Bioenergy commodity pricing: barriers and opportunities, presented in Bioenergy Trading Conference in Copenhangen. Presentation can be received on request

1. Organized bioenergy commodity
pricing: Barriers and
opportunities
October 2011
Jinke van Dam Consultancy
Associate from SQ Consult

2. Contents
1. About Jinke van Dam Consultancy / SQ Consult
2. Current trends
3. Diversity of the market
4. The subsidy trap
5. Price volatility
6. Need to control upstream business (or not?)
7. Certification and sustainability requirements
8. Opportunities for moving towards an organized global
commodity market

3. 1. SQ Consult / Jinke van Dam Consultancy
 Independent Consultant on Sustainable biomass,
bioenergy and biobased materials
 Associate from SQ Consult
 SQ Consult in short
 Areas of expertise
Our mission is to deliver sustainable quality to our clients.
We help them meet the challenges of climate change,
sustainability and energy transition by designing solutions
which suits their culture and organization.

4. SQ Consult in short
 SQ Consult is an independent consultancy firm specialized in sustainable
energy development, climate change and energy transition
 We are the strongest and most integrated virtual network in sustainability
in Europe; with presence in the United States of America and Latin America
 Our experts are recognized at international level, each with more than ten
years experience in sustainability and/or energy
Country presence: Netherlands, Spain, France, Germany, Switzerland, Italy,
Portugal, Denmark, Lithuania, USA, Peru, Chile, Colombia and Costa Rica

5. Areas of expertise
• Strategy for the development of new energy
Sustainable
energies
matrices using bioenergy, wind, hydro, solar, etc.
• Sustainability systems for different renewable
energy chains
• Mitigation and adaptation policies strategies
• Carbon market mechanisms (EU ETS and other
Climate
change cap-and-trade systems, CDM, voluntary markets,
new market mechanisms – NAMAs, sectoral)
• International climate negotiations (EU, global)
• In industry and built environment
Energy use • Policy and strategy for energy saving
and • Rationalization of the use of conventional forms of
efficiency
energy (including gas and electricity storage)

6. Contents
1. About Jinke van Dam Consultancy / SQ Consult
2. Current trends
3. Diversity of the market
4. The subsidy trap
5. Price volatility
6. Need to control upstream business (or not?)
7. Certification and sustainability requirements
8. Opportunities for moving towards an organized global
commodity market

7. 2. Current trends:
- Growing value of bioenergy to the world's energy matrix;
- Global economic crisis;
- Potentially large industry:
Forecast December 2010 Pike Research > steady growth investments
in next 5 years rising from $28.2 billion annually in 2010 to $33.7
billion by 2016
- Development of sustainability regulations and principles in
markets;
- Managing the economics of sustainable production and its
verifiable certification is a key need.

8. Urgent challenges bioenergy
industry:
Developing the commercial strength to exist without long-term
government incentives, even as demand falters, and
Constant and sufficient provision of sustainable feedstock in a
volatile, capital-constrained and very risky global marketplace.

9. 3. Diversity of the market
“Common
theme
throughout
the
North
American
Biomass
Pellet
Export
Conference
(September
2011):
“despite
its
rapid
growth
poten,al,
the
pellet
industry
is
s,ll
vola,le
and
unpredictable.
“ This
is
a
tough
business,”
Wood
varies
not
just
by
tree,
he
added,
but
also
by
region
and
species….”
©
hSp://www.biomassmagazine.com/ar,cles/5787/global-­‐pellet-­‐industry-­‐on-­‐the-­‐rise-­‐sustainability-­‐key

Regional
varia,on
in
markets
(small,
middle,
large)

Regional
or
interna,onal
supply
of
biomass
(logis,cs)

Differences
in
subsidies
and
taxes

10. Characteris*cs
of
Europe’s
major
pellet
market
types
(Sikkema
et
al,
2011)
Netherlands
Sweden
Germany,
Austria

11. Diversity of the market
CIF
prices
of
bulk
pellets
for
large
scale
power
produc,on
in
the
Netherlands,
United
Kingdom
and
for
medium
scale
district
hea,ng
&
CHP
in
Scandinavia
Differences
in
price
se[ngs
(historic
vs.
one
month
ahead),
Due
to
subsidies,
Sweden
can
allow
Higher
pellet
prices
than
Netherlands
©
Sikkema
et
al,
2011

12. Diversity of the market
Prices
of
bulk
pellets
for
residen,al
hea,ng
in
Europe
(incl.
delivery
and
VAT)
Seasonality
Conversion
Swedish
Krona
to
Euro
Rising
prices
raw
material
©
Sikkema
et
al,
2011

13. 4. The subsidy “trap”

Bioenergy
products
live
trapped
in
the
vicious
loop
of
subsidies
and
incen,ves
(and
uncertain,es
in
policies).

On
one
hand,
heavily
imported
subsidized
biofuels
AND
fossil
fuels
destroy
any
compe,,ve
industry
and
inhibit
its
healthy
growth.

