Factors for Bioenergy Market DevelopmentAnders Roos and Bo Hektor
Robin Graham Christian Rakos |
Paper presented at BioEnergy '98: Expanding Bioenergy Partnerships, Madison, Wisconsin, October 4-8, 1998.
Focusing on the development of the whole bioenergy market rather than isolated projects, this paper contributes to the identification of barriers and drivers behind bioenergy technology implementation. It presents a framework for the assessment of the potentials for bioenergy market growth to be used by decision makers in administration and industry. The conclusions are based on case studies of operating bioenergy markets in Austria, United States and Sweden. Six important factors for bioenergy market growth have been identified:
Different applications of the framework are discussed.
Key words: Bioenergy markets, nontechnical barriers, energy policy.
Despite the long history of research and development that has resulted in a wide choice of bioenergy systems, biomass energy on average still represents a small fraction of the energy production in most industrialized countries, 3.5% in North America, 0.9% in Japan and 3.2% in OECD Europe. Some individual countries have a much higher biomass share in the energy production, 13.8% in Turkey, and 13.1% in Sweden, and 11.7% in Austria (IEA/OECD 1996). The most critical problems with bioenergy implementation appear at the later stages of the chain, where technically well performing systems have to compete with other energy forms in a competitive market. Often these problems have been classified as “nontechnical barriers” to bioenergy technology implementation.
Several studies have investigated the issue of bioenergy technology implementation (e.g. AFB-Nett 1995, Bioenergy ‘96 1996, Chartier et al. 1996, Medhurst et al. 1997). To date, however, no structured framework has been presented that identifies the most important barriers and drivers for the development of real bioenergy markets.
This paper presents a framework for the understanding of barriers and drivers behind bioenergy technology implementation and commercialization. It focuses on bioenergy market growth, rather than on individual bioenergy projects. The analysis is based on standard economic theories about investment, transaction costs and industrial organization.
The framework has been developed through case studies of operating full-size bioenergy markets:
It should be stressed that these five markets are not “success stories” in all aspects. They have of course developed due to some favourable conditions, but they also face problems and threats that have to be overcome in the future. In this study technical aspects of bioenergy production (e.g. innovation, R&D, etc.) are not discussed in detail. Nor does the study make use of psychological, sociological, or pedagogical aspects behind peoples’ decision making and technology adoption (works in this field are Stern, 1986 and Rakos, 1995). This decision does not infer any judgement about their value in studying bioenergy-related issues. Rather, we find economic theory more useful for the objective of this study - to present an overview of market possibilities for bioenergy systems.
Pellet heating in the United States Wood pellets have been used for residential heating in the United States for more than 15 years. The pellet industry started in the early 1980's in the Northwest and gradually has spread to the Great Lakes and New England regions. About 350 000 homeowners in the United States heat their houses with pellets (Pickering, 1996). The pellets are burned in stoves and both the equipment and pellets are usually sold by stove dealers. The fuel is an upgraded woodfuel dried and compressed from wood industry residues in special pellet factories. Pellet heating is efficient and comfortable; furthermore it requires less work and attention than traditional woodstoves and is less expensive than electric heating. Toughest competition for the pellet heating industry comes from oil and natural gas, both of which are low cost heating options.
During its development, the pellet industry has improved technological and market performance. The business has also cooperated to implement product quality standards for the pellet and to coordinate marketing efforts.
The growth of biomass power in Maine was the result of the Public Utility Regulatory Policies Act (PURPA) legislation in the United States in 1979. The PURPA encouraged electricity production by small non-utility producers using co-generation techniques or renewable fuels. The law created a window of opportunity for alternative energy forms in the country and in the year 1992 biomass power accounted for 25% of the total electricity supply in the state.
The biofuel consists of wood waste from forest industries and residues from logging operations. Because of an existing forest industry activity in the state, both supply and transports of the fuel could be arranged in a cost efficient way.
However, the low price of natural gas and oil and the ongoing restructuring of the electricity market in the state has reduced the further expansion of biomass power in Maine. As the present contracts between the independent power producers and the utilities end in the beginning of the next century, the biomass power industry in Maine will have to find new ways to meet the changing market conditions.
Sweden is presently the second largest pellet producer in the world, after the United States. The production in 1996 was 500,000 tons, distributed on more than 16 different factories all over the country. The pellet factories mainly use by-products from wood industries. Most pellet production in Sweden is aimed for large district heating plants. However, during the last five years pellet heating of small houses has grown and today about 6000 homeowners heat their houses with pellets, mainly in central heating systems. Pellets are economically advantageous in Sweden as they are exempted from environmental and energy taxes. It is therefore profitable for the individual homeowner to convert from, e.g. oil to pellets.
