A set of economic and competitiveness criteria previously identified as the important criteria, are first adjusted based on the summarized suggestions in section 4.3.1.8, and are then considered in this case study. They are introduced in Table 4-7.
In economic perspective, three conventional economic criteria have been considered in this study including Internal Rate of Return (IRR) representing project profitability, Return on Capital Employed (ROCE) showing investment efficiency and Total Capital Investment Cost (TCI) representing capital intensiveness of the project. Moreover, four unconventional criteria are added to the list of decision criteria which include Downside Economic Performance (DEP) representing project robustness under poor market condition for products in order to address market risks, Short-term Business Viability (SBV) representing profitability of Phase I , Phase I Implementation Capability (PIC) representing capability of targeted biorefinery strategies to be implemented at the mill in order to address technology risks and Resistance to Supply Market Uncertainty (RTMU) representing project sensitivity to the market price of energy and chemicals as two main components of production cost in biorefinery context. These new criteria are more described as following.
Given the risk associated with volatility in the market price of bioproducts, a minimum level of economic viability of the project must be possible under poor market condition assuming that such condition would last for a finite time in the order of months. The reason is that investors should consider their ability to sustain cash flow for that finite period of time. In the current thesis, this concept has been introduced through DEP criterion in which poor market condition is defined as the lowest annual product portfolio value over the last five years, expressed on a monthly basis. This has been evaluated in monthly basis for some products and yearly basis for more emerging products considering the fact that monthly basis data are not publically available for the emerging products. It is assumed that this poor market condition would last for one third a year while for the rest of the year market would be at its normal condition. This criterion is measured in terms of the averaged margin created in a year, considering both poor and normal market condition former lasting for one third and latter for two third of a year.
Taking into account the risk associated with emerging biorefinery strategies, profitability of Phase I as the short term strategy is a pre-requisite for investment in biorefinery. However a reduced short-term profitability would be acceptable relative to the strategic objectives. This has been addressed by SBV criterion which is defined as the profitability of Phase I when it will be proceed till the end of production length, representing the worst case scenario in which switching into Phase II can not be pursued.
Another new criterion which is defined in this thesis is PIC addressing the capability of each technology to be implemented at the full scale to be first to the market given the risk associated with project execution. PIC criterion is defined as a combination of three sub-components including (1) the level of technology maturity (in terms of largest operating plant), (2) process scalability (in terms of how much the targeted scale of Phase I is far from the designed scale of the candidate technology), and (3) the ability of implementing Phase 1 (in terms of possibility of implementation over 24 months). In order to aggregate these three sub-components, arbitrarily a weighting factor WT has been attributed to each as of 50% for technology maturity because it is a show stopper, and 25% to each of the second and the third sub-components. This criterion has been quantified by attributing three possible numbers to each sub-component representing different levels of their performance. These numbers are 1, 3 and 5 that are respectively showing low, medium and high performance AT . For instance, for the first sub-component which is about technology maturity, if the candidate technology has been commercialized, it can get 5, if it is at demonstration scale it gets 3 and if there is only a pilot plant for that technology, it can not get more than 1. Applying this scoring approach and taking into account the attributed weights, one score PIC according to the following equation is obtained for each candidate technology as the value of PIC criterion.
PIC WT
U
T
. AT (4-2)
In addition to these criteria, the RTMU criterion was also taken into account which addresses project sensitivity to raw material and energy cost fluctuations.
Competitiveness Criteria
In addition to economic performance, competitiveness of the candidate biorefinery strategies were evaluated through three criteria including Competitive Access to Biomass (CAB), Competitiveness on Production Costs (CPC) and Quality Revenue (QR) as the identified important competitiveness criteria. The CAB criterion defined by Diffo et al. (Diffo, Chambost et al. 201X) represents the potential to secure access to low-cost biomass over the long-term.
The CPC criterion represents the potential to compete on market prices against the existing producers(Diffo, Chambost et al. 201X), defined in this study as a maximum amount of discount that can be applied on the minimum existing product sales price in last five years, resulting in minimum possible margin created by the product portfolio.
The QR criterion shows the benefits on margin creation and revenue stabilization associated with added value products in a diversified product portfolio. This criterion is defined as a proportion of total revenue that belongs to the added value products.
Table 4-7 Economic and competitiveness criteria
Criteria Interpretation (result of conducted MCDM I) Metric
IRR:
Internal Rate of Return
IRR measures overall project profitability under normal market conditions. It should preferably be greater than a minimum target value for long-term investments and further increased relative to the riskiness of the option -Higher IRR is preferred as this represents a higher profitability.