On
the
other
hand,
subsidies
are
s,ll
needed
to
overcome
the
economic
costs
from
logis,cal,
distribu,on
and
trade
barriers
while
achieving
at
the
same
,me
both
mandated
produc,on
and
blend.
 Limits
an
even
level-­‐playing
field
of
our
energy
resources;
 Hampers
development
compe,,ve
markets

14. The subsidy trap
Overview
of
ques,onnaire
responses
on
import/export
tariffs
Junginger
M.,
Dam
J.
van,
et
al
(2011)

15. 5. Price volatility
Many
factors
influencing
the
price
level
of
bioenergy
Conversion
product
and
its
varia,on
(some
of
them
shown)
rates
Weather
Fuel
/
Oil
Climate
price
change
Fer,lizer
price
Price
Bioenergy
(Lack
of)
product
Specula,ons
investment
Demand
And…many
interrela*ons!
(Piesse
et
al,
2009)
Government
policies

16. Price volatility
Rela,on
between
US-­‐
Euro
rate
Price
premium
longer
term
contracts
©
Sikkema
et
al,
2011

17. Price volatility agricultural
commodities Conversion
rates
Weather
Fuel
/
Oil
Climate
price
change
Fer,lizer
price
Price
Bioenergy
(Lack
of)
product
Specula,ons
investment
Demand
Price
food
commodity
(Piesse
et
al,
2009)
Government
policies
Food
prices
See
also
the
sustainability
discussion!!!

18. Price volatility
Causes
of
maize
price
increases
since
2004
in
the
US
(B.A.
Babcock,
2011):
Expansion
influenced
by
crude
oil
prices
(high
profitability),
investment
and
market
driven
Other
forces:
weather,
food
demand
Subsidies:
Influence
small
–
s,mulates
expansion,
surplus
on
price
levels
Note:
So@ening
effect
from
crop
price
maize
to
final
retain
(food
price)

19. Price volatility
The
graph
below
shows
the
clear
correla,on
between
the
price
of
crude
oil
and
the
UN
FFAO
Food
Price
Index.

20. Price volatility
Several
chains
of
ac,ons
can
be
iden,fied,
all
influencing
the
impact
of
biofuel
produc,on
on
cereal
prices
>
difficult
to
dis,nguish
the
final
price
effect
caused
by
the
ini,al
increase
in
biofuel
produc,on,
(©
H.
Langeveld,
2011)
Transparency
desired!

21. 6. Control upstream business
Determinants
for
backward
integra*on
of
business
(R
Bansal,
2009):

High
Input
Cost
–
Feedstock
>
70%
of
the
total
cost

Hedging
Future
Con,ngencies:
For
companies
with
large
geographical
range,
hedging
the
future
risk
associated
with
availability
and
price
of
feedstock

More
likely
when
the
downstream
firm
such
as
the
biofuel
producer
commits
to
large
investments
in
assets
such
as
refineries.

Backward
integra,on
will
insulate
companies
from
excesses
of
feedstock
supply
due
to
market
forces
of
demand
and
supply.

Ex
Post
Lock-­‐in
-­‐
Firms
integrated
to
avoid
bargaining
problems
arising
from
dependency
with
the
feedstock
suppliers.

22. Control upstream business
Examples:
Investment
in
large
parcels
of
land
for
low-­‐cost
biomass
supplies
Large
European
u,li,es
invest
in
pellets
facili,es
in
other
con,nents
to
have
control
of
the
full
value
chain
to
keep
their
business
successful:
 RWE
AG
started
with
the
construc,on
of
the
world
biggest
plant
for
wood
pellets
in
the
U.S.
state
of
Georgia.
 RWE
is
also
inves,ng
in
port
facili,es.
Energy
companies
like
Essent/RWE
have
their
own
trading
unit
within
their
company
examining
origins
of
biomass
and
tes,ng
pellets
for
large
scale
co-­‐firing.

23. Control upstream business
Advantages
Risks
and
disadvantages
Ensures
beSer
control
on
the
supply
chain
Diver,ng
aSen,on
from
key
business
Minimize
the
exposure
to
the
risk
of
By
going
upstream,
energy
companies
also
demand
and
price
fluctua,ons
assume
the
risks
of
dedicated
biomass
suppliers
(e.g.
flooding)
Facilita,ng
faster
decision-­‐making
and
Inaccessibility
of
cheaper
feedstock
in
implementa,on
process.
market
(spot
prices)
Easier
to
implement
process
innova,ons
(R
Bansal,
2009)

24. 7. Certification and sustainability
requirements
 Information required through chain on characteristics and source of origin
 Chain of Custody
 Independent auditing system
 Still many uncertainties…… Administra,ve
burden?
Costs?
Requirements
(future)?

