Phase 1: Development of the BSCR Standards

The BSCR Standards are the result of more than 3 years of input from an Industry Stakeholder Group of over 150 leading bioeconomy financial institutions, capital providers, operators, developers, feedstock producers, industry organizations and academics. Development work has been generously funded in the US by the US Department of Energy’s Bioenergy Technologies Office (BETO), and in Canada by Natural Resources Canada (NRCan) and Ecostrat. Accreditation as a National Standard of Canada (NSC) is currently in process by the Canadian Standards Association (CSA), and ANSI accreditation in the US is proposed for FY2020/21.

 

Standard development has been led in the US by Ecostrat and Idaho National Labs (www.inl.gov) and in Canada by Ecostrat (www.ecostrat.com). The Standards are organized into six Risk Categories that fully encompass biomass feedstock supply chain risk. Each Risk Category identifies specific Risk Factors and Risk Indicators, and establishes Guidance that directs  users to best-in-kind methods and tools to measure and mitigate feedstock risks.

 

The Standards are a response to the fact that investor capacity to assess biomass supply chain risk is limited, particularly in the fast-paced capital finance markets. By giving capital markets, credit agencies, commercial lenders and insurance companies a common validated approach to pricing feedstock risk, the BSCR Standards create efficiencies that accelerate bio-project development and increase the pool of capital available to the bioeconomy.

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Phase 2: A Risk Rating System Designed for Biomass

Activating the mainstream capital markets to finance biomass-based projects and assets is critical to accelerating the bioeconomy, and a robust credible system for rating biomass feedstock risk is a key requirement for that mainstream participation. Development of Biomass Risk Rating mechanisms based upon the BSCR Standards is the next important step in accelerating needed capital flow to the bioeconomy. Just as credit ratings help financial markets better understand credit risk and are essential to the efficient flow of trillions of dollars of capital through the economy, a Biomass Risk Ratings Framework based on the BSCR Standards will simplify analyses of feedstock risk for investor markets and drive capital into the sector.

Risk rating is a proven solution to risk quantification problems in the global credit markets. The importance of S&P, Moody’s and Fitch to the flow of trillions of dollars of capital from the financial markets is clear: application of a transparent, rules-based, standardized risk evaluation approach creates major efficiencies for the capital markets. The lack of a similar tool to easily signal complex feedstock risk to investors is a key barrier to investment in the biomass sector.

 

Biomass Ratings based upon the Standards will enable third parties to deliver quantitative risk evaluations that simplify biomass feedstock risk for the capital markets. Ratings (AA, A-, BB, etc.) enable the capital markets to incorporate key pathways of biomass feedstock risk in the project financing structure. The Ratings Review Committee comprised of 40+ industry leaders from the capital markets with over $50 B collectively of sector-designated capital will provide valuable input to “ground truth” draft iterations of the ratings mechanisms and protocols. Robust capital market feedback will ensure that Biomass Risk Ratings are a valuable tool for signaling feedstock risk to the capital markets. Phase 2 is planned for FY20.

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THE BENEFITS OF INTEGRATING STANDARDS INTO INVESTOR DECISION-MAKING

 

The BSCR Standards support key participants in the bioeconomy to better achieve their goals.

Here’s How:

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Capital Markets

  • Help manage risk and prevent exposure.
  • Enable capital to properly structure around feedstock risk.
  • Faster and more accurate investment decision-making.

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Governments

  • Drive needed capital into biomass-based projects. Accelerate the rate of biomass project development.
  • Prevent project failure and subsequent dampening effects on future investment in the sector.
  • Enable government to accurately calibrate suitable levels of support.

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Developers

  • Enable access to a wider pool of less expensive capital.
  • Gain clarity on feedstock risk and mitigation insights.
  • Decrease likelihood of project failure due to feedstock risk.
  • Creates more resilient projects.

TIMELINE

A systematic, standardized framework for assessing biomass supply chains

Timeline
                   
September 2016

The US Department of Energy’s (USDOE) Bioenergy Technologies Office (BETO) funds Idaho National Laboratories (inl.gov) and Ecostrat to carry out development of Standards for Biomass Supply Chain Risk: a systematic, standardized method for assessing supply chain risk for the elimination of needless economic “drag” of inflated project capital costs on biomass projects. The objective is to facilitate better capital market understanding and pricing of the risks inherent in biomass supply chains to improve the flow of capital to projects seeking funding and accelerate the rate of bioenergy project development.

