Bioenergy Critical Success Factors

The Bioenergy Deployment Consortium identifies the four deciding factors in a company’s success or failure. Do you have the right stuff for bioenergy?

A few days ago, three respected members of the community approached the Digest with a working paper on the “four critical success factors for bioenergy”. Would we publish it?

Would be publish it? You bet we would, and here it is.

It’s one of the most objective, case-based, short and effective guides to what it takes to make it from pilot to player, from bench to big.

Although there is room on every mall for the shopping boutique, it is not the case with energy. In this sector, scale is everything, once a materially advantaged fuel-making process has been identified.

But what makes for “the right stuff?” To date, it’s been tough to analyze. For one thing, many of the top players are highly-private companies that share little information about their transformational IP, anord even their business models and contracts. But here is an antidote for that problem.

A look at how identifying target markets, raw materials, horizontal integration and management skill become the deciding factors in a company’s success or failure.

Do you have The Right Stuff? Are you heading in that direction? Here’s a guidebook for that journey.

Bioenergy Critical Success Factors

By B.A. (Ben) Thorp, Harry Seamans and Masood Akhtar.

As principals within the Bioenergy Deployment Consortium, we have watched projects develop and mature. Some are successful, some are on the pathway to success, some seem to be on the pathway to failure and unfortunately some have already failed. Many projects have been reviewed with rigor by federal agencies, but this review is typically on a project by project basis. By taking a larger industry-wide view, The BDC has identified four critical success factors (CSF) for the emerging bioenergy industry.

We have determined that projects on the pathway to success seem to employ very well at least three of the four CSF.  Projects that do not employ these factors have an uncertain future.  The recommended use of the factors will be discussed after their description.

Critical Success Factors

A validated business plan (with a validated profit and loss forecast) is key to success for any project. This is well understood.  However, most companies keep the business plan information confidential so it is not available to interested parties who are not potential investors. BDC has studied numerous projects to determine if it is possible to derive information on critical success factors from information which is publicly available and can be validated.  The four CSF identified to date are:

• Target market,

• Use of low cost raw materials,

• Horizontal integration, and

• Business acumen including project execution.

To facilitate an understanding of each CSF we have included generalized ranking criteria. These ranking criteria can be defined for regions or for specific technologies or projects. Readers should not be restricted in how they use the illustrations provided.

1.  Target Markets

A project must identify and validate a market in which it can establish a relative competitive position versus the current supply and demand. There must be a clear path and timeframe to establishing a competitive cost and price position. This does not have to be immediate, but it must be real and without subsidy. Further, the market must be large enough to allow the introduction of the bioproducts without causing significant market disruption.  Values placed on environmental impact must be compelling as the market has shown two characteristics. The first is an unwillingness to pay a premium to be green. The second is a rapid shift in the definition of what environmental characteristic are valued.  We have seen that environmental value translates to a tie breaker to consumers rather than an overall reason to pay more for the product.

Because the bioproducts capital and manufacturing costs may initially be high, target markets for high value outputs provide better opportunities. Bio-outputs ranked in order of highest value based on 2011 U.S. market prices include:

•    High value chemicals such as  pharmaceutical products
•    High value industrial chemical building blocks such as  n-butanol
•    Aviation fuel
•    Diesel
•    Gasoline
•    Crude oil substitute
•    Ethanol
•    Steam and/or hot water (in horizontal integration)

The preceding list does not account for incentives.  Federal or regional incentives can cause dramatic shifts in the order listed above and must be included. Yield must be considered as low yields of a high selling price bioproducts might not be “high value output.”  Facilities might also produce multiple products and the establishment of relative competitive position applies to the total output of the project. Target market is the first independent variable.

