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FAO/UNEP/UN-Energy Bioenergy Decision Support Tool -
MODULE 4: Project Screening
Box 3: Project level investment risks associated with feedstock supply
Bioenergy is unique in comparison to other classes of energy in that much of the risk associated with new investment falls on the
supply of feedstock rather than in the other parts of the chain (conversion, transport, distribution and end-use).
The following questions are relevant in assessing the feedstock risk:
• Location – where is the expected biomass feedstock supply located in relation to the processing facilities?
• Homogeneity – is the expected feedstock of a homogenous quality (e.g. a specifc variety of tree) or is it heterogeneous (e.g.
collection of different residues)?
• Alternative buyers – are there alternative buyers, either existing or potential, for the feedstock?
• Climate – is the availability of the feedstock subject to climatic, seasonal or other (non-price) fuctuations?
• Pre-processing – will the feedstock require pre-processing (and if so, can it potentially be done at a separate location?) or if not
strictly required, will there be signifcant economic benefts to incorporating pre-processing?
• Measurement – is it diffcult and/or costly to measure the quality or quantity of feedstock?
• Procurement – are there non-price limitations or conditions on the type of procurement or contracting that can be used to
obtain the feedstock from the supplier?
• Experience – Does the operator of the facility that will use the feedstock have previous experience with the specifc type of
biomass that will be supplied?
products. Bioenergy products are not always uniform in quality
and/or face the market barriers associated with adaptation into
the existing fossil-based infrastructure (especially in the case of
transport). Unlike international commodities such as oil or coal,
they do not have established markets that absorb the risks
associated with reaching a suffcient level of demand. Conse-
quently, any type of guaranteed market (e.g. mandate for blending
biofuels) automatically reduces investment risk.
The fnancial assessment of bioenergy projects, especially in Least
Developed Countries, can often be improved from consideration
of non-fnancial capital in the evaluation process; this effect is
generally due to the fact that bioenergy is more labour-intensive
than other energy forms and can have strong linkages to intan-
gible community assets and knowledge. The non-fnancial types
of capital can be broken down as follows (Practical Action, 2009):
1. Human capital: knowledge and skills that can be utilised or
created as a result of the project.
2. Natural capital: new alternatives for using land, water,
nutrients and other resources or inputs.
3. Social capital: cooperative/social arrangements that can
result in improved capacity for farmers to use the land,
increased awareness of producers and consumers’ rights
and obligations, and social networking activities resulting
when energy services (especially lighting) are expanded.
4. Physical capital: additional tools, machinery, and services
available as a result of the project.
The valuation of these forms of capital is often diffcult; inclusion
of non-fnancial capital will often require institutional mechanisms
such as cooperatives, standardised (and easily interpreted)
contracts with farmers and clear agreements on the use of
common infrastructure and resources (e.g. telecommunications,
water, machinery).
The fnancial viability of bioenergy projects can be improved
through carbon fnance, which involves investments in GHG
emission reduction/avoidance projects and the creation of fnan-
cial instruments that are tradable on a market. Two project-based
mechanisms exist within the Kyoto Protocol: Joint Implementation
(JI) and the Clean Development Mechanism (CDM). There is
also a Voluntary Carbon Standard (VCS) programme for carbon
offsets. Some national agencies and development banks invest
in climate-change mitigation projects through carbon markets
as well as within the framework of JI and the CDM, including the
multilateral banks (e.g. World Bank, European Bank for Recon-
struction and Development) and the various national development
agencies. A summary of voluntary carbon markets that have
some special relevance for bioenergy projects is given in Table 4.
Carbon Finance should not been seen as the sole or even primary
source of fnancing, but rather as a complementary source that
can nevertheless in some cases, make the difference in reaching
fnancial viability. The possibility to draw on existing project
assessment methodologies such as those available through the
CDM also builds capacity among project developers and host
countries (UNEP, 2009).
Every CDM project must use an approved methodology for
comparing the expected emissions reductions to the baseline
case, in order to show that the emissions will be additional to
those that would have occurred without the project. These
methodologies clearly have some general value for project carbon
accounting beyond the CDM, since they provide some analytical
basis for creating a portfolio of projects that have a low-carbon
profle. Since the CDM certifcation process itself involves publicly
available information, project developers can use the methodolo-
gies to better inform GHG accounting in their projects for strategic
purposes and also to consider the possibility for accessing
voluntary carbon markets (CDM, 2010; CDM, 2011). Most CDM
bioenergy projects have relied on agricultural residues, since
these are often the “low-hanging fruit,” among bioenergy invest-
ments due to lower cost and availability compared to dedicated
feedstocks (see Table 5).
The complicated nature of the CDM project cycle means that
CDM may not be necessary or appropriate for some types of
bioenergy projects. The size of the GHG reductions and the scale
of the project will need to be suffcient to cover the fxed costs
(and transaction costs) of the CDM application process. However,
bioenergy projects may have special characteristics in terms of
sustainable development goals, and this might make them more
attractive to host governments and also to the voluntary carbon
market (UNEP/CD4CDM, 2006; UNDP, 2009). The “development
dividend” for CDM projects tends to be greater for renewable