“Case Study”

Application of UNFC-2009 to BioEnergy

By James Primrose

A Sugarcane Ethanol Plant in Brazil

Palais des Nations, Geneva

18th November 2014

1

What will we do in this session?

• Introduce a hypothetical Brazilian Sugarcane Ethanol Case Study

• Consider other Bioenergy Examples from a conceptual standpoint.

• Objectives:

– Provide an outline on how the UNFC classification might work in a Bioenergy scenario.

– Demonstrate the key decision points that need to be considered.

– Trigger discussions: classification may sometimes be subjective.

– Identify specific Bioenergy issues that need to be addressed in the Bioenergy Specification document

2

There are a number of key questions that we would like to have your opinion about

1. Can the UNFC-2009 be usefully applied to Bioenergy projects? – Key E- and F-axis criteria / questions

– Access and Entitlement to the BioEnergy source (e.g. biomass)

• What business / access models exist ?

• Which models demonstrate sufficient access/ entitlement ?

– Treatment of non-energy co-products ?

– What uncertainties to be taken into account under the G-axis?

• Can G4 quantities be usefully defined ?

– Are there certain Bioenergy value chains that raise specific challenges?

2. Future “owner” for the Bioenergy Specification ?

3

UNFC-2009 Categories

E Socio-Economic Viability

F Project Feasibility

G Geological Knowledge

Sugarcane ethanol mill

Cane harvest Delivery & sampling Unloading Cane preparation Juice extraction

Pre-processing

Power export

Juice treatment & filtering

Fermentation Distillation &

Dehydration

Storage

Truck loading

Evaporation

Processing

Sugar production

Ethanol production

Cooking &

crystallization

Centrifuging

& drying

Bagging

Juice is converted sugar and

ethanol (50:50 split)

100 - 200 million litres of ethanol per year

170 - 340 kt of sugar per year

Juice

Steam

&

P

ow

er G

en

eratio

n

Bagasse

High-pressure

boiler

Bagasse

residue

Power and

steam for

process energy

Sugarcane input: 2.5 mtpa capacity, with expansion to 5 mtpa

4

Potential for Bagasse

import/export.

“Out-grower” cane

Purchases from 3rd

parties –

typically annual contracts

Sugarcane Ethanol Project : Usina BioSucro • Existing 2.5 Mtpa Crush Capacity Mill.

– Start-up 2008. Expected economic life-time 30 years (to 2038). – produces typically a 55 :45 split of ethanol (~100 mill litres) and sugar (170 ktpa). – Ability to swing production 60:40 either way. – Surplus power from cogen export to grid. – ~60% of cane from a portfolio of land leases – Average lease lifetime ~ 6 years + with an option of a 1 yr extension / maintained on a

rolling basis. – ~40% cane from out-growers – annual contracts.

• Sanctioned Project to expand capacity at mill to 5 Mpta. – Planned commissioning date 2015 harvesting season. Project currently 70%

mechanically complete. – Expected Economic Lifetime 30 yrs (to 2045). – Planned 50:50 ethanol / sugar split with ability to swing 60:40 either way. – Increased cogen, increased power exports to grid. – 60% : 40% leased : out-grower cane. Same average lease lifetime 6+1yrs. – Cane planting underway.

• Product Monetization.

– Ethanol 80:20 split of sales to domestic market and for export. – Sugar : Mixture of sales via a broker and direct to end-users – annual contracts. – Power : Mixture of spot and auction contracts

5

Sugarcane Ethanol Project : Usina BioSucro

6

Production Train 1

Lease Renewal

Train 2 Lease Renewal

Train 2 2015 Start-up

Projected Yield (Cane) Increase

Train 2 Lease Renewal

Train 1 Lease Renewal

Train 1 Lease Renewal

Train 1 Lease Renewal

Train 1 Economic Life

Train 2 Economic Life

Energy Product Supplied

(Ethanol & Power export)

Train 1 Reinvestment ?

Train 2 Reinvestment ?

Train 2 Lease Renewal

Train 2 Lease Renewal

Train 1 Lease Extension

Train 1 Lease Extension

Train 1 Lease Extension

Train 1 Lease Extension

Train 2 Lease Extension

Train 2 Lease Extension

Train 2 Lease Extension

Train 2 Lease Extension

Key Metrics

7

2005 2010 2015 2020 2025 2030

$ Investment

Agricultural Sustain Capex

Industrial Sustain Capex

Capex

2005 2010 2015 2020 2025 2030

M3 EtOH Tes Sugar

GWh power Annual Production

Power Export

Sugar Crystal

Sugar No.11

Anhydrous EtOH

Hydrous EtoH

Train 1

Invest

Train 2

Invest

2015 2020 2030 2035

Te/ha

Projected Cane Yields (wo Tech)

1st Cut

2nd Cut

3rd Cut

4th Cut

5th Cut

6th Cut

Avg

2005 2010 2015 2020 2025 2030

$

Cumm Discounted Cashflow @ 10% (post tax)

Key decisions

8

Reference Point • Marketable Energy Products

Ethanol, and Power

What about the sugar? • Sugar output is not counted, but value considered in

determination of project economic viability.