Timeline
                   
December 2016

Advisory Board formed.  50-member Industry Stakeholder Group of project operators, feedstock suppliers, rating bodies, investment community representatives and academics. 6 Biomass Categories proposed; Evaluative Framework Risk Categories developed. Consultation period with Industry Stakeholder Group begins.

Timeline
                   
July 2017

Initial review of published academic literature on supply chain risk complete. Engagement period begins with Industry Stakeholder Group to solicit feedback on feedstock Risk Categories, Risk Factors and Risk Indicators.

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September 2017

BETO extends development funding for BSCR Standards for second year

Timeline
                   
February 2018

Industry Stakeholder increased to 100 members. Further refinement of Risk Factors and Indicators from Advisory, Industry Stakeholder Group and other industry parties. 23 Risk Factors and 128 Risk Indicators form the basis of the BSCR Standards.

Timeline
                   
September 2018

BETO extends development funding BSCR Standards for third year

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November 2018

Extensive engagement period with Industry Stakeholder to develop Standards Guidance. BSCR Standards Draft Framework published and available for public comment on INL website.

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December 2018

Natural Resources Canada / Canadian Forest Service supports development of Canadian version of BSCR Standards by Ecostrat. FPInnovations and National Lab CanmetENERGY contribute Guidance information and risk data.

Timeline
                   
March - June 2019

Canadian Stakeholder Group of 50 companies formed and integrated with US Stakeholder Group of 100.

Timeline
                   
July 2019

Biomass Supply Chain Risk Ratings Review Committee formed of 40 leaders from capital markets including Citibank, Goldman Sachs, BNP Paribas, Scotiabank, RaboBank, Manulife, Munich Re, Shell, Total and the Toronto Stock Exchange (TSX). Total value of deployable capital to the bio-sector by members of the Risk Ratings Review Committee is >$50B.

Timeline
                   
August - September 2019

Application of BSCR Standards to first test case of wood to electricity plant in Southeast US shows positive results: over 41% of Risk Factors and 34% of the Risk Indicators in the Standards were not addressed by previous reports. Overall project risk as perceived by capital markets was shown to decrease by 29% after application of the BSCR Standards.

Timeline
                   
October 2019

Standards Council of Canada, a crown corporation and member body to ISO and IEC, funds accreditation of the BSCR Standards as a National Standard of Canada (NSC). Ecostrat engages Canadian Standards Association (CSA) for accreditation. ANSI accreditation in the US is proposed for FY20/21.

FREQUENTLY ASKED QUESTIONS

Investor capacity to assess biomass supply chain risk is limited, particularly in the fast-paced capital finance markets. Until now, there have been no established protocols, standards or recognized industry best practices that developers, investors, commercial lenders, insurance companies and rating agencies can utilize and rely upon to empirically demonstrate biomass supply chain risk. This has been a key challenge to the rate of growth of the bio-industry.

The lack of a standardized and recognized approach to feedstock risk means that the debt and capital markets are independently using inconsistent approaches and evaluation criteria, leading to unreliable assessments of bio-project risks. Put simply, they are confused about the quanta of risk. This results in significant project financing barriers for bio-projects and in millions of dollars of “financial-drag” on the projects that are eventually built.

US and Canadian governments have recognized that biomass supply chain risk, and the difficulty capital markets currently have  quantifying it, is a major challenge to increasing the rate of growth of the bioeconomy. In 2016 the US DOE BETO funded a four-year program for Idaho National Laboratory and Ecostrat to carry out the development of US Standards for Biomass Supply Chain Risk. In 2018 NRCan supported development of similar Standards for Biomass Supply Chain Risk for Canada. Both versions of the BSCR Standards are now complete

Currently, the Standards Council of Canada (SCC) is currently working with Ecostrat to accredit the BSCR Standards as a National Standard of Canada. ANSI accreditation in the US is planned to begin in FY20 /21.

Ongoing support from the capital markets has been notable. A Biomass Supply Chain Risk Ratings Review Committee has been formed of 40+ leaders from capital markets including Citibank, Goldman Sachs, BNP Paribas, Scotiabank, RaboBank, Manulife, Munich Re, Shell, Total and the Toronto Stock Exchange (TSX). Total value of deployable capital to the bio-sector by members of the Risk Ratings Review Committee is >$50B.

Application of BSCR Standards to first test case of wood to electricity plant in Southeast US shows positive results: over 41% of Risk Factors and 34% of the Risk Indicators in the Standards were not addressed by previous reports. Overall project risk as perceived by capital markets was shown to decrease by 29% after application of the BSCR Standards.

