Biomass Fuel Availability

Transcription

1 Exh. Pet. EWK-2 Biomass Fuel Availability North Springfield, Vermont Prepared for: North Springfield Sustainable Energy Project A Project of Winstanley Enterprises September 2011 Prepared By: Innovative Natural Resource Solutions LLC 107 Elm Street, Suite 100-G Portland, ME /

2 Introduction This document serves as an independent assessment of wood availability, and factors influencing availability and pricing, for a proposed wood-fired power plant with an expected annual wood use of 400,000 to 440,000 green tons in North Springfield, VT. Innovative Natural Resource Solutions LLC (INRS) was hired by the North Springfield Sustainable Energy Project to compile this report. INRS has experience with the region s forest products industry and loggers, and has a strong working knowledge of existing and potential markets for biomass in the Northeast. INRS believes the information contained in this report to be correct, based upon information sources we deem reliable. Given the dynamic nature of wood markets and biomass, INRS does not warrantee information in this report against all errors. This report contains some predictions, forecasts and forward-looking statements that are based upon the professional knowledge, experience and opinion of INRS. These predictions and forecasts are not guarantees of future events. Innovative Natural Resource Solutions LLC Founded in 1994, Innovative Natural Resource Solutions LLC (INRS) is a full-service consulting firm specializing in the forest industry, natural resource conservation, and renewable energy. INRS has worked with a number of parties on the development of new biomass energy facilities around the country. The firm is currently working with developers of biomass or biofuel projects in Maine, New Hampshire, New York, New Jersey, Vermont, Illinois, Virginia, and Michigan. A complete description of INRS activities in biomass energy development, including a partial client listing, can be found at Innovative Natural Resource Solutions LLC Page 2 of 40

3 Table of Contents Summary 4 Market Structure for Forest-Derived Wood 5 Roundwood Supply 9 Existing, Proposed and Idle Users of Low-Grade Wood 10 Forest Residues 21 Forest Growth and Removals 23 Issues in Biomass Fuel Management 27 Diesel as a Component of Biomass Production Costs 31 Historic and Projected Biomass Prices 33 Potential Suppliers 35 Procurement Agent 36 Biomass Supply Infrastructure Development 37 Endnotes 40 Table of Figures and Tables Figure 1. Schematic of Products Derived from a Single Tree... 6 Figure 2. Log landing with slasher (left), chipper (right), and wood sorted by product... 7 Figure 3. Wood sorted for chipping Figure 4. Close-up of chipper on log landing Figure 5. Trailer for whole-tree chips, with opening for chipper to blow chips into Figure 6. Roundwood Stored for Chipping, Biomass Power Plant Figure 7. Existing Users of Low-Grade Wood (U.S. only) and Drive Times Figure 8. Existing and Proposed Facilities Proximate to North Springfield, VT Figure 9. Major Competitors (Existing and Proposed) for Low-Grade Wood near North Springfield, VT with 30, 60, 90 and 120 Minute Drive Times Figure 10. Forest Residues and 60 Minute Drive Time Figure 11. Thirty Mile Radius and 60 Minute Drive Time from North Springfield, VT Figure 12. Timberland Ownership Types within 30 Miles of North Springfield, VT Figure 13. Biomass Production by Month (typical) Figure 14. Historic Biomass Pricing, Table 1. Major Competitors for Low-Grade Wood Table 2. Forest Residues and 60 Minute Drive Time Table 3. Standing Inventory and Net Growth- Removals for Area within 30 Miles of North Springfield (private land only) Table 4. Diesel costs in biomass production Table 5. Projected Wood Prices at Various Diesel Costs; Table 6. Cash flows with facility financing of biomass equipment (example) Innovative Natural Resource Solutions LLC Page 3 of 40

