Financial Tools for the Promotion of Biofuels

Transcription

1 NOT AN OFFICIAL UNCTAD DOCUMENT Financial Tools for the Promotion of Biofuels For: Accra Conference By: Winfried Rijssenbeek, FACT foundation Date: 06/11/06

2 Content 1. Introduction 2. Market considerations for Jatropha plantations and biofuels 3. Development path for biofuels and Jatropha plantations 4. Models and arrangements between the actors 5. Financing 6. Conclusions

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4 1. Introduction Biofuels: vital element for global sustainable energy supply, Fossil fuel expensive and unreliable in many rural areas, Alternative: local bio-fuel production for modern energy supply.

5 What is the FACT Foundation FACT - Fuels from Agriculture in Communal Technology (May 2005) promote potential of biofuel production for farmers in developing countries, to generate cash income and improve quality of life. FACT s mission: to assist local organisations and companies delivering: accurate information and know-how on biofuels (production to application) FACT activities: FACT is a knowledge and expertise centre, Implements field projects with local counterparts, FACT has also started its own research programme. Financially supported by donor organisations in the Netherlands

6 About the presentation First: Market considerations for Jatropha plantations and bio-fuels. Then, show models of collaboration between big and small entrepreneurs in the sector Finish with financing aspects

7 2. Market considerations for Jatropha plantations and biofuels The international market National markets Local market

8 International Markets Bio energy market: cannot be satisfied in volume and expanding continuously, Drivers: Energy security, Kyoto Climate concerns, high oil prices and depletion, Indust. Countries Government policies: EU 2010, 5.75 %, Sweden 100%, 2020 Risks for biofuels: prices fossil fuels volatile; economies of scale in Brazil and Malaysia, with lower production prices, Risks with Jatropha are agronomic: variety, best practices, economics. NOTE: energy crops will make food crops more expensive: Urban poor compensated by subsidized staple food?

9 The Economist, October,25th,2003

10 Guatamala, Octagon

11 National markets Food production in Asia: lessons learned: Provide with good and stable crop prices. (temporary subsidies for urban poor for basic food) Agro-processing industries are to be developed; Provide farmers targeted loans (providing better seed, nutrient inputs, etc.) to invest; Train farmers on how to produce more effectively with the new inputs, like seeds and nutrients.

12 National markets For Biofuels a national policy might include: Providing a solid minimum price to farmers (intervention price) for energy crops, to reduce farmer s risk (new crop new market); Reduce taxation on nationally produced biofuels; Provide training and agricultural extension services for the production of biofuels; Provide loans for plantations of Jatropha; Support processing units with good prices of bio-oils. Note: policy instruments are to be measured on their effectiveness

13 National markets What can be learned from the EU countries national energy policies: stable (20 years) and good prices provided for production of renewable energy (kwh) of Germany and Spain have had much bigger impact on deployment of renewable energy than complicated temporary investment support measures.

14 Local market Definition: for a minor city, village, for a agro-processing industry, Applications: electricity, local transport, local agro-equipment.

15 Local market Requirements Land and time availability: availability of land and time to invest in the establishment of the bio-oil crop; The bio-oil should have direct use: i.e. clear need for agro-processing or other productive or consumptive energy (market for processed food products, or buying power for consumptive energy); Other basic needs of village, like drinking water, diseases control, etc. should have been covered; Village community: good track-record in organising/managing other social purpose systems, like drinking water; health, etc.; The bio-oil should be more competitive than other energy solutions that might be available

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18 3. Development path for biofuels and Jatropha plantations Traditional crops can become export crops: Small and Medium Size Farmers producing for local market, Companies or estates producing for export. Both ways have their own dynamics

19 Development path for biofuels and Jatropha plantations: actors Parameter Small holders alone Small holders & oil boards [1] or bio-oil cooperative s Estates [2] Estates with larger contract farmers Estates with small holders Local production [3] Domestic production Production for export

20 4. Models arrangements between actors Characteristics of Jatrophabiofuel sector: Jatropha is a new perennial crop for many regions. Its production methods and yields are not fully understood and therefore pose a risk to small farmers. Price development is uncertain because it competes directly with the volatile oil market. Special attention should be given to the way the introduction is financed. Three standard models to finance the Jatropha introduction among farmers. Buying agreement between promoter and farmer Joint venture between promoter and farmer Loan from promoter to farmer As we will see, choosing a finance model is highly dependent on the local context.

21 4. Models and arrangements between the actors Assumption for all models: The Jatropha plant starts producing from year 3 onwards; The promoter of the system is also (co-)owner of the oil processing facility (press) and can be an estate, cooperative or entrepreneur; The promoter has sufficient demand to sell all oil produced.

22 Buy-back agreement at fixed price Farmers contribute their land and labor, Promoter contributes seeds, initial fertilizer and technical assistance. All contributions are in kind so no money flows take place between the promoter and the farmer until year 3, The farmer sells Jatropha beans to the promoter at fixed price. The press cake is preferably returned to the farmers, in order to close the production cycle as much as possible.

23 Buy-back Agreement (over time) Input Year 1 Year 2 Year 3 Contribution of Contribution Contribution Promoter Farmer Promoter Farmer Promoter Farmer Land Labor Seed Fertilizer Techn. Ass. Output Year 1 Year 2 Year 3 Income for Income for Income for Promoter Farmer Promoter Farmer Promoter Farmer Beans Oil Press cake (1) (2)

24 The advantages/disadvantages Advantages: Its simplicity: no financial flows take place until year 3. This is useful when working with a large number of small farmers. This is a model frequently encountered with other perennial cash crops that are managed by cooperatives of product boards Risk for the farmer is small: the promoter guarantees to buy at a fixed price any quantity produced. Subsistence farmers, who are often resistant to loans, may find this an acceptable model. Disadvantages are: Risk lays mainly with the promoter; Compensation for the work of farmers during first 2 years negotiated; Farmers may not have a clear idea of the market price of their product.

