You could say that the last one year had been a biomass energy year for me.
While the solar sector is where one would have expected most of EAI’s consulting assignments to have come from (and indeed we did get quite a few from that sector), surprisingly, there were a fairly good number of assignments we got in the biomass energy sector.
On second thoughts, however, it should not have been surprising at all.
Let’s consider numbers. Until about 2012, there some sanity prevailed in the prices of fossil fuels used for heating – furnace oil, diesel, LPG and natural gas. Since then, it has been chaos here.
Most fossil fuel prices used for industrial heating have increased by over 50% in the last 2 years alone.
When you consider that heating energy costs for some of the companies (especially in industries such as chemical and process, food/bakeries etc) could be as high as 20% of their total running costs, you realise the magnitude of the problem for these companies.
For a company whose heating costs were 25% of its total running costs, a 50% increase in the cost of fossil fuels would mean a 12.5% increase in their total cost of operations. Assuming that their gross margins ((revenues – operating costs)/revenues) are about 30%, a 12.5% increase in operating costs would bring down the gross margins to about 20%, a serious reduction. If some of these companies are operating in highly competitive markets with severe pressure on margins, such a big decrease in gross margins might even throw the companies net profits into the red. In essence, high energy costs has the power to effectively run the company to ground within a few months!
Is there now any wonder why companies were suddenly knocking on our doors asking us if we could help them with bio-based heating? (Here’s a post I had written on the comparative economic advantages of biomass over fossil fuels for industrial heating. And it is not just India. Many companies in Europe too doing something similar – see here and here)
From among the companies that were keen on shifting to biomass from fossil fuels for heating, there are of course no prizes for guessing the sectors these companies belonged to – mostly chemicals, food sectors and fast moving consumer goods sectors. As you would have guessed, these are the sectors in which heating and drying play dominant roles in operations.
Of the half dozen companies we had worked with in the past one year, most companies felt the challenge was mainly on the biomass sourcing front. Most of them in fact had already figured out (or at least thought they had figured out) the biomass to heat technology they would be using. In some cases, the companies had decided to go for gasification, while in a few others (especially those with very large heating requirements), they probably did not have a choice but to go for direct combustion. In most cases, we agreed with the choice of the technology selected by the client.
The real challenge, for which the companies came to us for help, was in assessing the reliability of the supply chain.
The problems with biomass supply chain are well known – and this is a challenge not just in India, but worldwide. It is worth reiterating that it is not the quantum of biomass availability that is a problem, not at least in India. The country produces about 200 million T of agricultural and forest waste every year – enough to generate about 25,000 MW of power or over 50,000 MW thermal capacity. That’s a heck of a lot.
The problem really is with the reliability of the supply chain – we lack an industry strength supply chain that can assuredly supply biomass to an industrial or commercial user at prices over which the consumer has a reasonable amount of confidence and control.
Neither – assurance of continuous supply or assurance on prices – can be taken for granted given the current unorganized nature of the biomass supply chain market in India.
How do companies then build a bio-energy based heating infrastructure? What strategy do they adopt to get enough confidence in the biomass supply chain?
The above were the main aspects we worked on for most of the assignments. Based on our work, the following are what we can state as parameters to use for your biomass supply strategy.
1. Go for a hybrid strategy, rather than either fossil or biomass – for most companies, it makes sense to gradually shift from furnace oil or LPG to biomass, rather than overnight. This reduces their risks significantly, while giving them time to understand the biomass supply chain market much better, from close quarters and choose the best suppliers to have long term relationships with. Today, many technology vendors (especially for the gasification option) are keen to provide such a hybrid solution where they provide a dual fuel burner that can accommodate both a fossil fuel such as LPG or natural gas and producer gas from biomass.
2. Multiple vendors – this must be an unsurprising parameter. It is of course a smart idea to work more with than one vendor. That way, the consumer cuts down his risks of supply disruptions while at the same time has better bargaining power on prices. From our work with a number of biomass briquette suppliers, we have seen that most of them are supplying in the range 75-100 T per day. If a factory requires say 30 T per day of biomass briquettes, it will indeed be much easier for them to get it from two vendors (at 15 T apiece on average) rather than one. At an existing average supply capacity of 75 T, a briquette supplier supplying an additional 15 T will have to increase his capacity by 20% to start supplying to a new user. something that appears manageable. If the entire biomass requirement of the end user (30 T) were to be supported by just one supplier, that would mean augmenting his supply capacity by almost 50% – a tough ask.
3. Proximity of the entire supply chain – while selecting vendors, it is critical to find out from where exactly they were getting their biomass. This can be a bit tricky. Most of the biomass suppliers supply to the clients in the form of briquettes. But where does the original, raw biomass come from? This is an important question because if the raw biomass comes from far, it is going as hell, even if the briquette maker is just a few kilometers from your place.
4. Current clients of the prospective vendors – this is one of the most critical parameters. If a supplier is already supplying to a company similar to yours in your vicinity, that is a big plus. And if that customer happens to be a large and prominent company, it is even better – because the earlier client would have likely done most of the due diligence that is required of the supplier.
5. How vertically integrated is the supplier – Most biomass briquette suppliers are essentially traders. They own almost nothing except some trucks. Most times, they have loose tie-ups with briquette makers. This arrangement is fine if they are supplying small quantities, but for large end users looking for reliable long term biomass supply, it is important to choose suppliers who control a much longer portion of the value chain. There are not too many companies that control the entire value chain – right from owning large energy crop plantations to delivering the biomass at your company doorstep, but if you can find one or few of these vertically integrated players, it could be quite useful. Remember, it works both ways: for a large, vertically integrated biomass solutions provider too, it will be good to have long term supply and price contracts because he has as much skin in the game as do the end users.
6. A thorough vendor evaluation with ratings done on critical parameters – The following are the key parameters you should consider
- Reliability – adherence to contract terms, on-time supply and adherence to quality of biomass
- Responsiveness – Lead time
- Flexibility – especially in responding to quick changes in requirements; also showing flexibility in taking back defective products
- Financials – total cost per ton, and payment terms
- Quality of biomass – rating on quality characteristics such as defect rates, biomass properties such as moisture, biomass density etc; presence of any quality system certification
- Assets & infrastructure – company’s location, size & infrastructure – proximity to the customer, transportation infrastructure, facility size, fleet size, warehouse numbers, capacities etc.
- Environment consciousness – environment and society conscious biomass production & handling (this is important in today’s world of green consumerism)
7. The Ever-necessary Plan B – For a company for which the feedstock for heating is of mission critical value, it is necessary to have a plan B when they are depending on a less-than-mature market sector. What could the Plan B be, if, in spite of all the precautions and supplier due diligence, a few months or years down the line there is a serious biomass supply disruption? To me, the only Plan B that is fail-safe is to have the original fossil fuel heating system as a back-up. Sure, the costs of using that would be much higher than the use of biomass (that was indeed the original rationale for going for biomass), but perhaps the overall cost (including collateral damage costs) of shutting down operations for a few weeks is much higher?
I do hope that the above framework provides those of you looking for a robust biomass supply chain with a guidance and direction to start from.
If you are interested in discussing further or taking EAI help in evaluating / identifying a biomass supply chain for your heating or power needs, send a note to me. That would Narasimhan Santhanam – firstname.lastname@example.org
Biomass: Strategic Issues in Supply Chain Logistics – an excellent international overview of the entire logistics chain for biomass and options possible at each component.