A Strategy for Supply
Somewhere in Northern Minnesota, timber residue slash piles litter the grounds at a logging operation. Russ Anderson, president of Advanced Biomass Solutions knows about it. Across the border, hundreds of miles away on the Canadian prairie, a mound of oat hulls is accumulating at a crushing mill. Anderson knows about that, too. As part of the Advanced Biomass Solutions team based in Greenbush, Minn., his job is all about finding biomass (woody, crop residue, even ground-up railroad ties) and finding the end-user who wants to buy it.
A self-proclaimed farm boy who “knows how to get stuff done,” Anderson’s official title in the world of biomass would be more along the lines of biomass procurement and supply officer mixed in with logistics manager and contract negotiations specialist. With the help of his brother Reed and a few others, Anderson has made the small northwestern Minnesota town a profit center off of one-time and short-term biomass supply contracts combined with some impressive long-term deals, serving both the animal ingredient markets and the competitive, growing biomass-infused power generation markets.
After a few years in the biomass supply game, the team has unique perspectives on the 50-mile radius rule, the key to forming new supply agreements, and, whether the practice of biomass cofiring for power production will create a positive financial atmosphere for the industry and for Advanced Biomass Solutions at a time when natural gas prices are tough to beat. (Here’s a hint: the small company is already hiring).
Mode of Operation
Russ may be a farm boy at heart, but he works a desk job. Each day he calls elevators, mills, logging operations and other facilities, looking for movable biomass. After dabbling in the cattle business, the small-time manufacturing business and even the wheat screening business, he’s found what it takes to survive with biomass. Reed, Mark Melby, Rod Thompson and Russ have created a supply network consisting of nine trucks, 15 trailers, seven staff drivers and an always expanding rolodex of industry contacts. “My day consists of sitting on the phone and finding loads,” he says. “Some are long-term, others are day-to-day loads.”
Ask anyone on the team about their immediate success with biomass and they will point out their ability to enter into short-term, sometimes one-load contracts. Because the team has operated nearly debt-free and lean from day one, has purchased used trucks and even started hauling with rented trailers, Russ explains that the team can afford to enter into short-term deals because the obligation to pay down truck debt (they don’t drive brand-new Kenworths according to Russ) or other lingering operating expenses just doesn’t exist. “We have a processing plant out in Western North Dakota,” he cites as an example of their sporadic load schedules. “It can be up to 8 loads per day. They give us about a day’s notice and we just have to be there. Does every load make us money? No it doesn’t,” he adds, “it is more about the service and the long haul.”
It’s the long-haul vision for the team that has made providing biomass to power production facilities a goal and in some cases a reality for the company. “We are delivering to power plants now on a consistent basis,” says Reed Anderson, CEO. The team’s ability to do so offers a glimpse into how others like the Andersons, people trying to build a business in the supply market, can do the same, and why there might also be the financial opportunity to do so in the future.
The first thing to know about supplying biomass to a cofiring facility is that the industry is competitive and secretive. “It is such a secretive business,” Russ says, regarding the source of a biomass load and where that load eventually ends up.
“It is competitive enough that if I tell you that we are bringing biomass into location A, people will know where we are getting it,” Reed says. Other companies in the biomass cofiring market throughout the same region also share the sentiment of the Andersons.
Courtney Boone, public affairs specialist for U.S. Steel, a steel production company that is cofiring biomass at two different taconite mine and steel production facilities in Minnesota, can attest. The use of woody biomass fuel to power either facility can make or break the company’s bottom line, Boone says, so the subject of biomass, although important, is tough, due to the company’s stake in the use of the renewable fuel.
The team from Greenbush has been in contract negotiations for a long-term supply agreement with a regional power production facility for over a year, Reed says (and of course, he won’t tell you which facility). Those negotiations prove out, the Andersons believe, the difficulty of profiting from those who cofire. But, Reed and Russ also believe they’ve found a successful path to meet the supply requirements of cofiring, regardless of their current negotiations.