NPV 1 / IRRCF. . 0 11 . 2 DEP: Downside Economic Performance
DEP measures the financial performance of the biorefinery strategy during poor market conditions. Higher DEP is preferred as a measure of project robustness, ie that the project can survive even under unfavourable market conditions.
DEP
V4 X Y EBITRevenueZ@PGGF COF]E./ 8 X Y EBITRevenueZ@NGFCO_ COF]E.
12 a X 100 ROCE: Return On Capital Employed
ROCE measures the cash generated relative to the invested capital for a biorefinery strategy and is widely used as a measure by the investment community. It expresses the efficiency of the investment measured by how much the biorefinery strategy generates cash flow from investments. Higher ROCE is preferred because it indicates better return on invested capital.
ROCE EBITTCI RTMU:
Resistance to Supply Market Uncertainty
This criterion measures sensitivity of the biorefinery margin to the cost of energy and chemicals. More robust biorefinery strategies are less sensitive to changes in energy and chemicals price and are less affected by these external sources of uncertainty.
EBIT
Cost of Chemiclas / Cost of ENergy TCI:
Total Capital Investment Costs
TCI is the amount of capital that must be raised in order to execute the project. There is a larger challenge to assemble
larger capital amounts. TCI FCI / WCI
SBV: Short term Business Viability
SBV measures project profitability as IRR in the short-term under normal market conditions which supports longer term corporate transformation. Larger SBV values is preferred representing greater margin in short term which accordingly supports Phase II implementation.
NPV 1 / SBVCF. . 0 11 . 2 PIC: Phase I Implementation Capability
PIC is an aggregated measure of technology risk that considers technology maturity (pilot demonstration etc), scale-up requirement to commercial scale, and ability to execute the Phase I technology in 24 months. Higher value of PIC is preferred because it represents lower technology risk in Phase I, and represents an opportunity to be faster to the market in Phase II.
PIC 0.5 X Maturity score / 0.25 X Scalability score / 0.25 X Imlementation capability score CAB:
Competitive Access to Biomass
CAB represents the ability to guarantee supply of biomass in competitive environment. The margin on biomass is a fundamental competitive factor related to securing feedstock over the longer-term, since it is a measure of capacity to pay more to retain cutting rights and to be competitive against other proponents seeking to use the same type of biomass.
EBITDA per ton of biomass
CPC:
Competitiveness on Production Costs
CPC shows how competitive the biorefinery product portfolio production costs are relative to market prices (and thus pre-existing producers), and is an indication of the project to penetrate existing markets and achieve market share in the short term, to guaranty market position in the longer term. A higher value of CPC is preferred as it shows that products can be manufactured below market prices, and thus the investor can better negotiate take-off agreements to penetrate the market and gain market share.
CPC
100% RevenueProduction Costs
@PGGF COF]E. LG K . G X 100
QR:
Quality Revenue
QR measures the ability of biorefinery strategy to maintain strong margins due to added value products in the product portfolio. The greater the value of QR as a percentage of total revenue, the stronger the biorefinery strategy.
Revenue from value added products Total revenue
Economic and competitiveness criteria evaluation
The values of these criteria for four candidate technologies have can be found in Appendix D. These criteria are completely conflicting and thus making decision using them in order to identify the promising alternatives in terms of economic and competitiveness performance is not easy. For instance some criteria such as IRR, ROCE, CPC, DEP and RTMU shows that Alt.1 is one of least promising options while based on PIC, TCI, SBV and QR criteria, this alternative is the most preferred investment option. Therefore aggregation of these criteria is crucial enabling decision makers to rank the alternatives considering all the defined criteria simultaneously. In order to meet this objective, a relative importance for each criterion has been evaluated by conducting an MCDM panel (MCDM I).
The multi-disciplinary panel for the MCDM involved six panelists from both industry and academia with various backgrounds, including biorefinery, energy, economics, market, and environmental expertise. This could ensure that expertise in the critical dimensions that should be considered in any strategic decision-making has been captured.
In this MCDM, not surprisingly IRR criterion was selected as the most important criterion, with an average target value of 30%. Using the trade-off method, weighting factor for each criterion in this category was quantified. The obtained weights can be found in Figure 4-18.
As can be seen in this figure, the first-ranked criteria in the context of this study are Internal Rate of Return (IRR), Competitiveness on Production Costs (CPC), Phase I Implementation Capability (PIC), Downside Economic Performance (DEP) and Return on Capital Employed (ROCE). Moreover the two least important criteria in this category are Quality Revenue (QR) and Total Capital Investment Cost (TCI). The low importance of QR criterion can be explained by this fact that although the concept of this criterion is really important, in the context of the results since all the alternatives show a good performance, this criterion could not help the panelists to well differentiate the alternatives. In addition, the low importance attributed to TCI is because according to panelists’ opinion, investment efficiency (ROCE) is important not necessarily the amount of money that investors should put on the table for investing in a project (TCI).