4 Summary The North Springfield Sustainable Energy Project is developing a wood-fired biomass electricity facility for North Springfield, VT. When running as a baseload plant, the facility would expect to consume between 400,000 and 440,000 green tons of wood per year. This assumes an average moisture content of 45% (varies by season and species) and an average BTU value of 4,625 per pound (9.25 MM per ton); these are typical for biomass in this region. This region of Vermont is heavily forested, with a meaningful agricultural base as well. Within a thirty-mile radius of the proposed facility (roughly equivalent to a 60-minute drive time), 81 percent of land is timberland, with the ability to serve as a strong supply base. The growth of non-sawlog material within 30 miles of North Springfield (exclusive of public lands) exceeds harvest by roughly 470,000 green tons. Additionally, roughly 200,000 green tons of forest residue are generated annually and available in the region. These sources combine to provide more than sufficient wood to sustainably supply a facility at this location. The region also has a number of existing and proposed markets for low-grade wood, and the stability and strength of these markets will influence biomass pricing at North Springfield. INRS breaks biomass prices into two components: - The cost of the diesel used to fell, skid, process and transport a ton of chips; and - All other components of cost (stumpage fees to a landowner, staff and equipment costs, supplier profit, etc.), referred to as the wood component. INRS projects that the wood component of biomass fuel for this location will average $27.00 per green ton in 2011, and increase annually by 3%. In order to get a final delivered price, 2.1 times the price of gallon of diesel should be added; for example, if diesel averages $4.00 per gallon in 2011, the average delivered cost for biomass fuel is projected to be $ Innovative Natural Resource Solutions LLC Page 4 of 40

5 Market Structure for Forest-Derived Wood Whole tree chips for use as biomass fuel are the by-product of timber harvesting for sawlogs and pulpwood. The economics and availability of biomass fuel rests upon the harvesting of highervalue products, with the tops, branches, off-spec wood and economically undesirable species potentially available as biomass fuel. On timber harvesting operations, the landowners and loggers are generally looking to harvest sawlogs (for lumber) and pulpwood (for paper mills), both usually higher value products than biomass. However, much wood does not meet the rigid specifications for these higher value markets (for example, a length of tree may be crooked, have rot, or have a split in it). For this wood, as well as all tops and branches, loggers have two choices: they can return the wood to the forest and allow it to decay, or they can chip the wood that does not meet sawlog and pulpwood specifications. Most loggers practice a combination of these approaches. In much of Northern New England, it is typical for loggers purchase portable whole tree chippers and chip vans (truck trailers designed to have chips blown in) in order to access this market. For firms engaged in land clearing, their need to remove most or all trees from a site makes a market for chips a necessary part of conducting their operations. However, given limited biomass markets in close proximity to North Springfield, VT, a number of local loggers do not currently own chipping equipment. Loggers and landowners make their money from growing, harvesting and selling veneer, sawlogs and (to a much lesser extent) pulpwood. The health of these markets, particularly sawlogs, is what allows people the economic opportunity to conduct a timber harvesting operation. If these markets suffer a significant downturn, less biomass may be available in the marketplace because fewer individuals will conduct timber harvesting operations. In general, when a single tree is harvested, a number of products can be derived. The bottom length (generally eight to sixteen feet) is often straight with relatively few defects such as knots or branches. This section is generally a veneer log, sent to a market that slices or peels the log for plywood, or more commonly a sawlog, and is sent to a sawmill for lumber production. Depending upon size and species, it may be pulpwood or biomass. The next lengths (again, often eight to sixteen feet) may become a variety of products. If it is straight and has few defects, it is a veneer log or sawlog and will be sent to a sawmill. If it is smaller than the size sawmills require, or has a large number of defects (rot, knots, split, etc.), it will be sent to a pulp mill for paper manufacturing. If it is not straight (and thus cannot be cleanly debarked) or if local roundwood markets are not strong, it will be chipped for use in biomass production or mulch, or left in the woods if those markets are not economically available. The tops and branches can be chipped for biomass energy markets, chipped for mulch markets, or left in the woods. Innovative Natural Resource Solutions LLC Page 5 of 40

6 Figure 1 shows the sections of a single tree and the products derived i ; figures 2 through 5 show parts of a New England logging operation that will produce whole-tree chips for a biomass power plant. Figure 1. Schematic of Products Derived from a Single Tree Innovative Natural Resource Solutions LLC Page 6 of 40