25 Joint venture (JV) The promoter and farmers sign an agreement in which the results of the investment (beans, oil, press cake and the income generated with their sales) are distributed among the investors, according to their respective contribution. In order to do this, the contribution of the parties involved has to be valued. In the following a numeric example will be presented (numbers are fictitious).

26 Input Year 1 Year 2 Year 3 Total Contribution of Contribution Contribution Promoter Farmer Promoter Farmer Promoter Farmer Promoter Farmer Land Labour Seed Fertilizer Te. Ass. Processor 1 3 donation donation donation Total Output Year 1 Year 2 Year 3 Total Income for Income for Income for Promoter Farmer Promoter Farmer Promoter Farmer Promoter Farmer Beans Oil, Press cake Total

27 Advantages/Disadvantages Advantages of this model are: Risk is more equally shared between farmers and promoter More interesting for farmers with entrepreneurial spirit and reserves because possible rewards are higher. Disadvantages are: More intensive in-field follow-up is necessary in order to prevent farmers from reporting less harvest than they actually have. This risk is less eminent, if the promoter is the only buyer of Jatropha beans in the region Administratively more complex than model 1. No compensation for the work of the farmers in the first 2 years.

28 Loans In this model, the promoter issues loans to the farmers. The loans should preferably be limited to inputs (seeds and fertilizer), while farmers contribute land and labor Also a grace period of at least 2 years can be considered, until the plantation becomes productive. There is no fixed buy back rate for the seeds

29 Loan Model Advantages of the loan model are: More price transparency: farmers receive market price for their product; No need for intensive monitoring in the field; Possibility to give transitional consumptive loans during the first 2 years; Less financial risk for the promoter. Disadvantages are: Administrative capacity to administrate loans must be created, if inexistent; The loan administration has cost, which reduces the yields for the farmers; Subsistence farmers may be resistant to loans; More loss for farmers in case of bad harvest.

30 Analysis Risk to Farmers range from 0 to 100 % depending on the model: If no small farmers policy of government, and small farmers: we recommend model 1 If good small farmers policy and entrepreneurial farmers model 2 or 3 can be adhered to.

31 5. Financing Financial tools Financiers and sources ODA and CDM

32 Financial tools: example FACT model Seed to oil conversion model Seed processing to oil Technical Processing capacity Capacity of e-motor units kg/hr of seed kw value Jatropha 28,00 1,88 Operation hrs Operation days/annum Processed seeds Oil yield Cake yield Residue of seed kg/annum of seed kg/annum of seed kg/annum hr/day day/annum kg/annum 12,00 312, % 70% 5%

33 From seed to biodiesel

34 Presses: oil cake can also be used to produce biogas

35 Financiers and sources International and bi-lateral agencies Private charity funds Private equity (funds)

36 Financiers The international and bi-lateral agencies: These traditional agencies are more and more cautious in accepting smaller innovative projects. Tendency to out-contract large sums to few reliable partners who manage the smaller projects and support the institutions and organisations in developing countries. Example DGIS: for the energy sector, GTZ has obtained several millions of Euros, NUON/EDF, World Bank, etc.. a general MFS (co-financing system) programme allocating funds to applicants under very strict conditions. (E.g. Strohalm, a relatively small NGO from the Netherlands, has obtained a 3.2 Million Euro, o.a. for biooil production for local development in Honduras; HIVOS, which was allocated 260 million Euro, which aims to move in the sustainable energy sector.

37 Financiers Private charity funds: These funds in Europe cover all sorts of good thematic goals and many focus on rural development. Quite a number of these are interested in energy so to assist the improvement of the living conditions of the rural poor. Some of these, especially those of companies with a high sustainability profile, follow the line of People Planet Profit, and support poverty projects.

38 Financiers Private equity (funds): There is a list of at least 50 of such funds for the renewable energy sector, which basically aim to invest in projects with a minimum of risk and a maximum of return. The projects that such funds are interested in, are large scale. At the same time quite some private equity companies today involved in Jatropha production in Africa. ( sun biofuels, etc.)

39 ODA and CDM ODA Official Development: stimulating development. CDM is extra to make a system viable CDM applicability: highly complicated CDM costs: 50 to Euro CDM ownership rights: beneficiaries or investors CDM and its temporary nature: for how long?

40 6. Conclusions 1. The International market in biofuels for West Africa = big opportunity, prices are however dependent on fossil fuels, and bio-fuels produced by countries on large scale (Brazil, Malaysia) also provide a reference for investors. 2. For large scale export production Jatropha = a high promise, but stability of production an issue to be tackled still. Further R&D needed. 3. For National market development important lessons to be learned from Asia and EU: a policy package of relatively high and stable prices at the start, provision of loans and provision of training will assist farmers to take-on these new energy crops. 4. Local biofuels markets in village power and use in agroprocessing are attractive to poor small holders.

41 Continued 1. Actors in biofuel production have different levels of risk acceptance: need national policy and different arrangements between promoters and farmers 2. Financial world: changes positive for biofuels: the equity funds, private investors and charity funds demonstrate increasing interest in this area. 3. The international and bilateral agencies out-contract their programs more and more, and this makes funding directed to local NGO s and business parties. 4. CDM will be an important source in the future: however it requires to to have the CDM certified (only with large projects >10000 ha). 5. The CDM is also very complicated to comply with, and will not be lasting. It is the cream on the pudding.

42 The End