biomass project finance

biomass project finance

Exploring the Dynamics of Biomass Project Finance: A Comprehensive Analysis

1. Introduction to Biomass Energy and Project Finance

A key in the development of capital-intensive projects is project finance. Unique from traditional corporate finance, project finance depends on a specific set of project cash flows to repay or refinance individual debt securities issued to fund the project’s construction. As project finance has become widely used, it has supported a wide range of technologies and infrastructure around the globe. Such projects require substantial funding for development, construction, and operating costs. Throughout the last two decades, combined cycle gas turbines have been the dominant technology funded through project finance, leading to an environment in which the typical structure has become rather predictable. Bioenergy projects alike can be developed, constructed, and operated under a project finance funding structure.

The world depends upon traditional nonrenewable energy sources for nearly 85% of its total energy needs. Biomass energy provides a sustainable alternative that is rich in resources, lessening a country’s dependence on its oil supply and reducing greenhouse gas emissions. Considered a primary energy resource, biomass energy can be converted into electricity, liquid boiler fuels, or gas boiler fuels. Conversion can be achieved through gasification, thermal processes, or anaerobic digestion. A dynamic and self-sufficient economy that taps into a nation’s available biomass resources can produce additional power, grow national employment, and reduce its reliance on imported fossil fuels. To access these benefits, infrastructure projects must be developed. Such projects require a significant accumulation of capital, for both construction and operating costs. Energy generation projects require a myriad of resources, including market and feasibility studies, environmental assessments, budgets, engineering studies, and site evaluations.

2. Key Components of Biomass Project Finance

The reasons for such situations may vary and depend on a host of things that may include changing land usage, administration and management problems, speculative and other inappropriate initial land and project assumptions.

A well-established methodology for project finance is the use of the high operating revenues of the different phases that biomass projects normally go through to finance the project. A noted feature of the various kinds of lignocelluloses is that plants often have a shortage of biomass at different particular times or during specific periods in the project delivery year. Such a shortage of biomass may often lead these projects away from the required production and may directly give rise to a situation of uneconomic project operations, resulting in the borrower deliberately allowing the damaged energy generation.

Biomass project finance can be best comprehended as other project finance, in which funds have been advanced and lent against a project. A unique feature of biomass power generation projects lies in their standard mode of borrowing, which is funded through the advancing of loans, normally prior to the following equity. The loans and finances are repaid from the future cash flows that are projected for the project.

3. Risk Management Strategies in Biomass Project Finance

Development of large-scale biomass projects requires substantial outlays of financial, physical, and human resources. The complexity of these projects and their relatively high overall risk level often deters lenders and equity investors, who are both interested in earning positive returns on their investments. Accordingly, the identification, thorough assessment, and careful management of operational, financial, and environmental risks are critical for controlling the cost of capital in these ventures. Restrictions on the availability of long-term (debt) capital at acceptable interest rates can be addressed by incorporating proper risk mitigation measures in the design of a biomass project as a means of transforming the potentially high investment risks into satisfactory and manageable revenue streams.

Financial assessment in biomass projects often proves to be exceptionally difficult. This chapter deals with the construction and validation of a comprehensive financial assessment methodology for fostering effective realization of biomass projects. The proposed methodology is grounded on the idea of risk management and is presented in six steps. It includes models for calculation of both the dynamic aspects of a biomass project’s cash flow generation and the dynamic behavior of biomass project long-term performance. Critical economic and technical key performance indicators are used, enabling comparison with a reference investment situation. Special attention is also paid to the mitigation of various types of biomass resource risk.

4. Case Studies and Success Stories in Biomass Project Finance

In addition, the structure of the project may be conditioned by tax issues, particularly for 100% equity projects. Equity projects before tax war could limit the tax liability of the company. The following main project structures can be distinguished: merchant projects; the antitake or take and pay system; the management contract; the leasing or BOT contract; the bonded company, the full guarantee on principle from sovereign or parastatal. Successful examples of biomass project finance are described in this report which show the key involvement of commercial investment capital. Such involvement is still relatively rare but is the only means of sustaining the biomass industry in the long term because parastatal modes of operation are being eliminated in line with WSDWD schedule.

The case studies of this report were selected primarily with a view to achieving broad coverage of the different types of waste feedstock used in the projects, and secondly to consider regional distribution of projects. Consequently, case studies of electricity-only and heat/CHP plants were chosen across the European Union using a variety of waste streams as feedstock. These feedstocks are: municipal solid waste (paper, plastics, wood), agricultural residues (straw, manure), industrial residues (wood shavings), sewage sludge, and bark and wood from forestry. Although the design of a project finance structure is specific to each company and each situation, the choice of investors, lenders, main creditors, suppliers, equipment suppliers and the business in which it operates all condition the choice of structure.