2.  Raw Materials

In all of the projects with which we are familiar, raw material contributes the most to operating cost. It is typical for raw material to represent at least 50% of operating cost. As such it is the single most important operating variable.  Security of feedstock supply is critical and needs evaluation. Categories of biomass streams, ranked lowest to highest cost (best first), include:

•    Waste from another business or process
•    Spent crops, which are a special example of a waste stream
•    Forest slash or thinnings
•    Energy crops
•    Whole tree chips
•    White wood chips

The cost of these raw materials varies by geographical regions and can be re-ranked for any particular project. It is important to emphasize that the use of a high cost raw material is not an automatic reason to assume low project performance. High performance in other criteria like target markets may justify the use of higher cost raw materials. Raw material is the second independent variable.

Figure 1 is a graphic representation of the outcome of selecting target markets, raw materials and the best technology to transform raw materials into the high value outputs. In this example the technology is the dependent variable and typically is selected third. It is an outcome of selecting the market and the raw material.

3.  Horizontal Integration

Horizontal integration means that the project facility is integrated with a sustainable, successful business facility as described below, and is focused on the efficiency and operating cost of the overall process.  Integration must be done in a way that provides economic benefit to the biomass facility and ideally for both facilities. Categories of horizontal integration starting with the best are:

•    Integrated products (e.g., recovered steam from a thermal process sold to a host),
•    Shared utilities (e.g., common fresh water feed, common boilers, common substations, effluent treatment, cogeneration, etc.),
•    Shared land use (e.g., growing energy crops between grape vines in vineyards) and
•    Shared administrative support.

Co-production of sugar, sugar ethanol and cellulosic ethanol from bagasse is an example of an integrated facility with high potential for success. This process couples two CSF’s by combining low-cost raw material and horizontal integration. The sugar cane is grown, harvested and transported for the sugar mills. Most sugar mills have solid fuel boilers to burn some of the bagasse for process heat. So this waste material exists at a site with compatible boilers.  Some or all of the bagasse can be converted into cellulosic chemicals and the waste streams from the cellulosic processes can be sent to the solid fuel boilers. This example of horizontal integration can provide nearly 100 % mass utilization. Integration like this leads to higher efficiency. Higher efficiency leads to lower operating cost and more sustainable use of the raw material. Sustainability is a more meaningful measure of success than renewability.

Another example of integration is a thermal biorefinery located adjacent to a food processing plant or a pulp and paper mill (any industrial facility that has a use for the heat generated by the process). If the biorefinery gasifies forest residuals and uses a Fischer Tropsch process to generate (FT) liquids, considerable high pressure steam can be recovered and used to generate power and steam for the biorefinery and the host facility. Detailed estimates show that over 20% of the revenue stream can come from the sale of power and steam.2 Such horizontal integrations can give nearly 100% mass utilization and 70 to 80% thermal efficiency. This can also meet the higher goal of sustainability.

4. Business Acumen and Project Execution

This is the least objective criteria and the hardest one to define, but you know it when you see it. We are inclined to put publicly traded companies at the top of the list because they tend to over-deliver and under- promise to their board of directors/shareholders. Lower in the list would be those technology companies who overpromise and underperform. Other categories starting from the best include:

•    Compelling, stable business plan where all major claims are documented and validated,
•    Strategic partners who have invested in the technology or deployment and have vested interest,
•    A revenue source to backstop cost overruns or performance shortfalls,
•    Inclusion of a successful entrepreneur: Great entrepreneurs know what they know and, more importantly, know what they do not know, always finding someone to complement their deficiencies,
•    Operating pilot plant with continuous runs to serve as the basis for design, construction and start-up,
•    Validated “rights-to-use” for the entire intellectual property,
•    Constant use of peer review, best practices and continuous improvement,
•    An experienced management team and strong board of directors, and
•    Appropriate skills in the “management of risk”.

These factors are difficult to evaluate. Experience does not equal skill. Even when the necessary skills are present, there is no guarantee that the group will function as an effective team. However business acumen and project execution are believed to be the most important CSF. Skilled management can overcome some deficiencies in the other CSF’s.  Unskilled management can fail even when all CSFs are in place.  Project execution can be better understood by using the models advocated by organizations such as Independent Project Analysis3.