The simple answer from Russ on how to establish a financial relationship with a cofiring facility is to talk the talk, then walk the walk. That means when he tells an oat hull supplier in Canada he can have a truck there in the morning, the truck will be there, for example. For forming long-term contracts, Russ says, it’s a proving game. By proving out the ability of the company to perform well in other operational settings outside of a cofiring operation looking for biomass, Russ believes Advanced Biomass Solutions has been able to grab the attention of cofiring facilities. And, by diversifying its supply agreements with various biomass feedstock acquisitions and numerous contract lengths ranging from day loads to daily loads, Russ says a biomass supplier trying to break into the cofiring world can survive the tough times and the waiting game with smaller revenue streams coming in more frequently.
According to Reed, the power production facilities the team has worked with have been good once the contracts are formed. Making phone calls and plant visits in addition to formal applications for advertised biomass contracts has worked for the company in securing its supply agreements. But to stay profitable during the waiting period typically linked to a cofiring facility, diversity is the key. That means hauling nearly every possible form of biomass and disregarding the notion that a load is ever out of range. “I find it kind of funny about this 50 or 75 mile radius,” Reed says in reference to the distance a power facility should acquire cofiring feedstock. Reed lives in Florida, a huge biomass producing state he notes, and he is currently working to secure a long-term supply contract. In his experience, a procuring agent at a cofiring facility will look past that the distance factor if the supplier is dependable, the feedstock is at the right price, the moisture content is within their specifications (typically below 15 percent moisture) and the supplier can, as Russ says, “walk the walk.”
As for the Biomass Crop Assistance Program or any other federal- or state-based aid, Reed says his team stays away from it all. “It is more hassle than it is worth to us.” The do-it-yourself attitude also extends to their maintenance and logistics. Mark Melby, chief operation officer for the company, lines up the routes for drivers, arranges pick-up and drop-off times, and when the trucks return he performs maintenance to keep the fleet healthy. Rod Thompson, CFO, analyzes the numbers of each load Russ finds, but he does it a bit different than most. First, Thompson and the team discuss the potential that a single load might have for the future. If a load doesn't create a profit the first time, or appears to be too far away, the team may still form a contract with the hope of a long-term relationship.
All operations might not have a Mark Melby, but Russ says along with having a strong resume of biomass supply, those looking to bust into the cofiring industry need to understand the basics of the power production facilities. “There are companies like ours because they don’t do it (procure biomass).
It is out of their services, they are busy running their power plants,” he says. Through negotiating and completing contracts with power production facilities, the Andersons say they’ve learned that a company cofires to comply with state-based renewable energy mandates or because it has chosen to play the green angle, and has actually advertised that they are looking for renewable energy alternatives (the Andersons have worked with cofiring advertisers).
But, even without a state-mandate required to meet a renewable portfolio standard, a company looking to go green, or as Boone says at U.S. Steel where biomass can save money in production costs, Reed says the biomass cofiring market is legitimate. “This is something that can hold its own, it is a legitimate power source.” Russ agrees.
“No doubt about it,” he says on the idea of retiring on the business of supplying biomass to power producers that cofire. “I don’t think biomass is going away and somebody needs to be buying and selling it.”
That sentiment however, doesn’t come without a catch. “Its tough right now as it sits with natural gas,” Reed adds. “As long as natural gas prices are low, I think it is going to be lean.”
There is no arguing Reed’s point, but the Anderson example highlights the interwoven relationship that exists between people like Russ and Reed who make calls and visits everyday to establish a customer base, people at a cofiring facility and the general public looking for cheaper energy bills. The outlook for biomass-based cofiring certainly depends on a state-based obligation, individual company agendas to lower greenhouse gases, and the price of natural gas. But, the U.S. Energy Information Agency’s Annual Energy Outlook 2012 shows that economic demand still plays a large role. Although coal-based power facilities in the U.S. will be reduced by one-sixth by 2020 due to federal mandates, the economy also plays a role in how much energy comes from boiler-based energy applications.
“Economic growth significantly affects generator retirement decisions by influencing electricity demand,” the EIA says. When economic growth is strong (and Russ would add winters are cold), the demand for electricity rises and the financial justification for maintaining operations at coal-based facilities is stronger, according to the EIA. The Andersons however, most likely won't be affected by what the EIA says. They believe biomass cofiring practices will continue to expand and their company will grow at the same time, at least the new hires the Andersons just brought on to find more biomass might hope so.
Author: Luke Geiver
Features Editor, Biomass Magazine