Solving biomass supply risk through contracting strategy and market structure

The cost to produce cellulosic biofuel could decline by 15% by introducing a system design to optimize trade-offs in the value chain.

Research indicates that the cost to use agriculture residue as biomass for cellulosic biofuel production or power generation, could decline as much as 15% from the simple introduction of a new system design that optimizes the trade-offs in the value chain.

Many countries rely on wood for indigenous energy supply while industrialized countries are incentivizing a policy framework to promote biomass-to-bioenergy through the use of dedicated energy crops and agriculture residue. Studies have suggested that converting biomass into bioenergy could supply one-quarter of world's energy needs without causing damage to ecosystem, while also reducing the pollution from open burning of agriculture residue in the field.

Despite the numerous economic, social and environmental benefits of converting biomass to bioenergy, the industry has been slow to develop, in part due to lack of development in the supply chain. Inconsistencies in biomass supply are a bottleneck to investments, as there are no cost-effective solutions for long-term biomass storage and transport.

A completely free market is too risky and exposes both biorefineries (producers) and farmers (suppliers) to significant price volatility, conclude researchers Rajdeep Golecha and Jianbang Gan. Using unconventional techniques such as Game Theory and Modern Portfolio Theory, their study suggests that long-term contracts between biorefineries and farmers using a "Derisked" supply market structure (where a buffer supply region is retained to mitigate supply shocks) allows the evaluation of trade-offs between the price of biomass, cost of alternative feedstock, cost of transport, and supply risk, which can reduce overall cost of biomass by 10% to 15%.

Using feedstock diversification by mixing corn stover, wheat and switchgrass in the right proportion, can reduce biomass supply risk by as much as 40% in the US Corn Belt, adds Golecha. While advancements in pre-treatment and storage are needed to solve seasonal variations, the proposed strategies are providing a template to the industry to solve long-term biomass supply risks.

The study has just been published in Renewable & Sustainable Energy Reviews (‘Effects of corn stover year-to-year supply variability & market structure on biomass utilization & cost') and in BioFPR (‘Optimal contracting structure between cellulosic biorefineries & farmers to reduce the impact of biomass supply variation: game theoretic analysis').

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