Can we count the energy used in the process?

• Yes - power and heat generated for process energy is counted, but treated as non-sales.

What units do we use? • Wait for conversion document for all renewables • For now, using barrels of ethanol (bbl) and terawatt-

hours (TWh) heat and power

Axis E & F Classification – Project Maturity

9

Project Maturity relies on evidence of technical and commercial maturity.

• Technical criteria (F axis )

• Commercial criteria (E axis) – Access and Entitlement <- Key issue for BioEnergy

– Market and Sales Connectivity

– Authorisation and Commitment

– Economic Case Validation

Access and Entitlement – Sugarcane Example

• What is the level confidence to the degree of access or entitlement to the land/ sugarcane ?

• None of the feedstock is from land owned by the plant owner. – Land equity could be reasonably assumed to demonstrate the highest confidence of access and

entitlement to the land biomass source.

• 90% of the feedstock is from leased land.

• Treatment / evidence base required to assess the certainty of lease renewals/ extensions.

• Treatment of the 10% sourced from out-growers ? – Typically sourced via yearly contracts.

– Sugarcane operations in other regions / countries rely much more heavily on this means of accessing cane, sometimes it is the only option available.

– Raises broader issue of the level of Access / Entitlement from biomass/crops obtained from the market (spot or annual contracts).

10

Possible categorisation Category Comment

Current Leases E1 High confidence. Demonstrable contractual entitlement.

Lease Extensions (1yr) E1 or E2 High to Moderate confidence. Demonstrable contractual entitlement to extend. Operational track record evidence ? Reasonable expectations of extension.

Lease Renewal E1 - E2 – E3 ? Categorisation depends on evidence base. Is there a track record of renewals. Reasonable expectations of renewal. Competition ?

General Bio-Energy Access / Entitlement Issues

• Multiple business models exist to access biomass for bioenergy. 4 generic cases.

– Land Equity. Plant Operator owns and produces the biomass feedstock.

– Lease. Plant operator leases the land and either cultivates the biomass directly or contracts to a 3rd party.

– “Stumpage”. Similar to lease. An operator has the right to remove a waste/residue. Typically applies to forestry, but could apply to other ag wastes.

– Sourced from Market: Operator feedstock from market. Covers spot purchase to LT supply contracts.

• Are there other models that need to be considered ? Raise other issues / questions ?

11

All three models would

appear to provide

demonstrable contractual

/ legal evidence of access

/ entitlement to the

biomass source over a

multi-year time frame

Contract holder also holds

the biomass supply “risk”

.

Typically shorter duration

contracts. Not linked to a

specific “source”.

Contract holder may be

exposed to a price/market

risk but not to the supply

risk from a specific source.

Access / Entitlement : Corn Ethanol ?

12

Description

• Plant owner contracts for grain supply with individual farmers annually and/or with a trader(s) spot or annually.

• Can involve a farm/plant Cooperative.

• Produces ethanol + animal feed.

Questions / Issues

• Simultaneous demonstration of access/entitlement to the source and market connectivity? Which value chain entities ?

• Does a biomass supply contract (spot or term) equate to Access/Entitlement to the “BioEnergy Source” ?

• Can Access/Entitlement be extended beyond the contractual terms of the supply contract ?

• Is the plant operator expose to the source / supply risk vs a price risk ?

• Situation replicated in other bioenergy supply chain where the biomass is accessed via commodity markets

Farmer Co-op ?

Corn/Maize Feedstock

Market and Sales Connectivity

• Are the conversion plant, storage and transport infrastructure in place to convert feedstock into an energy product? For how long?

• In the sugarcane ethanol case study:

– Technical lifetime of the conversion plant (30 years) → Commercial

project – high confidence

– Lifetime extension by capex reinvestment → Not yet commercial

project.

• N.B: Access & Entitlement constraints may be more restrictive than the technical/economic lifetime of the conversion asset.

13

Authorisation and Commitment

• Is sanction / financial approval to develop the plant in place, including from any JV partners?

• In the sugarcane ethanol case study:

– Current plant is already operating → Commercial project – high

confidence

– An expansion of plant capacity is currently in the final stages of the construction/commissioning process → Commercial project – high

confidence

• Note that economically viable upgrades / technology enhancements, that are not yet sanctioned would be lower confidence (E2, E3).

14

Economic case validation

• Is there an economic model demonstrating commerciality?

• If this depends on policy support, what is the lifetime of the policy?

• Policy risks, potential termination or reduction of policy support may impact categorisation of all or some of the project’s resources.

• In the sugarcane ethanol case study:

– The plant is commercially viable and no policy support is required →

Commercial project – high confidence

15

What uncertainties to be taken into account under the G-axis ?

• The G axis in the UNFC designates the level of confidence in the geological knowledge (i.e. the energy source) and potential recoverability of the quantities.

• Renewable Energy Specification extends this to cover meteorology, climatology, topography and other branches of geography, ecology, geography and geology.

• Possible Bioenergy related issues would include… – Biomass Yield Risks

• Weather related harvest risks. Sunshine, rainfall, frost etc…

• Harvest recovery risks, (harvester performance, storage losses etc.)