The Swedish pellet industry is at an earlier stage than in the United States. Some fundamental standards for pellets and burners still have to be introduced and the equipment (burners, feeding mechanisms, etc.) has to be improved. The challenge to the industry is to maintain a competitive situation between the different manufacturers, and simultaneously coordinate standardization, testing and marketing activities.
Next to the forest industry, the district heating and combined heat and power sector consumes the most biofuel in Sweden, 82.4 PJ in 1996 or one quarter of the national total biofuel consumption. The heating plants are in the 5-500 MW range. The reason for this increasing consumption of biofuels is twofold. First, there is a rich supply of low cost wood fuels in Sweden from the forest industry and as residues from logging activities. Second, increased energy and environmental taxes on fossil fuels have improved the competitiveness for all biofuels. The fuel is bought from biofuel companies that generally coordinate their field operation with regular forestry operations. A small share of the woodfuel originates from short rotation woody crops.
In the 1970's and 1980's earlier stages of its history, the bioenergy market in Sweden met resistance from the forest industry who feared competition for the raw material. In recent years, however, it is the forest sector that is organizing a large part of the wood fuel market, and the biofuel business is highly integrated with the forest industry. Meanwhile, as the market has grown, fuel prices have decreased which indicates that the whole woodfuel chain has become more cost efficient and that there is a good physical supply of wood fuels.
The first biomass district heating plant in Austria was established in 1979. The scale of the Austrian heating plants is more modest than in Sweden, from a few hundred kW to 8 MW. The annual rate of growth of the biomass district heating capacity has been averaging 25% since 1987 and by 1997, 300 biomass district heating plants had been built in Austria. Generous subsidies is one driving force behind the development. Plants run by farmers’ cooperatives are the most favoured and can receive up to 50% of the investment cost in different contributions from local and federal government and from the structural funds of the European Union. Other operators usually receive 10-30% (Rakos 1995). Depending on the economic situation, plant operators use predominantly wastes from forest industries or wood from thinnings which is an expensive fuel but improves forest stand quality.
The economic performances of the plants vary considerably, depending on heat sales, heat cost and in a lesser degree on investment and heat prices. The best predictors of success are a high subscription rate and that conflicts are avoided in the village.
For a bioenergy enterprise, e.g. a Combined Heat and Power (CHP) plant that produces heat and power from biomass, the key to achieving competitiveness is to increase productivity from all factors of production, reduce costs, improve product quality and to intensify marketing efforts. A particularly important type of cost at the early stages, when the business still is defining itself and the market is generally ‘thin’, are the transaction costs, i.e. the costs for market search, measurement, negotiation, contracting and contract enforcement. As the business grows, innovative technical and organizational solutions are normally found that increase productivity and reduce costs, including transaction costs. In the example of the CHP plant above, cheap feedstock may be obtained in the form of biomass waste from some other industry, e.g. a forest industry; new contracting practices and quality standards improve market efficiency; feedstock deliveries will be better coordinated; innovation will take place etc. The success of a bioenergy technology will also depend on the degree and kind of competition in factor markets and in consumer markets. Policy measures on the national, regional and local level also influence the final outcome of the bioenergy business.
In our case studies the following important factors -- barriers and drivers -- for bioenergy markets development were identified:
By integration is meant both formal mergers and acquisitions of different businesses, but also more informal but stable business relations. Most current bioenergy activities are integrated with other industries by using the other industry’s by products as fuel. This biofuel may be residues from forest industries, from agricultural processes or municipal solid waste. The use of existing structures may, however, also concern machines, infrastructure, know-how, dealer networks etc. Integration can be used both as a means to get cheap input factors and to reduce transaction costs and risks. Where bioenergy markets have been able to grow, the positive complementarity effects between and the bioenergy producer and some partner industry (e.g. in the forest or agricultural sector) have been more important than the competition for the biomass fuel between the sectors.
In all cases described in this paper fuel is a by-product from logging, forest industry or from the agricultural sector. In Maine the contractors collecting the forest fuel normally have a forest sector background and in Sweden the fuel trade is organized by forestry companies. The pellet industry in the United States is integrated downstream to an infrastructure of stove and pellet fuel dealers for the distribution and marketing tasks. In the Austrian case is that the biomass heating plant often rely on the integration on one local supplier for the biofuel. The district heating projects in Austria were often integrated with other village community activities and its success relied on the community spirit in the village. All cases show different ways for a bioenergy industry to take advantage of existing resources and structures.
The bioenergy industry can also take advantage of scale effects as the market grows. This will create markets for specialists -- consultants, fuel dealers and brokers -- who will improve the overall market performance. Larger series of machinery and equipment and larger volumes of biofuels also contribute to reduced production costs. And there will be more incentives for spending on R&D, standardization, and marketing. A growing market will therefore lead to reduced costs at different stages and a positive loop may be created.
