November 24, 2010
BY Bryan Sims
Uncertainty and exposure to risk associated with complex supply
chain dynamics and tight debt markets have left once promising biomass-to-bioenergy
deals to falter. At the Pacific West Biomass Conference & Trade Show Jan.
10-12 in Seattle, in a panel titled, Minimizing Your Exposure to Risk with
Effective Hedging and Contract Strategies, industry experts will explain how
introducing structured price indices before engaging long-term power purchase
agreements can be a critical hedging
tool to encourage healthy investment for project development.
Peter Gardett, bureau chief with Argus Media Inc., intends to
discuss how implementing a clear, transparent, inclusive pricing of fuel is
essential for developing the Pacific Northwest biomass market, not only for bioenergy
producers in the region, but also for those in accessible Pacific Rim markets.
“The purpose is to introduce a pricing mechanism to encourage
utilities to take woody biomass, hedge their exposure to those fuels and sign
contracts that support long-term production investment,” Gardett said. “I think
the biomass industry has to be more comfortable with indexation and the
operating environment in which they work.”
Gardett noted the disparity between how the Pacific Northwest has
struggled to keep pace with a rapidly developing market in the Southeast.
“There’s no reason the Northwest should be lagging,” Gardett said. “Having a
more transparent market should help close that gap.”
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Pete Stewart, president and chief executive officer for
Forest2Market, will outline a strategy for negotiating long-term supply
agreements that involve both relationship building between suppliers and
bioenergy producers, and how a pricing index would ensure that suppliers are
being paid based on fair market value. Once a fair market value price index is
in place, according to Stewart, biomass suppliers should be more willing to
accept long-term agreements.
Since Forest2Market currently has biomass indexation models “in
practice” throughout the country, Stewart said the firm is capable of breaking
down various transactions into different components such as harvesting,
chipping, hauling and the actual product itself. He added that the majority of
the biomass fuel cost consists of capital, labor and diesel fuel used to
transport and produce the fuel, with a fraction of the price (about 10 percent)
coming directly from the wood fuel itself.
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“So, what you can do is if you’re a buyer or supplier of this
material, what you’re always long on is CPI (capital price index) or inflation
and diesel [cost],” Stewart said. “In other words, you always have exposure to
those two things. You can easily quantify what those are, and if you can
quantify what those are, you can hedge those in a futures market.”
Stewart added, “Once we can demonstrate that through really good
data and analytics, then bankers, developers and suppliers can get really
comfortable around that index and use that to develop a dual index strategy.”
JD Lindeberg, principal and chief financial officer for Resource
Recycling Systems Inc., will discuss how the negotiation of a power purchase
agreement “pass through” could be a viable hedging strategy for bioenergy
developers when unpredictable price fluctuations of external components within
the PPA, such as diesel prices, affect price structure of renewable electricity
or power sold into market.
“Effectively, the idea is you do this in such a way that enables
you to separate out the execution risks in the marketplace with the input
risks,” Lindeberg said, adding that understanding this prior to signing a
potential PPA is key for biomass project developers. “In general, if the price
of diesel fuel runs up because a shortage of petroleum products, we’re probably
going to see a similar increase in the price of power and the availability of
that power.”
Katherine
Ryzhaya, vice president of structured transactions and renewable energy markets
for Evolution Markets, will round out the panel.
To
register for the Pacific West Biomass Conference & Trade Show, or for more
information, click here.