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9 Roundwood Supply In addition to chips, some biomass power plants ii take roundwood (i.e., un-chipped stems that can be stacked and transported on log trucks) delivered to a remote yard as a source of wood. Roundwood can then be chipped on an as-needed basis and delivered to the facility. It allows smaller producers, and those that are unable or unable to add chipping to their operations. Roundwood for biomass electricity use competes directly with pulp for paper production, as well as firewood and pellets. Roundwood for biomass tends to work only in areas economically distant from existing pulp and paper mills, and provides an opportunity for loggers that do not want to make or cannot afford the significant investment in chipping and transport capacity to serve as suppliers to a biomass market. Springfield, VT is currently such a location. Once delivered, roundwood can be stored for long periods of time before use; this provides facilities the ability to purchase wood at advantageous times and store until needed. Roundwood chipping requires both storage and on-site processing. Innovative Natural Resource Solutions LLC Page 9 of 40

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21 Forest Residues Forest residues are the otherwise unused portion of a tree harvested for sawlogs, veneer, pulpwood, or other roundwood product. When a logger cuts a tree, the most valuable portion is generally the straight, lower portion. This portion, which can be cleanly debarked, can be used to produce lumber, pulp for paper, or other products, depending upon the species, specifications, and local markets. The portions of a harvested tree considered forest residue may refer to branches, tops, areas with splits or sweep, or portions of a tree with rot. Forest residue is collected in the process of some timber harvests, particularly during harvests employing highly mechanized logging crews operating high-capacity equipment. For logging crews using chainsaws and cable skidders (as well as some other configurations of logging equipment), most forest residue is left in the woods, at the site a tree is felled. This residue could still be theoretically collected and utilized, but the economics would likely prove challenging. Once brought to a log landing (a centralized point for collection and processing of wood from a timber harvest), the high-value portions of a tree are separated from the parts that are off-spec, and forest residue is piled separately. Forest residue can then be chipped directly into a logging truck, for direct delivery to market. Forest residues tend to be mixed species, as any and all residue on the log landing can be chipped and co-mingled. Within the counties that are in proximity to North Springfield, VT, INRS estimates that roughly 400,000 green tons of forest residue is physically available. In our experience, roughly half of this could be available to market, and it is likely that the supply infrastructure would need to be developed to capture this volume. As such, up to 200,000 green tons could be available locally, and provide a high volume of the wood necessary to source the plant. The figure and table below provide details on the potentially available forest residue. Innovative Natural Resource Solutions LLC Page 21 of 40

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26 Sufficient Local Forest-Based Supply to Support 35 MW Between forest residues and net growth there is sufficient wood in the area surrounding North Springfield, Vermont to sustainably supply a 25 MW 35 MW wood-fired power plant. In addition to these sources, other fuel types may include sawmill residue, pallets, land clearing wood and other forms of clean wood. These are all available in modest and fluctuating supply in the region surrounding North Springfield, and are not relied upon as part of a core supply in this analysis. They should be considered opportunity fuels, which will become part of the facilities fuel mix based upon short-term availability and pricing. Innovative Natural Resource Solutions LLC Page 26 of 40

27 Issues in Biomass Fuel Management Long-term Contracting and Consistent Wood Purchasing There is often a desire on the part of facility developers and financial backers to enter into longterm, fixed price contracts for wood. This has proved problematic in the biomass industry for a number of reasons: - Due to the mom and pop nature of the forestry and logging industry, there are few suppliers with credit or resources that would be recognized by major financial institutions. There are a handful of credit-worthy firms that serve as aggregators, bringing together wood from a number of parties. However, the small number of firms that fit this description allows them to charge significant premiums to provide meaningful price and volume guarantees. - Many loggers believe that overall markets for low-grade wood and biomass fuel will strengthen, not decline. Given the renewed interest in development of biomass facilities across the country, this is likely true. Suppliers are thus reluctant to enter into a longterm fixed price contract. INRS recent experience in Maine and other parts of New England shows that loggers are currently demanding a premium over current market prices to provide long-term (3-5 year) price and volume guarantees. - While offering surety to both parties, long-term contracts can be viewed as a dual disadvantage for a biomass facility. If the price paid is above spot market value, the facility is over-paying for its wood and losing money. Conversely, if the price is below spot market value, the logger may have trouble paying the landowner prevailing stumpage rates, and thus will have difficulty securing sites and accessing required volumes. - Recent steep swings in the price of diesel fuel a major input to the harvesting, processing and transport of chips - have some loggers worried about entering into contracts that would leave them losing money in the event of sharp fuel price increases. For this reason, if long-term contracts are pursued a diesel adjustment formula will likely need to be a component of the contract. Innovative Natural Resource Solutions LLC Page 27 of 40