The lowest level of consensus among the panelists occ
disagreement among them about the metric by which this criterion has been measured. The SBV was calculated as the project profitability for the case that there would not be a chance to switch into Phase II, meaning that Phase I would continue working for a whole production length. However panelists believe that this metric can not well represent the short term profitability due to the assumed production length for Phase I which is beyond their definition for short term vision.
Figure 4-18 Weighting factor of economic and competitiveness criteria
Applying the obtained weighting factors and utility values of the criteria, economic and competitiveness score was calculated for each design alternative
These scores indicate that the least promising alternatives in terms of economic competitiveness performance are lignin precipitation (Alt.1) and concentrated acid hydrolysis (Alt.4). The main reason that Alt.1 does not show a promising performanc
the common mills in Canada, the bottleneck at the studied mill is not its recovery boiler and therefore extracting lignin from black liquor would not lead to increase the pulp production
18.0 14.4 0 2 4 6 8 10 12 14 16 18 20 E co no m ic a nd C om pe ti ti ve ne ss C ri te ri a We ig ht in g F ac to r (%)
The lowest level of consensus among the panelists occurred for the SBV criterion due to disagreement among them about the metric by which this criterion has been measured. The SBV was calculated as the project profitability for the case that there would not be a chance to switch hase I would continue working for a whole production length. However panelists believe that this metric can not well represent the short term profitability due to the assumed production length for Phase I which is beyond their definition for short term
Weighting factor of economic and competitiveness criteria
Applying the obtained weighting factors and utility values of the criteria, economic and competitiveness score was calculated for each design alternative that is shown in Figure 4 These scores indicate that the least promising alternatives in terms of economic
are lignin precipitation (Alt.1) and concentrated acid hydrolysis (Alt.4). The main reason that Alt.1 does not show a promising performance is that, in opposite of the common mills in Canada, the bottleneck at the studied mill is not its recovery boiler and therefore extracting lignin from black liquor would not lead to increase the pulp production
13.3 11.0
9.9
7.9 7.7 7.7
6.0
urred for the SBV criterion due to disagreement among them about the metric by which this criterion has been measured. The SBV was calculated as the project profitability for the case that there would not be a chance to switch hase I would continue working for a whole production length. However panelists believe that this metric can not well represent the short term profitability due to the assumed production length for Phase I which is beyond their definition for short term
Weighting factor of economic and competitiveness criteria
Applying the obtained weighting factors and utility values of the criteria, economic and shown in Figure 4-19. These scores indicate that the least promising alternatives in terms of economic and are lignin precipitation (Alt.1) and concentrated acid hydrolysis e is that, in opposite of the common mills in Canada, the bottleneck at the studied mill is not its recovery boiler and therefore extracting lignin from black liquor would not lead to increase the pulp production
capacity. The main reasons of non promising economic performance of Alt.4 are mainly due to its high operating cost as a result of considerable usage of chemicals and also its capital intensiveness.
On the other hand, the scores show that the organosolv treatment (Alt.2) and the fast pyrolysis (Alt.3) are the most preferred technologies in the context of the studied mill in terms of economic and competitiveness performance. For Alt.2 this success is mainly due to the scores coming from CPC, DEP and ROCE criteria. The high values of CPC and DEP criteria in this alternative is because even low end market condition can not dramatically influence their margin due to the high value as revenue to production cost ratio. In Alt.2 and Alt.3 the annual revenue considering poor market condition for one third of the year would be respectively 88% and 32% more than the production costs. Whereas Alt.1 and Alt.4 in which their revenue at the same condition is respectively 3% and 1% less than the production costs. In addition, although the Alt.2 is a capital intensive option, the investment efficiently represented by ROCE is considerably high due to the margin created because of high revenue coming from lignin stream targeted for PAN replacement in carbon fiber production.
Figure 4-19 Economic and competitiveness score of biorefinery alternatives
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 E co no m ic a nd C om pe ti ti ve ne ss S co re
Quality Revenue (QR) Short term Business Viability (SBV) Competitive Access to Biomass (CAB) Return on Sypply Mrket Uncertainty (RTMU) Total Capital Investment Cost (TCI) PhaseI Implementation Capability (PIC) Dwonside Economic Performance (DEP) Competitiveness on Production Costs (CPC) Return on Capital Employed (ROCE) Internal Rate of Return (IRR)