The cases provide several examples of this feature. As the bioenergy sectors in Maine and Sweden grew, fuel prices decreased, indicating a dynamic process of technical progress, learning, and cost reductions. The same process can be seen on the growing pellet sector in the United States. As this market increased, the business could afford certain cooperating, and efforts for product and pellet quality control, which can be important on a growing consumer market.
For a new bioenergy technology, competition is essential for technical development. The basic criterion for a competitive market is that there are many sellers and many buyers, and few restrictions to entering the business. If the market is competitive both in technology and in contracting, gradual learning and innovation will take place and a variety of technical solutions and contracting practices will be tested in the race for shares of the growing market. However, there is a potential contradiction between the scale effects described above and competition. In order to exploit certain scale effects, e.g. marketing, standardization etc., the market players have to cooperate and reduce competition in certain areas. Sometimes, especially when a small bioenergy industry with limited resources is facing tough competition from other energy forms -- e.g. oil, natural gas, coal --, the best strategy for the individual bioenergy enterprise may be to put cooperation with other bioenergy businesses before internal competition in order to meet the bigger threat of the competing energy technology.
Evidently, competition between bioenergy market players has been important for the incremental technical improvement for the bioenergy sectors. This has taken place at different stages of the chain, between fuel contractors, equipment producers, dealers, plant owners. The fast improvement of the pellet stove in the United States in the 1980's and 1990's is one example where competition fosters product development. The same process is now taking place in the Swedish pellet sector.
The competition with other business is perhaps the most important factor to consider for a prospective bioenergy investor. This competition may take place both in the market for inputs, primarily the feedstock market where a bioenergy plant may compete with another biomass buyer, e.g. a pulp-and-paper plant or a particle board industry; and in the consumer markets, where competition come from other energy sources, e.g. oil, gas, or electricity. An established energy industry may also try to introduce “barriers to entry” for bioenergy competitors by strategic moves on the market or by influencing energy policy.
The bioenergy markets in this study are all influenced by the competition with other energy systems, often using fossil fuels. These competitors are generally powerful with big market shares and important financial resources. However, the bioenergy industries in our study always possess important competitive advantages, e.g. environmental qualities, local support, reliability.
It is not always easy to determine if a country’s energy policy favours or disfavours bioenergy development. Often incentives and disincentives are in place simultaneously. It is however clear that most bioenergy markets today depend on energy policy support, e.g. through subsidies, taxes, or other incentives. Key issues in this respect are whether energy policies can be expected to be stable, and how much the bioenergy promoters can influence the policy design.
Most energy markets in our study have developed because of policy measures. In Maine it was the PURPA legislation in combination to favourable local supply conditions that paved the way for a fast expansion of the bioenergy power expansion. In Sweden, high taxes on fossil fuels have improved the competitive situation for biofuels. In the Austrian case investment subsidies turned biomass district heating into a favourable option. For the pellet sector in the United States, however, policy has played a less important role.
But changing policies can also represent a risk for the bioenergy sector as it becomes vulnerable to policy changes. The restructures of the power sector in Maine represent one such change.
One final factor for the success of bioenergy industry is the support by the local policy makers and the local population. A favourable attitude in the local community helps the bioenergy industry in several ways: expediting permits, improving public relations, increasing local demand, etc.
The bioenergy sectors in this study have generally received strong local support, mainly because it generates local jobs and economic input. Both local policy makers and local population of rural communities generally welcome a new heating plant or a pellet factory. In Austria the district heating plants were often even the result of initiatives by village inhabitants themselves. And in Maine local power production may become a selling argument for the biomass power companies in the state in the changing electricity market.
In this paper we have presented a framework for the identification of drivers and barriers for bioenergy technology implementation particularly concerning commercial market introduction. The framework is robust and suitable for the analysis of different types of bioenergy sectors as it is based on recognized economic concepts. It is general in scope without being too rigid. The framework can be used for preliminary assessments of the potential for bioenergy investment. However, for a final investment decision or before a policy scheme is decided, more elaborate calculations do of course have to be carried out.
As this framework can provide a theoretically based and practical first tests of the market potential of a bioenergy technology in a region, its application is relevant to many purposes:
Further development could also include the application of the framework for the assessment of a new or emerging bioenergy market. Thus far the framework has only been applied to the five case studies which were also used for its development. A proper test would be to apply the framework to a new but a real problem where the drivers and barriers for future development have to be identified and discussed.
As large sums of money and public spending may be involved in different support policies for bioenergy implementation, a quick tool to identify the barriers and drivers is needed. This framework should help identify critical factors for bioenergy growth and promote the wise and efficient use of public and private funds for bioenergy technologies.
Support from Task XII of the Bioenergy Agreement of the International Energy Agency is gratefully acknowledged.
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