THE STANDARDS FOR BIOMASS SUPPLY CHAIN RISK

2.1.1 COMPETITOR LOCATIONS AND GEOGRAPHICAL INFLUENCE ON THE MARKET

Rationale

Competitors’ locations relative to a Proponent can affect the viability of procuring feedstock and the cost of that feedstock. Accurate and detailed competitor mapping provides an understanding of the geographical influence a competitor may have, including competitive advantages such as short-hauling.

Reporting

Reporting Requirements

  1. Proponent shall demonstrate an understanding of the competitor’s location relative to the Proponent, and its impact on feedstock supply. This shall include an evaluation of competitor’s ability to short-haul the Proponent and otherwise exert pressure on local suppliers.
Guidance

Guidance for Reporting Requirement 1

Standard industry practice suggests a thorough understanding of all competing markets of material size within a 2-3-hour drive-time of the Proponent (drive-time is preferred over distance). If Proponent’s or competitor’s feedstock is derived from distances greater than 2 hours, then an extension of the competition zone may be warranted.

“Short-haul” refers to the advantage one biomass market may have over another due to proximity to a supplier and the pricing advantage less transport distance entails. Suppliers are often incented to provide material to the closest market, but such incentives could be overcome by other benefits (e.g., higher price, shorter payment terms, more favourable unloading hours, less waiting times, etc.) provided by the other, more distant markets. The closer market short- hauls the less proximate one.

Map the competitor together with Proponent’s suppliers to understand the competitor’s ability to affect supply. Competitors located in close proximity to the Proponent may drive feedstock cost and put pressure to breach on Proponent’s contracted suppliers, especially during times of shortage.

Guidance Source

Crummett (2017, interview); Solomon (2018, interview)

2.1.2 HISTORICAL FLUCTUATION OF QUANTITY USED

Rationale

Clear understanding of key competitors’ consumption of each type of feedstock utilized by the Proponent is essential to quantifying the risks associated with each competitor. Understanding historical trends of feedstock utilization can provide valuable information about feedstock price elasticity during shortages, and insight into events that may impact future supply conditions. It can enable more accurate estimates of the sensitivity of feedstock availability to potential future consumption levels or to the impact of external events (e.g., weather events, structural economic changes, seasonality, or policy change).

Reporting

Reporting Requirements

Proponent shall demonstrate understanding of:

  1. Current key competitor intake quantity for each type of feedstock used by the competitor
  2. Current key competitor intake quantity for each type of linked

Reporting Recommendations

Proponent should demonstrate understanding of:

  1. Historical utilization of each type for feedstock used by the Proponent
  2. Historical competitor intake quantity for each type of linked feedstock.
Guidance

Guidance for Reporting Requirement 1

Not all competitors will have the same relevance to a Proponent. “Key” or “major” competitors are generally characterized by intake of similar feedstock in material quantities, and are located within 150km of the Proponent.

“Linked feedstock” refers to feedstock not used by the Proponent but used by competing markets, and which could be used by competing markets to exert influence on a supplier. For example, during times of shortage a pulp and paper mill that utilized both chips and bark could refuse to accept a supplier’s bark unless it supplied the chips otherwise being contracted to the Proponent.

At minimum, data shall, for every type of feedstock utilized by the Proponent, include feedstock category and description for annual and monthly quantities.

Published/public data is preferred but often unavailable. Third-party feedback is acceptable if triangulated.

Guidance for Reporting Recommendation 1

“Historical information” shall refer to data covering at least 3 years. 5 years is preferable.

 Most accurate information about competitors’ feedstock consumption often comes from suppliers. Developing good initial relationships with suppliers can provide access to valuable information about competitors.

 Guidance for Reporting Recommendation 2

A credible third-party company should be engaged to collect and/or verify the competitor’s feedstock quality specifications.

Guidance Source

Abt (2018, interview); Baylies (2017, interview); Crummett (2017, interview)

2.1.3 COMPETITOR PRICING AND PRICE SENSITIVITY

Rationale

Understanding how much competitors pay for different feedstock types is an essential step to determining competitiveness of Proponent.

Historical prices paid by competitors provide insight into their procurement behaviours and ability/willingness to pay premiums for feedstock and expert pressure on Proponent’s suppliers during times of feedstock shortage. Competitors that have an ability to offer higher prices for feedstock during feedstock shortages can pose significant risks to Proponent.

Knowledge of competitor pricing and price sensitivity is also an essential prerequisite to formulating a feedstock cost curve which can enable predictions of feedstock redundancy; i.e., how much feedstock could become available at different pricing levels (see Category 3–Supply Chain Risk 3.1.3).

Reporting

Reporting Requirements

Proponent shall demonstrate understanding of:

  1. Current price paid by competitors for feedstocks used by Proponent
  2. Historical feedstock price paid by the If significant price fluctuation has occurred, then Proponent shall demonstrate understanding of factors driving such fluctuation.
  3. The market for competitors’ end products and any relationship between this market and the ability of competitor to drive feedstock price over time. 

