20.07.2024
A few months ago, another company in another sector of the world economy went bankrupt. Or rather, in the USA. Or rather, in the renewable fuel production market. And even more precisely, Enviva. The company filed for bankruptcy and protection from creditors just two years after its capitalization was at its peak of $6 billion. It would seem that such an event is not something unusual in the modern world. Any business is a risk and a lottery. Companies are born and die. Or they are born, grow and die. Or they are born, grow and grow. In this whole story with Enviva, what is interesting to me personally is that such a company was able to achieve huge indicators for a market that a priori cannot have large producers. The declared current volume of Enviva pellet production is 5 million tons. Even coal companies can envy such a volume. And this is wood pellets. Even if we take into account that such a volume of production is provided by ten pellet plants, then still the volume of production of 500 thousand tons for one plant is a lot, because everything related to biomass has features that are different from the production of other types of raw materials or goods.
For example, you can invest a lot of money in the construction of a coal mine. With large reserves of this resource, you can immediately build a large mine shaft and extract 5-10 million tons of coal per year. Even in deep Ukrainian or Polish mines, you can make a good profit. And the mine next door, which extracts 100-200 thousand tons of coal per year, will barely make ends meet, or even completely sit on the neck of taxpayers. You can build a thermal power plant with 800 MW of electrical capacity and provide electricity to a small country. And small power plants of 20-50 MW will be forced to close, unable to withstand price competition. In each of these examples, the law of economics, called the “economy of scale”, works. That is, with an increase in production capacity, the cost of production and the specific cost of investment per unit of capacity decrease. And this directly affects the company’s profit and return on investment. And this applies to any production. Almost all companies tend to consolidate and build new powerful factories or mines. And this law works so well that it becomes profitable to build large enterprises in one part of the globe and transport products to other continents.
However, biomass has its own characteristics. It is not concentrated in large quantities on a small area or in a small volume. There are no biomass deposits. This is a resource that takes time to recover. For miscanthus or wheat straw, it is a calendar year, and for wood, it is 50-100 years. In addition, biomass has a low yield per unit area, and in the harvested form it has a low bulk density. To extract brown coal in a quarry with reserves of hundreds of millions of tons, you can install a walking excavator with an hourly productivity of several thousand tons of ordinary raw materials. This coal will be fed by conveyors to a very powerful coal-fired thermal power plant. And this process will take place in rain and snow, in winter and summer. At the same time, the cost of coal extraction will be lower than that of a competitor with lower productivity. And you cannot build the largest combine for biomass. And year-round harvesting is possible only for wood, and even then in good weather.
Why doesn’t the effect of scale work with biomass? Why do all attempts to create large-scale production, for example, paper from straw, run into hidden problems? Why can’t you name a single successful commercial project with large-scale use of biomass?
Firstly, the low bulk density of biomass affects the high cost of its transportation. And the cost of transportation at a certain point becomes higher than the economies of scale when expanding production. That is, you can build a pellet plant and supply it with your own straw, which will be formed during the grain harvest. But the greater the capacity of the plant, the greater the area of fields that straw will need to be transported from. With a certain capacity of the plant, the delivery radius will be so large that you will understand that you need not to increase the capacity of the plant, but to build the same one in the center of straw collection several hundred kilometers from the first one. This is very reminiscent of organizing honey collection in an apiary. You cannot create a super-large apiary in one place with a honey production of 100 tons per year. Because bees from one place can only fly around the fields within a radius of 3-5 km.
Secondly, the biomass market in developed countries is usually balanced. Wood processors, if they do not use wood processing waste themselves, sell it to various buyers. And all the straw in the EU is collected, dumped and used for their own needs until the next harvest or sold to small consumers. The emergence of a large buyer of biomass causes a sharp demand for it, since it is impossible to compensate for the increase in demand in the region by importing biomass from a neighboring region for the reason described above. The market reaction in this region is always is the increase in prices for such biomass, as a result of which those who cannot pay the higher price refuse it. And a new player who entered the local biomass market is forced to adjust the financial indicators of a highly profitable project yesterday.
Thirdly, there are two ways to obtain biomass. The first is to purposefully grow, for example, miscanthus for its straw. Then all the costs of growing and harvesting it fall on the finished product. The second is to grow cereals, the cost of which compensates for the costs of their sowing and harvesting, in particular the straw formed. In the second case, biomass is a by-product with a conditionally free value. The same applies to wood, wood chips and sawdust. You can purposefully harvest wood, processing it into pellets, and also purchase chips and sawdust from third-party companies for further processing. But if you are the owner of a woodworking enterprise, where the cost of lumber covers all your expenses, and sawdust is a conditionally free by-product, then the natural development of a lumber production business is to create a wood pellet line. Having conditionally free raw materials and the absence of costs for its transportation, you become practically unattainable for competitors. In this case, the margin of your pellets will tend to 100%. This may seem incredible, but:
Why do I consider Enviva’s business model unviable? Let’s now walk through the chain of the entire technological process of this company.
So, we have $110 per ton of pellets in the plant’s warehouse. And as you can see, the big difference in costs for different pellet production business models is the cost of purchased raw materials (which are also the fuel for drying it) and its transportation. The “monster” created by Enviva managers has low margins and is uncompetitive compared to smaller manufacturers built at wood processing companies.
How did Enviva’s management manage to “inflate the stock market bubble”? After all, they were able to do it in a country where the wholesale price of gas for industrial consumers is $130 per 1,000 cubic meters. meters. Despite the fact that the amount of heat released from 1000 cubic meters of natural gas is 1.7 times greater than from a ton of wood pellets. Enviva, of course, understood this. Therefore, the company was initially aimed at the European market. The EU leadership consistently forced European companies to switch to renewable energy sources. And the Russian leadership did everything to ensure that natural gas prices in Europe increased. And this created favorable conditions for Enviva to increase profits, which allowed it to pump the company with borrowed funds, constantly increasing its capital.
ization and expanding production capacity. Ships with pellets increased traffic across the Atlantic Ocean. At a certain point, which was a full-scale war between Russia and Ukraine, energy prices in the EU and the world, as well as the value of Enviva shares, soared to unprecedented heights. But the companies and leaders of the EU countries could not tolerate this situation for long. Having opened access to their territory for liquefied gas, they very soon achieved natural gas prices even lower than before Russia’s full-scale aggression against Ukraine. The fall in natural gas prices caused a decrease in prices for other types of fuel: coal and wood pellets. Enviva’s profit was not enough to service its loans, and it declared itself bankrupt.
The example of Enviva shows typical mistakes when building biomass-based industries. Anyone who announces plans to build a cardboard and paper mill that will use wheat straw, miscanthus or industrial hemp is someone who has never worked with biomass. Owners of pellet production plants from purchased raw materials are likely to go bankrupt during another drop in fuel prices. Biomass requires more careful development of business plans than when using other types of raw materials. But despite the problems of use in production, biomass will still take its place in the decarbonization of the global economy. Many small effective projects will help provide people with a renewable resource, just as millions of beekeepers around the world provide 8 billion people on the planet with sweet treats for their tables.