Activating the mainstream capital markets to finance and refinance clean fuel projects and assets is critical to delivering on government bioeconomy priorities, and a robust credible system for rating biomass feedstock risk is a key requirement for that mainstream participation.

Leveraging initial investment into the Biomass Supply Chain Risk Standards by developing a Risk Rating Framework and scoring protocols is the essential next step in enabling the investment required for rapid growth of the bioeconomy. While BSCR Standards are necessary to achieve the goal of accelerating capital flow to bioeconomy projects, by themselves they are not sufficient. That is, the BSCR Standards are necessary infrastructure for efficiently gathering data pertaining to all pathways of biomass feedstock risk, but they are not sufficient to efficiently signal that risk to the capital markets.

If Standards are the bow, Risk Ratings are the arrow. In order for the capital markets to make quick, efficient and effective decisions about biomass project risk, an additional mechanism is required to efficiently translate the collection of granular risk data, modelling outputs, analytical results and feedback enabled by the BSCR Standards, into clear signals that the capital markets can utilize— that mechanism is an alphanumeric scoring and risk ratings framework (AA, A, BB, B-, etc.). Without development of a signaling mechanism to translate project risks exposed by the BSCR Standards into the language of the capital markets, the potential benefits of the BSCR Standards to drive capital flow to bio-projects will be greatly reduced.

Biomass Risk Ratings Framework based on the BSCR Standards will enable independent third-party evaluators to carry out quantitative assessments of feedstock risk of project supply chains. The Rating Framework will consist of open ratings criteria, tools, transparent scoring protocols and standardized alphanumeric risk ratings (e.g., AA, A, BB, etc.). It will combine the information from multiple Risk Indicators into a score for each Risk Factor. These scores will then translate into single probabilistic expressions of risk and rank for each Risk Category.

The Biomass Ratings will provide the capital markets with a set of  tools needed to drive investment at the scale required for delivery of government bioeconomy policy. It will do so by enabling investors and capital markets to efficiently quantify biomass feedstock risk, accurately price that risk, and prioritize investments with minimum feedstock risk.

A similar standards-based ratings system has been in use for decades to facilitate trillions of dollars of capital flow each year: credit ratings systems have been vital in driving capital into various industries for the last 30 years. The powerful benefit that credit ratings systems provide to capital flow is clearly illustrated by the number of ratings issued in the credit market– in 2011, nearly 3 million ratings were issued by the S&P, Moody’s and Fitch Rating Agencies worldwide, with Fitch alone issuing ratings valued at $9.5 trillion.

Credit ratings are vital to trillions of dollars of capital flow because they function as efficient signals of risk that the capital markets trust to understand counterparty risk.

Just as credit ratings help financial markets better understand risk for existing projects, the BSCR Risk Ratings Framework will simplify analysis of biomass feedstock risk for the capital markets. The fact that the bioeconomy does not currently have a ratings system to provide such capital market signals is a significant barrier to bio-project financing. This barrier manifests in slow capital flow to the sector and high project capital costs estimated to be up to 250 basis points higher than necessary.

Initial investment can be facilitated by market pull created by policy mandates — but subsequent investment will be based on “success history” of initial projects. If initial projects fail, investors may decide to curtail similar investments going forward due to market uncertainty. Plant failures due to feedstock risk therefore represents a significant risk to bioeconomy development.

The dampening effect of project failure on future investment is well documented; early project failure has a knock-on effect on subsequent sector investment. Once projects fail, subsequent measures to mitigate risks are less effective in changing preconceived notions of sector risk in the eyes of the capital markets.

It is a fact that 2nd generation biofuel plants often utilize feedstocks with supply chains that are not mature (e.g., corn stover or forest residues), and even when they are mature (such as pulpwood), the long-term feedstock risks are often not adequately understood by the capital markets. By efficiently signally the presence of feedstock risk to the capital markets, this initiative enables effective mitigation of risk by the developer, operator or capital markets before it manifests in plant failure which can undermine investment in subsequent biomass projects.

Equally as important, project failure due to improper or inadequate assessment of feedstock risk represents a significant threat to bioeconomy development. Failure of even one single new bio-based facility would create market dynamics that could impede future project financing. It is therefore essential to prevent feedstock failures before they occur and undermine the ability of future projects to secure capital. Biomass Risk Ratings help prevent project failure by helping capital markets structure project financing in a way that ensures actual biomass feedstock risk is accurately quantified and considered.