June 21, 2009

Biomass to Electricity is 80% more efficient than Biofuels

Biomass to Electricity (and torrefaction as a densification and logistics strategy) continues to make more and more sense.

A recent study published in Science concludes that using biomass to produce electricity is 80 percent more efficient than transforming the biomass to biofuels and 200% more effective at reducing greenhouse gas emissions.

While I understand our infatuation with creating liquid fuels, if biomass is more effective in generating electricity in the near term (and it is) we should apply more funds and political support for biomass combustion (the "burn baby burn" strategy).

Every year we put off addressing global warming in a meaningful way just increases the hole we have to eventually dig out of, and the cost of doing so.

Biomass to electricity is today's solution -- it costs less to implement than the alternatives and it reduces the amount of carbon we pull out of the ground.

I think Ethanol did the industry a huge dis-favor. The numbers on it were just horrible yet it got over-promoted. Now, I'm afraid that we threw the 'baby out with the bathwater' and for a period of time "Ethanol" became synonymous with "BioMass" .

The good news is that time and data are changing that perception. This study is just one more example on how the United States is coming around to what much of Europe has already figured out -- Biomass is the lowest cost, most practical way to make meaningful progress on global warming. It is the most Intelligent Carbon Strategy.

June 7, 2009

Duke University Grad Students Complete Torrefaction Business Plan

I recently mentored a Duke Graduate Engineering group in an Entrepreneurship Studies Class.  The topic was Torrefaction (this surprises you!). 

These students developed a full blown business plan for a torrefaction mini-mill (regional plant) in North Carolina.

When the cost of the plant was $ 600/Ton hour of production, and there was a mix between initial equity and convertible debt ($ 3 Million), and $4 Million downstream debt their business plan calls for a 25 Million dollar revenue company generating 31% EBITDA by year 5 .  I actually think that they grow the business too fast in the early years. It may be more capital efficient to take on less capital up front, grow a little more slowly until the intial units are generating cash, then use debt if you can get it, or higher priced equity later to ramp up the buisness quickly.

They assumed Green Credits starting at zero in year one, and ramping to $20 per ton over time, which is anyone's guess.  They also did not do a sensitivity analysis to the carbon spread (the difference between the price of raw biomass and the displaced coal on a BTU basis), which is key to the analysis which I held out as an 'advanced assignment' if they had time.   I will either do this analysis or have it commissioned and will post next on this issue).

But overall, it provided two really valuable things:

1)  Another set of eyes and spreadsheets working independently on the analysis of the underlying business model.

2)  Another business plan which independently tries to concisely communicate the value proposition, market and risks associated with torrefaction.  (I ghost wrote a plan for another company to try and help them move forward -- so now that's two plans from which to draw from the future).

Torrefaction plants are one block in the value chain and a necessary part of the development of the industry. 

The recent downdraft in coal prices in the US, coupled with a lack of green credits right now, has hampered the development of the industry in the US.  Yet these business plans show that there is promise in the US, and explain why this industry is developing more quickly in Europe.

Next, I'm going to apply option pricing models (talk about geeky!) to determine the volatility weighted coal price at which torrefaction makes sense.  The model is still most sensitive to carbon spreads.  The notion would be that if an investor wanted to, they could build a plant and hedge against downdrafts in coal prices.  Then the question is would it make economic sense when you put the cost of the hedge on top?  Stay Tuned.