28 While long-term contracts are difficult, it is recommended that the facility endeavor to purchase wood on a consistent basis. Suppliers react rationally to increases or decreases in the low-grade wood market, either increasing or decreasing production capabilities to meet demand. However, when demand is unpredictable and fluctuates wildly, loggers will not make investments in necessary harvesting or transport equipment, thus driving up overall wood prices. Drastic and unpredictable changes in buying patterns will cause suppliers to seek other markets, discourage investment in new fuel production equipment, and cause fuel prices to increase over time. Weekly Payment for Wood Payment for wood fuel on a weekly basis (the week following delivery) is the standard in the forest products industry. Loggers expect weekly payments, and are often in need of cash flow in order to keep their operations running. Some pulp and paper facilities have attempted to move to payments every other week; this has caused significant financial difficulties for suppliers and makes these markets less attractive when supplies become tight. Innovative Natural Resource Solutions LLC Page 28 of 40

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30 On-Site Wood Management Once delivered to the site, unloaded and moved through the processing facility, wood will be stored on-site for later use. As is standard in the industry, the facility should keep a sufficient supply of wood fuel on-hand to allow for short-term disruptions in fuel supply (e.g., no harvesting or transport of wood during a period of heavy rains or during spring mud season). The facility should consider a first-in, first-out fuel management program that makes certain that wood is used in the order that it arrives. This will assure that wood is not left in piles for long periods of time (generally 90 days or more). After about 90 days (depending upon moisture content, precipitation and temperature), wood can begin to compost, significantly diminishing its heating value. Innovative Natural Resource Solutions LLC Page 30 of 40

31 Diesel as a Component of Biomass Production Costs As noted above, diesel fuel is a significant cost input to the price of biomass. Diesel is used in both in-wood operations (felling and skidding), operations at the log landing (handling and chipping), and transport to the facility. INRS has developed a formula for estimating the fuel used and diesel cost component of biomass fuel, based upon distance to market, payload size, and fuel cost. As a rule of thumb, two gallons of diesel fuel are used in the production of a single green ton of biomass. However, this varies considerably by the type and age of equipment, operator decisions, harvest prescription, skidding distance, distance to market, and other variables. The table below shows the estimated typical diesel cost component of production of biomass - both for wood operations (felling, skidding, handling and chipping) and transportation at a number of diesel fuel costs. Innovative Natural Resource Solutions LLC Page 31 of 40

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36 Procurement Agent The facility will need an individual who has a primary responsibility the procurement of biomass fuel for the facility. Responsibilities for such a position typically include: Development and maintenance of relationship with a large number of suppliers; Management of contracts and timely payments for supply; Day-to-day management of supply and inventory levels; Development of procurement plans and constant monitoring of local and regional market dynamics; and Problem solving related to supply interruptions or other challenges. Several existing firms in New England currently conduct this service for biomass facilities, others are developing this capacity. NSSEP could also provide this service through in-house staff. Innovative Natural Resource Solutions LLC Page 36 of 40

37 Biomass Supply Infrastructure Development Southern Vermont has a long history as a forest industry region. There is a meaningful logging infrastructure in the region, and a number of large logging contractors that have the ability to become biomass fuel producers. However, given the modest existing chip markets in the region, many potential suppliers do not currently have the capacity to process and create biomass chips, and this infrastructure will need to be built with some level of assistance. There are a number of ways that this can be addressed, including: Long-term contracts that provide the supplier certainty that they can pay off the significant capital cost of new equipment: o Contracts can provide a fixed price, fixed quantity, or price indexed to input costs (e.g., diesel fuel), and give the buyer some level of assurance that wood can be purchased at a known price formula; o Long-term contracts between large, credit-worthy parties (e.g. the biomass plant) and small parties (e.g. loggers) tend to be one-sided, with the smaller parties having greater ability to exit the contract with minimal penalty; o Many loggers are reluctant to enter into known price contracts, fearing that they will miss emerging opportunities for biomass-related revenue generation. Financing packages offered to suppliers that are paid off as fuel is provided to the facility: o Helps quickly build the infrastructure needed to supply a facility; o Encourages loggers to deliver to the facility, building supplier loyalty; o Puts the facility in the position of acting as a lender, not a core business and not an action many entities are interested in taking. Contracting with mobile chipping units that can service a number of small suppliers: o Allows smaller logging contractors to act as suppliers without scaling up and adding equipment and staff; o Chips from these aggregators tend to be higher cost, as there is cost and downtime involved in constantly moving a chipper (or grinder) from one location to the next. Concentrating on biomass suppliers that have chip generation as a by-product of their core business (e.g. sawmills): o An excellent strategy and one that should be pursued, but regional wood residue generation is sought after by the pulp and paper industry. Innovative Natural Resource Solutions LLC Page 37 of 40

