new mexico biomass project development handbook final

8/14/2019 New Mexico Biomass Project Development Handbook FINAL

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HANDBOOK FOR DEVELOPINGBIOMASS TO LIQUID FUELS PROJECTSIN NEW MEXICO: GUIDELINES FOR

ENTREPRENEURS

June 2004

Prepared for:

New Mexico Energy, Minerals, andNatural Resources Department

Santa Fe, NM

Prepared by:

TSS CONSULTANTS2724 Kilgore Road

Rancho Cordova, CA 95670(916) 638-8811

tssconsultants.com


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HANDBOOK FOR DEVELOPING BIOMASSTO LIQUID FUEL PROJECTS IN NEW MEXICO:

GUIDELINES FOR ENTREPRENEURS

Table of Contents

I. INTRODUCTION.3A. Background..3B. History....4C. Stages of Developing New Commercial Technologies....7

ll. CONDUCTING FEASIBILITY STUDIES11

A. Risk Assessment...11

B. Preliminary Feasibility Studies..16 Technology Assessment

Siting, Environmental Assessment & Permitting

Biomass Supply Availability

Market Assessment

Preliminary Financial Proformas

Development/ Management Team

Other Business Issues

C. Comprehensive Feasibility Study..24

Go/No Go Decision

Prepare Comprehensive Feasibility Study

III. OBTAIN PROJECT FINANCING.27

IV. PROCUREEQUIPMENTANDCONSTRUCTPROJECT...31

Biomass Project Development TSS Consultants

Guidance Handbook August 2004


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e. STARTUP ANDOPERATE PROJECT.32

APPENDIX A. SUMMARY CHECKLIST FOR DEVELOPING A BIOMASSTO LIQUID FUELS COMMERCIAL SCALE FACILITY...33

APPENDIX B. GLOSSARY OF COMMON TERMS.35


Guidance Handbook August 2004


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I. Introduction

A. Background

The New Mexico Energy, Minerals and Natural Resources Department(EMNRD), Energy Conservation and Management Division (ECMD) contractedwith TSS Consultants (TSS) to produce guidelines for businesses interested indeveloping biomass to liquid fuel products. Since 1987, TSS has evaluated newproposed biomass technologies for commercial developers, equity investors andfinancing groups or institutions.

During the past few years there has been a proliferation of private investors andscientists developing new biomass to energy technologies. TSS has over 400biomass technology companies in its worldwide database. These are mostlycompanies with new technologies that produce energy product(s) such as

biodiesel, ethanol, or electricity. As a result, throughout the United States, thereare many biomass technology companies and entrepreneurs proposing newdemonstration and commercial facilities to public agencies, financial institutions,and communities with forest, agriculture and urban biomass wastes. Suchwastes are creating environmental and costly waste disposal problems for theseentities. Most of the entrepreneurs, developers, scientists, and public agencieshave no experience in the biomass industry, and very few of the privatedevelopers have developed an industrial facility, much less a biomass to liquidfuels industrial facility.

Development of a biomass to liquid

fuelsindustrial plant is a complex, expensiveand high risk undertaking. Thus, there isneed for some guidelines to assistprivate developers, as well as the publicagencies considering subsidies basedon the potential public benefits. ThisHandbook is intended to provideguidelines and a pathway forentrepreneurs to develop new biomass to liquid fuel commercial scale facilities.It identifies key areas that must be addressed, potential problems, and deal-

killing risk issues that could prevent successful development and operation of anew facility.

A Summary Checklist of key steps is included in the Appendix, as a quickoverview of the steps for developing a biomass commercial scale facility. THISHANDBOOK IS NOT A SUBSTITUTE FOR DOING THE ACTUALDEVELOPMENT WORK. Nor is it comprehensive in that it only provides stepswith example generic issues that must addressed. There are many development


Guidance Handbook June 20044

This Handbook is intendedto provide guidelines and apathway for entrepreneursto develop new biomass toliquid fuel commercialscalefacilities.


