USA, April 12, 2010 (RISI) -When UPM, one of the world's largest forestry businesses, recently changed its identity to become ‘UPM - the Biofore Company' it represented much more than a corporate rebranding. Rather, it made a very public signal of a major shift that is driving business change across the forestry industry around the world. Other companies too, are making public declarations of their intent to pursue opportunities in the energy market. Weyerhaeuser in the US, for example, announced a joint venture -Catchlight - with oil major Chevron, to research and develop biofuels.
With the paper market contending with stagnant demand and chronic oversupply, bioenergy offers a way for forest products companies to take a significant step toward creating a new business model, achieving high performance and increasing the productivity of new and existing capital assets through new revenue growth.
Accordingly, forestry companies are increasingly examining and in many cases acting on the chance to meet the growing demand for alternative sources of power and energy. But there is no single route to achieving this goal and businesses need to examine their strategic options in order to align their existing capabilities, assets, capital and appetite for risk with the extent and nature of their entry into a new market.
The growing demand for green energy
The clear demand for alternative sources of sustainable energy and power from businesses and consumers explains why ‘traditional' forestry companies are shifting their attention to other uses for both their core and waste products. For all the question is not whether they should seek to move into new markets, but rather how far and how fast.
Regulations, too, are increasingly driving diversification into greener forms of energy. Governments are already supporting-and mandating-the production of renewable energy sources. In the United States, for example, more than 30 states have already adopted renewable energy mandates in the form of Renewable Portfolio Standards (RPS).
Similarly, in the European Union, most countries have renewable energy support schemes that favour producers of bioenergy from wood products and the EU has mandated a proportion of energy from renewable sources with which every member state needs to comply. The EU's ambitious energy and climate policy aims to reduce energy consumption by 20% by 2020, with a similar cut in CO2 emissions, while raising the proportion of renewables in the EU's energy mix to 20 per cent. Today over 50% of the EU's renewable energy comes from biomass, and the vast majority of this (some 80%) is wood biomass. While longer term the proportion of renewable energy derived from forest products will shrink as other sources such as wind and hydro develop, there is likely to remain a strong absolute demand for wood and associated waste products.
Choosing the right strategic path
Building the infrastructure and running operations required to meet the demand for greener energy are complex, expensive and potentially risky undertakings, especially for greenfield ventures that potentially lack existing engineering, manufacturing, and sales and marketing skill sets.
But while many companies in other sectors are hesitant about embracing the new opportunities presented by the rising demand for greener energy, forest products businesses enjoy an inherent advantage. Many integrated producers already have the engineering and operations know-how to run and manage the complex bio-energy supply chain. Based on Accenture's research and industry experience, we see three main areas of opportunity for forest products companies in bioenergy: 1) raw or converted biomass supplier, 2) biomass power producers, and 3) biofuels producer.
• Biomass supplier As a supplier of raw or converted biomass, the key to success will be mastery and control of the (local) biomass energy feedstock. This opportunity could take several forms and require different levels of investment, but in all cases it will involve a biomass supplier feeding a utility or a biofuels producer. In one model, the biomass supplier will be a relationship manager, aggregating a number of smaller suppliers to deliver at scale to the utility or biofuels producer. The biomass aggregator in this model might also manage billing and payments, meaning that the aggregator must be adept at managing credit risk. The biomass aggregator may choose to lock in the biomass input supply and deliveries to the utility through long-term contracts, thus creating more stable and predictable spreads.
In another model, the biomass supplier may own the forestlands in relatively close proximity to the utility or biofuels producer. The biomass owner in this case may run the forestland operation itself or may contract it out. The credit risk is mitigated, but at the expense of significant new investment. In fact, a number of companies are partnering with tree nurseries to plant fuel-wood plantations to secure raw wood supply for their biomass activities and to share the investment cost.
These models favour forest products companies. First, although many forest products companies have divested their forestland assets, they still manage the web of local vendors who supply sawlogs and pulpwood to their mills. In many cases, these are long-standing relationships that can be positioned for mutual gain. Second, reacquiring forest management skills should be relatively straightforward for the forest products company, since there is a big difference between refreshing old skills and developing new skills from scratch.
Biomass aggregation or supply is likely to suit companies that simply want to extend their current supply chain management skill set to generate incremental revenue and, in fact, a number of forest products companies are already doing this.
• Biomass power producer Many forest products companies already produce electricity as part of their manufacturing processes. Most pulp producers and integrated paper and packaging mills, for example, burn black liquor in recovery boilers as well as bark and other waste materials. In fact, modern mills are capable of becoming small net exporters of electricity. The production of steam and electricity from biomass is first used to hedge carbon-based energy and reduce exposure to variably priced market electricity. But a significant opportunity exists beyond this first step. Biomass power production facilities could be positioned in any location, connected to the electric grid through transmission lines, particularly where there is little competition for feedstock. A biomass facility could conceivably be located in one place and deliver power to another state or even country in the EU. With this model, forest products companies can serve distant utilities seeking renewable power. However, expanding into this business model will require significant capital investment-including new or upgraded boiler, turbine and transmission capacity-and a tolerance for risk.
• Biofuels producer We are seeing an increasing number of forestry companies enter the biofuels market to produce ethanol and diesel. They enjoy an advantage over other biofuels feedstocks as they already have the feedstock logistics capabilities and, in many cases, experience in pre-treating the forestry feedstock. In addition, there are different streams of forestry waste and multiple options of both biochemical and thermochemical pathways. For example:
• Lignol - developed a solvent-based pre-treatment technology to separate the biomass into its components. The resulting cellulosic fraction is highly susceptible to enzymatic hydrolysis, generating very high yields of glucose
• Neste/ Stora Enso - focus on commercialising a BtL process for conversion of wood residues to synthetic diesel
• RSE Pulp - developed a proprietary process for pre-extracting hemicelluloses during the pulping process
• Royal Nedalco/ Mascoma - developed new yeasts capable of fermenting C5 and C6 sugars to ethanol
• UPM - looking at producing biodiesel and fuel oils (via pyrolysis and gasification/FT) and bioethanol (via biochemical conversion) from forest products
• VTT - R&D across a wide range of biochemical and thermochemical technologies (gasification & gas cleaning; preprocessing (biomass production & handling); fast pyrolysis; enzymatic hydrolysis & fermentation)
A creative approach required
A major, and quite valid, concern is the level of investment required to fully participate in the biomass business. A creative approach will be required. A unique characteristic of the renewables business however, - and one forest products companies can use to their advantage - is the availability of public funding to learn the business, develop technology and fund capital investment. Forest products companies also can take advantage of investment and production tax credits and alternative energy user tax credits such as those announced in Canada in March of this year. These sources of funding and tax credits can help companies "pay the tuition" to gain competency in biomass energy and biofuels production. For these reasons, forest products companies may want to start making mastery of government alternative energy funding a core competency of their businesses.
Finally, companies need to make a clear assessment of the personnel and skills they will require to venture into this business. Especially in the case of the merchant biomass power producer, forest products companies will likely need to acquire talent that they have little previous experience of managing.