Validation

Four critical success factors have been developed empirically from observation and comparison. They can be validated and optimized after numerous observations, but it is too early to claim complete validation, although they pass the common sense test.  These factors have been able to account for success or failure of U.S. projects to date.

We will use three unnamed but real projects as illustrative examples of why we have confidence in the utility of the CSFs.

The first project we examined failed to even meet considerably reduced goals from the beginning of the project. This project had high cost raw materials, was not horizontally integrated, had a low value output and the team had low business acumen.  There was reason to believe early on that this project would not be successful.  Any project that ranks low on all four CSF’s cannot be categorized as being on a path to success.

The second project is a proposed cellulosic ethanol facility. It has low cost raw materials (spent crops from the same harvest area), appears to have good business acumen, is integrated with common utilities and effluent, and the team has good business acumen4. The output ranks low with respect to target market criteria, but the product currently has a subsidy and synergy with the host facility. Also this plant has a DOE grant to lower the capital intensity. It appears to be on the path to success.  It should be noted that the DOE grant is only considered a factor to success if the other criteria are in place to make the project a success long term without government assistance.

The third project uses a sugar containing waste stream from an existing facility. The project will have low cost feedstock, will be horizontally integrated, and will produce a high value product. A key entrepreneur appears to meet the business acumen requirements4. In addition many of the process steps have been proven at other locations. This project also appears to be on the path to success.

Conclusions

Four critical success factors have been identified and defined. They are empirical and need further development validation. They include both objective and subjective variables.  We have applied them to a large number of projects. Projects which rank high seem to be on a successful pathway. Projects which rank low reduced their scope or have failed.  Only rarely will one project rank high on all four critical success factors. Projects which rank high on at least three are moving toward success. Projects which rank high on two are about average. Projects that rank low on all four have an uncertain future or may be a niche solution.

We recommend using the CSF’s to raise flags for investigation and as tools for optimization. High rankings rate green flag, moderate rankings rate yellow and low rate red. All yellow and red rankings will need thorough investigation and will likely need strategic change.  The criteria are useful to the project owners in consideration of optimizing their project and for potential investors and government agencies for backing the projects that are most likely to be successful.

Any project can develop its own sub measurement system for each CSF. Any ranking can be examined for opportunity improvement. Those improvements can be in project design, project startup or post startup upside opportunities.

It is important that projects with potential be recognized and promoted. More important, projects with low ranking require strategic change. The bioenergy industry and the nation need more biomass to bioenergy successes and fewer failures.

About the Bioenergy Deployment Consortium

The Bioenergy Deployment Consortium (BDC)1 is a non-profit national organization whose key mission is to promote the biomass economy. The BDC has established a reputation of being objective, reliable and trustworthy and serves its members by:

Separating fact from fiction to provide meaningful and accurate information

Coding and cataloging benchmark articles/information on the status of bioproducts development (R&D, pilot, demonstration, commercial), policies, funding opportunities, etc.

Conducting two symposia per year in which the members specify the contents: Speakers focus on federal funding opportunities, policies, status of projects (advanced biofuels, biochemicals and biomass power), and other special topics of interest to members.

Arranging tours of operating pilot/demonstration./commercial plants (seven to date)

Collecting information on pilot/demonstration plants in the US and validating them, and

Providing networking opportunities for technology providers, service providers, end users, funding providers, etc. and, very importantly, facilitating partnerships to help deploy successful bioenergy facilities.

Notes

1 See www.bioenergydc.org
2 “Demonstration Plant: Biomass Fuels to Liquids, Slide 16- Robert Byrne presentation at DOE IBR Peer Review, February 1, 2011, Washington D.C.
3 See www.IPAglobal.com or www.IPAinstitute.com
4 Based on presentations to the DOE Integrated Biorefinery (IBR) Peer Review, February 2011