• Pest / Pathogens.

• Long-term water, soil quality related risks.

– Biomass Conversion Risks

• Conversion efficiency/performance. E.g. microorganism performance, hygiene.

• ……..

• Typically most projects would appropriately parameterise these risks.

16

Other Bioenergy Value Chains (1) Type Description Points to consider

Vegetable oil

biodiesel plant

• Plant owner contracts for vegetable oil with a cooperative annually, and buys on the spot market

• Produces biodiesel. This involves using non-renewable methanol

• Who can claim reserves • Proving access to feedstock • Proving future market

connectivity given changing policy climate

• Use of non renewable input

Wood chip co-

firing plant

• Coal plant owner contracts for supply of woodchips for 20 years

• These are co-fired with coal to produce power

• Who can claim reserves • Proving access to

feedstock • Proving future market

connectivity given changing policy climate

Other Bioenergy Value Chains (2)

18

Type Description Points to consider

Waste CHP plant

• Plant contracts with waste management company for waste supply over 20 years

• Produces heat and power

• Who can claim reserves

• Proving access to feedstock

• Changing feedstock quality

Forestry residue pellet plant

• Large forestry owner sites a pellet plant at their forest. Also contracts additional feedstock from a neighbouring forest owner on a 10 year contract

• Produces pellets, sold to a distributor then to multiple small users and one power plant

• Who can claim reserves

• Proving access to feedstock

• Proving market connectivity

19

A Renewable Fuel Example

Liquid Fuel

Solid Fuel

Source Processing Losses Marketable

Energy Products

Storage

UNFC Common project characteristics:

• A defined level of investment, with an expected production profile

• Prerequisites such as gaining access to the resource and market, receiving

authorization, and validation of the economic case

• As the project develops, risk declines and certainty of returns improves

April 2014 – ABLC Washington, D.C. Copyright © 2014 DuPont. All rights reserved.

Implications

• BioEnergy covers a wide range of sectors, many with complex value / supply chains.

• Multiple models exist of gaining access to the biomass (re)source.

• In some cases there may well be no single entity that can simultaneously demonstrate access/entitlement to the source and market connectivity.

• Alternately examples could arise where two or more entities could “book” the same BioEnergy source.

• Difficult or impossible to set out a “prescriptive” methodology that would deal with every eventuality. Methodology must be high-level and principle led. Practice will be determined by expert users.

20

Who should maintain and develop the Bioenergy / Biofuels classification framework?

21

• In the case of oil and minerals, industry standards are sponsored and maintained by industry or professional organizations, which also work to “map” their existing standards to the UNFC-2009, and to national reporting and regulatory disclosure agencies.

• The Petroleum Resource Management System (PRMS) is endorsed by the 5 major professional organizations [Society of Petroleum Engineers (SPE); Word Petroleum Council (WPC); American Association of Petroleum Geologists (AAPG); Society of Petroleum Evaluation Engineers (SPEE); Society of Exploration Geophysicists (SEG)] and maintained by SPE Oil & Gas Reserves Committee (OGRC).

Organisation Description

Global Bioenergy Partnership

(GBEP)

http://www.globalbioenergy.org

Launched with support from G8 and G20, GBEP’s purpose is to support wider, cost effective biomass and

biofuels deployment (with particular focus on developing countries). It is a forum to develop effective policy

frameworks to facilitate investment and promote project development and implementation.

World Bioenergy Association

http://www.worldbioenergy.org

The purpose of WBA is to promote the increasing utilization of bioenergy globally in an efficient, sustainable,

economic and environmentally friendly way. Members include national and regional bioenergy

organizations, institutions, companies and individuals.

IRENA - International

Renewable Energy Association

http://www.irena.org

Intergovernmental organisation that supports countries in their transition to a sustainable energy future,

and serves as the principal platform for international cooperation, a centre of excellence, and a repository of

policy, technology, resource and financial knowledge on renewable energy.

Bioenergy candidate organizations? Examples:

Key Questions / Issues Re-cap

• Can the UNFC-2009 be usefully applied to Bioenergy projects?

– Are the criteria for moving along the E- and F-axis clear?

– What is a useful project life time to apply?

– What uncertainties to be taken into account under the G-axis?

• Given the multiplicity of potential Bioenergy value chains are there any specific examples that raise unique methodological issues that need to be considered ?

• Access and Entitlement to the Bioenergy source

– Achieving alignment on treatment of biomass sourced from commodity markets (spot / term contracts).

• Future “owner” for the Bioenergy Specification ?

22

Back-Up

23

Can F4 / G4 Quantities be usefully defined ?

24

EFG 1 - 3 categorisation bounded by project

criteria.

How to evaluate

a renewable

resource outside

of a project ?

Category E3F3G4 ?

• Resources are cumulative quantities of energy

over a certain time period. What time period to

use?

• G4 are estimated quantities associated with a

potential Deposit (“exploration projects”). Is this

classification applicable? Or should we apply G1

to G3 to reflect the level of confidence in the

estimated quantities associated with a known

Deposit?