Figure 3. Value chain with socio-economic descriptions. Data sources: Statistical yearbook of forestry (2013). Energiapuun hintaseuranta (Energy wood price monitoring) Metsätilastotiedote (Forest Statistical Bulletin) 25/2014. Value chain in BioPAD case Kuittila The Case Kuittila has been described more precisely in the BioPAD case study reports. In this report, Kuittila case is studied in order to get one real case to demonstrate value chains. Kuittila farm is generating both electricity and heat from wood, which is coming from own forest near by the farm. Farm is using very good quality feedstock in order to avoid problems in the running of their Volter chp-unit. That is why the value of wood is higher than described in figure 3. Harvesting is outsourced for local harvesting company KME ltd. as well as chipping and transportation. Chips are artificially dried in drying facility of the farm. Drying cost are difficult to calculate, because dryer is used also for other purposes. Conversion happens in Volter chp unit, generating about 45 /MWh conversion cost from capital costs and variable costs (figure 4). The alternative source of energy for the farm would be electricity from the grid and heat production either by light heating oil or wood chips. Wood chips for heat only would be costing about 21 /MWh and electricity from the grid would be 80 /MWh. If heat oil would be used, the fuel cost only would be over 100 /MWh. Because also other energy forms require infrastructure at the farm, 100 /MWh was taken as comparison value. 5

6 Parts of value chain owned by Kuittila Farm Goes directly to forest owner. In Finland 20% of population have direct connection to wood sale revenues KME is local small firm. Cost structure: labour and local service 50%, fuel, capital and others 50% Storages are on awerage 5 months at the roadside. Stems have minumum dry matter loss. KME ltd. Takes care of chipping and transport. Labour and local service 50%, fuel, capital and others 50% Drying generates approximatly 60% capital costs and 40% labour and energy costs. Energy plants are remarkable investments. Most of the costs are capital costs for banks and technology supplier (80%) 8 /m /MWh 20 /odt Price of wood before harvesting 15 /m /MWh 37.5 /odt Cost of felling and forwarding 0.11 /m /MWh 0.28 /odt Min. storage cost (tied capital 5%ir) 16 /m /MWh 40 /odt Chipping and transportation cost 8 /m /MWh 20 /odt Capital and operational costs of plant 81 /m 3 45 /MWh /odt Capital and operational costs of plant Biomass growing Biomass purchase Harvesting & Forwarding Storage Chipping & Transportation Drying and storage Combustion Delivery Value change of one MWh * *Alternative price of energy if produced by most probable option, light fuel oil. Figure 4. Kuittila value chain. As described in figure 4, Kuittila owns 5 steps of 8 in value chain. 3 steps are outsourced, which means that less than 20% of added value goes primarily out from Kuittila. However, about 50% of that remains on local level by salaries. Combustion requires high investments, which are not locally produced in the case of Kuittila. This means that major part of added value created in combustion is not staying in local economics. Further studies Value chain analysis presented in this paper is not meant to be scientific and exact approach into this topic. Forest energy value chain as a term is regularly used but seldom understood. Aforementioned descriptions are on purpose simple and easy going. Nowadays value chains are actually too limited descriptions of value adding processes. Processes are more often value networks. Value networks can be enlarged to remain well known input/output tables, where more interactions of economics are included. 6

7 References Energiapuun hintaseuranta (Energy wood price monitoring) Metsätilastotiedote (Forest Statistical Bulletin) 25/2014. Laitila, J Harvesting technology and the cost of fuel chips from early thinnings. Silva Fennica 42(2): Porter, M.E Competitive Advantage: Creating and Sustaining Superior Performance. New York, Free Press. London, Collier Macmillan. 560p. Shabanin, N., Akhtari, S. & Sowlati, T Value chain optimization of forest biomass for bioenergy production: A review. Renewable and Sustainable Energy Reviews. Vol. 23, July 2013, Pages Statistical Yearbook of Forestry Finnish Forest Research Institute. 7

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