38 Financing of Biomass Production Equipment To build supply infrastructure and secure a consistent supply of biomass fuel, the facility can provide financing for in-wood biomass processing equipment for suppliers. The following is adapted from a case study INRS and R.E. Consulting prepared highlighting the way one biomass firm uses equipment financing to strengthen their supply chain. This case study, prepared for the Massachusetts Technology Collaborative, examines the practices of Boralex, a firm with six wood-fired power plants in Maine and New York. Boralex is considered a leader in this supply chain strategy. The financing program is a lease to buy agreement, where payment is based on wood deliveries (i.e., $/ton). The program is available to any reputable contractor who is interested in establishing an in-woods biomass processing operation. Each agreement is tailored to meet the mutual needs of the contractor and the facility. The agreements are governed by a contract that states the annual volume to be delivered to the biomass facility and respective prices. The typical contract length is five years with an annual volume of approximately 50,000 to 60,000 tons vi. The annual volume is expected to be delivered in a 40 week time period vii. Volume obligations and delivered prices are renegotiated annually to provide flexibility for the contractor and the power plant. The contractor is responsible for negotiating the purchase price with the equipment dealer, and the power plant pays the invoice for the machine plus the cost of the manufacturer s recommended parts inventory. Under the terms of the agreement, the contractor pays back the principal, and interest at 7.0%, through wood deliveries. The contractor is not required to make an equipment payment if they do not deliver wood. When a load of chips or hog fuel is delivered, a dollar per ton amount (e.g., $2.50/ton) is withheld from payment to the contractor and credited towards money owed on the machine (see table below). With prior approval from the power plant, the contractor can use the equipment for deliveries to competing facilities, however, the contractor is required to make the same dollar per ton equipment payment to the power plant on the volume. The ownership title transfers to the contractor and payment withholding ceases when the money owed equals zero. Once the contractor owns the machine, they are still required to fulfill their annual volume obligation for the remaining term of the contract, but they do not need the power plant s prior approval to make deliveries to other wood-fired power plants. The contractor has the option to forfeit the agreement prematurely, however doing so eliminates all accrued ownership in the financed equipment. If the wood-energy industry becomes uncompetitive and all of the power plant s wood-energy facilities close, a force majeure clause would be triggered, thus elevating the obligation for the contractor to continue to make equipment payments. In the occurrence of such an event, the contractor has the option to pay the remaining balance on the equipment liability, however they are not required to. Innovative Natural Resource Solutions LLC Page 38 of 40

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40 Exh. Pet. EWK-2 Endnotes i Note: This tree is used for illustration purposes only. Forest-grown trees look significantly different than this diagram, generally with longer trunks and less crown, or leafy top. ii At present, only one biomass facility in New England Hemphill Power & Light in Springfield, NH accepts roundwood on a year-round basis. A number of other regional facilities purchase roundwood as a supply hedge during spring mud season. iii Miles, P.D. Forest Inventory EVALIDator web-application version St. Paul, MN: U.S. Department of Agriculture, Forest Service, Northern Research Station. [Available only on internet: iv USDA Forest Service data is presented in cubic feet. INRS calculated green tons assuming 85 cubic feet of solid wood per cord, and that a green cord of wood weighs 2.6 tons for hardwood and 2.3 tons for softwood. v Timberland refers to land that is biologically and legally capable of growing commercial forest products. vi This volume applies to large chippers or grinders. The typical annual volume obligation for a smaller chipper is 10,000 to 15,000 tons. vii This equates to an average daily delivery of approximately eight to nine loads. ( ##411# # % (1 %1! 1 1# # +