25. Uncertainties for biofuels:
 Expected ILUC crop factor in Europe for biofuels in next years
 Transposition EU-RED to national legislation
UK: Renewable Energy Directive (RED) and Fuel Quality Directive (FQD) will be
transposed via (currently draft) The Renewable Transport Fuel Obligations
(Amendment) Order 2011
FRANCE: RED and FQD transposed on September 16, 2011. The national
sustainability system for biofuels and bioliquids will be regulated by a Decree.
SPAIN: RED and FQD will be transposed via Royal Decree. This Royal Decree
will also establish the principles for the Spanish National Sustainability
Verification System.
Etc….
 Recognition of certification systems ongoing (now 7 recognized on
European level, 20 more in submission phase)

26. Uncertainties for solid biomass:
Key results Consultation EC obligatory sustainability criteria for solid
biomass:
 Increased reliance on third countries for meeting targets;
 New policy developments have influence as FLEG(T), EU Timber Logging
Regulation (also Lacey Act in US);
 Impacts on (developing) national biomass sustainability schemes; generally
considered to be negative on average EU biomass costs;
 Majority supports binding sustainability criteria for solid biomass and biogas;
 Replies on scope sustainability criteria are mixed

27. Uncertainties for solid biomass:
Ini*a*ve
Target
group
Descrip*on
IWPBI
Large
energy
companies,
Standardiza,on
in
contract,
mainly
in
Northern
quality
and
sustainability
Europe
requirements
EN-­‐PLUS-­‐GREEN
Pellet
producers
and
Standardiza,on
in
quality
and
users
in
Europe
sustainability
requirements
Blue
Angel
Voluntary
label
in
Sustainability
requirements
for
Germany
wood
chips
and
pellets
Green
Gold
Label
Essent/RWE
-­‐
extending
Sustainability
requirements
solid
biomass
DRAX
Own
company
Sustainability
requirements
solid
biomass
Other
standards
as
Laborelec,
FSC,
PEFC,
na,onal
forestry
schemes….

28. 8. Moving towards an organized global commodity
market:
Overcoming the subsidy trap….
o A long term, stable political environment is needed for a
market to develop instead of short-term, unpredictable
subsidies.
o Incentives for de-carbonization should replace subsidies
o Addressing domestic and international barriers instead of
subsidies as:
 Consolidation of the upstream infrastructure
 Financial security agreements
 Infrastructure for settlement and clearing services is needed
 Harmonization of product requirements

29. Moving towards an organized global commodity market:
Price transparency and tempering volatility
Exchange
markets
(under
development)
and
price
indexes
Bioethanol
Biodiesel
Solid
biomass
Chicago
Ethanol
Swap
Rapeseed,
palm
and
soy
APX-­‐Endex,
Bal,c
Wood
Futures
biodiesel
Swap
Futures
pellet
price
index,
FOEX
(RME
and
FAME
Argus
biodiesel
FOB
RoSerdam)
Subject
to
the
rules
and
Subject
to
the
rules
and
APX-­‐ENDEX,
the
Anglo-­‐
regula,ons
of
the
New
regula,ons
of
the
New
Dutch
energy
exchange;
York
Mercan,le
York
Mercan,le
Bal,c
based
on
exports
Exchange
(NYMEX)
Exchange
(NYMEX)
from
RIGA;
FOEX
for
Nordic
countries

30. All
ENDEX
Wood
Pellets
seSlement
prices
are
based
on
delivery
CIF
RoSerdam
Product
specifica,ons
establish
possibility
to
prove
sustainable
produc,on
with
labels
or
cer,ficates.

31. Moving towards an organized global commodity market:
Integration of certification

Requires
standardiza,on
of
quality
and
sustainability
requirements:
THIS
IS
KEY!

The
obliga,on
of
providing
all
needed
cer,fica,on
is
passed
on
mostly
through
the
feedstock
traders
/
exchange
market
who
can
take
on
them
as
sanitary
or
quality
cer,fica,ons.
 Facilita,on
in
administra,on:
Informa,on
pathways
to
be
developed
in
the
biofuel
companies
are
less
complicated

32. Moving towards an organized global commodity market:
Facilitating trade and volumes
 Takes
over
upstream
risks;
 Energy
companies
deal
directly
with
a
trader
 Constant
supply
feedstock
without
many
complica,ons
 BeSer
security
of
price.
ROLE
OF
TRADER
/
Exchange
market

33. “Common
theme
throughout
the
North
American
Biomass
Pellet
Export
Conference
(September
2011):
“despite
its
rapid
growth
poten,al,
the
pellet
industry
is
s,ll
vola,le
and
unpredictable.
“ This
is
a
tough
business,”
Wood
varies
not
just
by
tree,
he
added,
but
also
by
region
and
species….”
©
hSp://www.biomassmagazine.com/ar,cles/5787/global-­‐pellet-­‐industry-­‐on-­‐the-­‐rise-­‐sustainability-­‐key
Moving towards an organized global commodity market:
“We
are
in
the
right
*me
for
market
future
exchanges,
brokers,
traders
and
key
users
to
come
together
and
make
the
first
steps
in
organizing
the
rules
for
such
market
and
infrastructure,
and
for
puUng
the
needed
pressure
on
the
demand
side
to
accelerate
the
transi*on”.
NewsleSer
SQ
Consult
“Roadmap
to
an
organized
global
commodity
market
of
bioenergy
carriers”

34. THANK YOU!
More information:
Jinke van Dam Consultancy
Bunnik, the Netherlands
E: jinke@jvdconsultancy.com / j.vandam@sqconsult.com
Skype: jinkevandam
Associate from SQ Consult