Reporting Recommendations

Proponent should demonstrate understanding of:

  1. Current price paid by competitors for linked feedstocks
  2. Competitor’s sensitivity to price increases
  3. Competitor’s track record of driving feedstock cost during periods of shortage
  4. Payment terms
  5. Payment history.
Guidance

Guidance for Reporting Requirement 1

If possible, pricing information should be acquired directly from the competitor or from published area data. However, competitors are often reluctant to supply such information. Use of a credible third-party to validate competitor feedstock price data is acceptable.

Guidance for Reporting Requirement 3

Competitors’ demand for feedstock and the maximum price they can pay for it may depend on the markets for their final product. For example, a pulp and paper mill’s demand for feedstock depends on the paper market. It is important to understand competitors’ end-markets to understand their likelihood of expanding operations and impacting feedstock availability and price.

Pass-throughs for feedstock costs are rare but it is important to understand whether this is an advantage a competitor has. A wood-to-power plant with a feedstock pass-through contract with its buyer is able to drive costs in times of shortage and may thereby constitute significant risk for a Proponent.

Anecdotal feedback from local supplier or a credible third-party expert may be useful in obtaining this kind of information.

Guidance for Reporting Recommendation 1

Third-party reports can be used to obtain historical feedstock pricing data; reliability can be acceptable if confirmed by at least three independent sources (i.e., triangulation). Suppliers can serve as sources of data validation.

Guidance for Reporting Recommendation 2

Understanding competitors’ price sensitivity can help the Proponent understand whether it is in a favourable position to acquire feedstock at times of low supply. The sale price/value or margins of a competitor (e.g., pulp and paper) may enable it to pay higher buy prices in order to capture scarce feedstock during times of shortage (Solomon 2019). Offtake agreement that allow pass-throughs for increases in feedstock costs (e.g., Power Purchase Agreements (PPAs)) may create a non-level playing field in times of feedstock shortage. Suppliers should be contacted to inquire about the competitor’s ability to pay higher prices during times of shortage (Tudmand & Hvisdas 2018).

A credible third-party should be engaged to collect/validate information.

Guidance for Reporting Recommendation 4

It is important to gauge Proponent’s payment terms relative to competing markets. Faster payment terms can constitute a significant advantage where pricing is comparable.

Guidance for Reporting Recommendation 5

It is important to gauge competitors’ payment history, in particular instances over the past 3-5 years of non-payment due to insolvencies or restructuring.

Guidance Source

Baylies (2017, interview); Crummett (2017, interview); Lowitt (2013); O’Leary (2017, interview); Tudmand & Hvisdas (2018)

2.1.4 IMPACTS OF FUTURE DEMAND ON FEEDSTOCK AVAILABILITY AND PRICE

Rationale

Future competitors for feedstock, or expansion of feedstock demand by current competitors, can cause feedstock market disruption.

Even before new competitors become operational, high interest in a supply basin can make suppliers overconfident, leading to a supplier-controlled market where short-term contracting becomes the norm and supply chain reliability is compromised for the Proponent. Once operational, new competitors increase demand on feedstock, potentially lowering availability and increasing cost.

Existing competitors may seek to expand operations, increasing consumption of feedstock.

Reporting

Reporting Requirements

Proponent shall demonstrate understanding of:

  1. Forecasted new demand on feedstock availability and price; impact of any proposed competitors or ones currently under construction (including currently operating competitors that have indicated potential expansion)
  2. Non-forecasted but potential new demand on feedstock

Reporting Recommendations

  1. Proponent should demonstrate understanding of conditions in which a competitor is likely to expand operations and/or barriers to entry for new competitors for feedstock.
Guidance

Guidance for Reporting Requirement 1

Information about expansions or competitors currently under construction can often be found through press releases and local economic development agencies, or through third-party experts and existing suppliers. Information about proposed Proponents can be harder to find; however, online research, press releases and conversations with experts and suppliers can provide sufficient information for analysis.

Guidance for Reporting Recommendation 1

Modelling the impact of potential future expansion plans of competitors, and of market conditions that can result in competitors’ desire to expand (e.g., a surge in the housing market, increased demand for renewable natural gas (RNG), or a subsidy for green power) are important for correctly forecasting future feedstock availability and price.

Guidance Source

O’Leary (2017, interview)

2.1.5 SUPPLY INFLUENCE OF COMPETITOR

Rationale

In some cases, competitors may be able to exert high degrees of pressure over local suppliers, effectively enabling them to control feedstock, especially during times of shortage. This control can derive from long previous relationships between suppliers and competitors. It can also result from verbal or “understood” agreements, or a competitor being able to assist suppliers in times of surplus by maintaining large inventories which enable suppliers to continue supplying when other markets impose quotas. Understanding and planning around such soft risk factors is important. If such relationships exist in the Proponent’s procurement area, they may indicate increased risk of feedstock shortage or pricing changes.

