By Jordan Solomon, President & CEO, Ecostrat Inc.
This article was originally published in the Canadian Biomass Magazine
Many people believe that the next 10 years will bring step changes in bio-technologies. I don’t disagree, but I believe that one of the most undervalued and important developments that will take place in the next 10 years will be the creation of de-risking and credit-enhancing mechanisms for bioeconomy projects.
These advances will be accretive and immediately transferable across the full spectrum of the bio-based industries; the benefits will impact advanced biofuels, bioenergy, bio-based heat and power, pellet production and bio-products among others.
When bio-projects choose to site in Canada, the Canadian economy enjoys a wide range of benefits. Recognizing this, in the past 10 years the federal government has taken meaningful steps towards its goal of promoting the bioeconomy in Canada. However, there have been few, if any, initiatives that address the vital issue of biomass supply chain risk in a way that allows capital to flow easier, faster and less expensively to the wide range of bio-projects. This is about to change.
The next 10 years will show a more nuanced approach by governments. In addition to supporting development of new and better bio-technologies, government will take us towards a de-carbonized future by supporting initiatives that eliminate barriers to bioeconomy development. One of the biggest barriers that is going to be eliminated in the next 10 years is inflated perceptions of biomass supply chain risk on the part of capital markets.
A key challenge to the rate of growth of the bio-industry is that risks associated with biomass supply chains are not well understood. While concerns about technology, construction, and offtake have clear paths to resolution, at present there are no established protocols, standards, or recognized industry best practices that developers, investors, commercial lenders, insurance companies and rating agencies can utilize and rely upon to empirically demonstrate biomass supply chain risk.
The lack of a standardized and recognized approach means that the debt and capital markets are independently using inconsistent approaches and evaluation criteria, leading to unreliable assessments of bio-project risks. Put simply they are confused about the quanta of risk. This results in significant project financing barriers for bio-projects and in millions of dollars of “financial-drag” on the projects that are eventually built.
A solution to this problem lies in creating an established set of recognized standards that gives capital markets, credit agencies, commercial lenders and insurance companies a common validated approach when attempting to price feedstock risk. The U.S. is already moving ahead. Two years ago the U.S. Department of Energy Bioenergy Technologies Office funded the development of new U.S. National Standards for Biomass Supply Chain Risk (BSCR). Development of the BSCR is being done by Idaho National Laboratory and Ecostrat.
In the next few years there will be independent body that will issue validated, industry-accepted certifications of the risk of biomass projects’ supply chains. Bio-projects will be able to empirically demonstrate the risk of feedstock supply chains to the capital markets though an accepted rating system: an A rated supply chain, for example, will present lower risk profile than an A-minus or BB rated supply chain. It will become common hear about an A-rated supply chain or a BB-rated supply chain. These ratings will assure the capital markets that the best available practices have been used and enable more accurate pricing of biomass supply chain risk.
Ultimately, by enabling the capital markets to more accurately quantify and price supply chain risk, we can drive 150-350 basis points out of the current debt burden worn by bio-projects, accelerate existing bio-project development and give a huge boost to our bioeconomy.Go Back