Reporting

Reporting Requirements

Proponent shall demonstrate understanding of:

  1. The proportion of supply that the competitor can control
  2. Historical occurrences where a competitor exerted control over supply.
Guidance

Guidance for Reporting Requirement 1

Suppliers are the most reliable source of information for gauging whether the competitor can exert sufficient pressure on feedstock supply to control it.

Agricultural Residue and Energy Crop. Farmers may be incented into changing the type of feedstock grown if an alternative type is more profitable. Proponent should gauge the risk of forward cropping changes.

Guidance Source

2.1.6 TEMPORARY MARKET-DRIVEN MARKETS

Rationale

Alternative, non-traditional, market-driven competitors for feedstock can drive feedstock demand in unusual circumstances. A Proponent using corn stover as a feedstock, for example, would not typically compete with higher-end animal feed markets due to quality issues. However, in times of significant hay shortage (e.g., during drought), farmers use corn stover in place of hay, driving the price of feedstock and decreasing availability for bio-projects (Bergtold 2018).

Reporting

Reporting Requirements

  1. Any alternative, non-traditional and market-driven markets for feedstock shall be identified, and the likelihood and impact of these markets upon Proponent shall be assessed.
Guidance
Guidance Source

Bergtold (2018, interview)

2.2.1 RELATIVE INVENTORY CAPACITY

Rationale

The more inventory a biomass facility is able to store, the more competitively it can behave on the market. Ability to store large inventories allows biomass Proponents to purchase inventory when the prices are low, giving it an economic advantage. Additionally, the ability to store inventory during feedstock supply surpluses enables competitor to continue to intake feedstock when the Proponent (with lesser inventory capacity) may be forced to put suppliers on quota. Larger investor capacity thereby creates supplier loyalty and this can increase reliability and decrease risk.

Reporting

Reporting Requirements

For each key competitor, Proponent shall demonstrate understanding of:

  1. Quantities of feedstock inventory that can be stored by competitors
  2. Competitive advantage due to high inventory potential.
Guidance

Guidance for Reporting Requirement 1

The quantity of stored inventory depends not only on available space in the yard, but also on the tolerance for feedstock quality. For example, feedstock stored for long periods can lose some of its calorific value. An assessment of land currently used for storage, stacking equipment and pile height restrictions, multiplied by that period of time until degeneration can enable a high-level determination of a competitor’s feedstock inventory potential.

Guidance Source

Rainey (2017, interview)

2.2.2 RELATIVE ACCESSIBILITY/DELIVERY HOURS AND WAIT TIMES

Rationale

The value attributed by suppliers to local markets is often directly related to the degree of flexibility the market provides in terms of delivery hours, and the more efficiently discharge can occur.

Reporting

Reporting Requirements

For each key competitor, Proponent shall asses:

  1. Discharge hours
  2. Average and maximum wait times to discharge
  3. Potential accessibility issues.
Guidance

Guidance for Reporting Requirement 1

Suppliers are likely to favour end-markets that provide more logistical convenience.

Guidance for Reporting Requirement 2

For example, if competitor’s price and transport distance are similar but wait time to discharge averages 2 hours versus 30 minutes for the Proponent, this would be a significant competitive advantage for the Proponent which could function to materially decrease risk.

Guidance for Reporting Requirement 3

Accessibility issues include road access, quality of yard conditions (e.g., paved, gravel or dirt), traffic and seasonal weight restrictions.

Guidance Source

2.2.3 RELATIVE SPECIFICATION ADVANTAGES

Rationale

When choosing a market, suppliers not only look at price, but also at relative quality requirements or specifications. It is important to understand a competitor’s feedstock quality specifications in order to accurately quantify the risk that a competitor can exert on the Proponent’s supply chain.

Reporting

Reporting Requirements

  1. Proponent shall demonstrate understanding of the specifications for each category of competing feedstock relative to that of the Proponent, and shall assess the impact of any differences.
Guidance

Guidance for Reporting Requirement 1

For example, if a potential competitor has a tighter quality specification than the Proponent, then it may not be a strong competitor for feedstock. On the other hand, a looser specification (e.g., higher allowable fines, contamination levels, ash, or sizing) may provide a competitor with a significant competitive advantage.

Guidance Source

Cook (2018, interview); Marsollek (2018, interview); Rainey (2017, interview)

2.2.4 DEMAND FOR COMPETITORS’ PRODUCTS

Rationale

Increased demand for competitor’s product can cause an increased demand for feedstock by the competitor, given the competitor can increase its production capacity easily. For example, an increased demand for biofuels due to a clean fuels policy can cause increased biofuel production by the competitor, thereby increasing demand for feedstock.

Reporting

Reporting Requirements

  1. Proponent shall demonstrate understanding of the market for competitors’ products and its potential for increased demand.
Guidance
Guidance Source

Khanna et al. (2011); Parrish (2018, interview)