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issues not identified in this Handbook that are specific to a proposed facility in ageographic region that uses identified biomass materials and sells to regionalmarkets. If this Handbook only prevents a few developers from investing in

projects that would never get financed because of one or more deal-killingissues, or makes a difference in the successful development of a proposed

project, it is well worth the investment by the State of New Mexico.

B. History

The current biomass technology industry represents a very small niche in theprivate sector. The industry history of developing technologies for convertingorganic, woody, or cellulose biomass into products has been influenced by threeprimary factors:

Avoiding the economic and environmental costs associated with thedisposal of biomass residues from urban landfills, burning or processing of

agricultural residues, and diverting fuels from forest and wildlands thatwould eventually be consumed in wildfires.

A shortage or lack of fossil fuels for energy in the form of transportationfuels, thermal heat applications or electricity. For example, during WorldWar II, Germany and Switzerland developed biomass to ethanol factoriesfor producing ethanol to cover their lack of oil supplies and support theirwar efforts.

Government mandates and incentives to produce domestic renewablesources of energy and become less dependent on imported oil and gas.

There have been short periods of energy supply problems, such as theOrganization of the Petroleum Exporting Countries (OPEC) crisis during 1974-1978, where government mandates and financial incentives supporteddevelopment of a new biomass electrical industry. This was based on the needfor domestic sources of energy in order to become less dependent on importedoil. Similarly, mandating the phasing out of gasoline additives such as MTBE forenvironmental reasons, coupled with the government subsidies for producingethanol from corn or biomass, is resulting in a significant increase in theproduction capacity of corn to ethanol. It is also resulting in vigorous investmentby the private sector to commercialize a number of biomass to ethanol

conversion technologies.The first major biomass energy productwas the utilization of biomass in thegeneration of electricity. This created newbiomass infrastructure, expertise andtechniques for collecting, transporting andprocessing biomass raw materials to a



The biomass to electricityindustry development isthe foundation ofknowledge andexperience fordevelopment of the new


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manufacturing facility. The biomass to electricity industry development is thefoundation of knowledge and experience for development of the new biomass toliquid fuels facilities.

The early biomass commercial/industrial scale technology was used to produce

electricity and steam for the forest industries in the U.S. It was primarily drivenby the need to dispose of mill wood wastes (mill residues), without uncontrolledburning that created unacceptable air emissions. As a result of public andgovernment pressure to reduce the disposal of the mill residues by burning themin large metal teepees with no air emission controls, the timber industryessentially converted coal burning power plant technology to combust mill wastesthat generated steam and electricity (also known as co-generation). This wasdriven by the environmental need to reduce air emissions from burning the millwastes. It eventually became the least costly way to dispose of the woodwastes, while at the same time generating energy.

This biomass power plant technology was resurrected and commercialized whenthe 1974-78 OPEC crisis occurred, although it was only being used at forestindustry mills for waste disposal and to produce energy. No one had yetdeveloped a stand-alone (generation only) biomass power plant with electricityas a primary product prior to the OPEC crisis. The reason was that biomasspower plant technology was not competitive economically with fossil fuel powerplants.

The OPEC crisis created a new energy priority to develop more domesticsources of energy to make the U. S. less dependent on fossil fuel imports. Thisresulted in government sponsored financial incentives and mandates fordeveloping domestic sources of energy, with a strong emphasis on renewableenergy (wind, biomass, solar, geothermal, fuel cells, landfill gas recovery, oceanwave energy, small hydro and other new renewable technologies).

After the 1974-78 OPEC crisis, the financial markets responded to thegovernment mandates of tax credits and requirements that utilities must contractwith independent producers of biomass and other renewable electricity. Thatdevelopment period of new electrical biomass plants peaked in 1990-1991. Bythen, oil prices had decreased significantly, causing both biomass electricity andliquid fuels technology to depend upon avoided waste disposal costs as theprimary driver of the economic viability to build a commercial biomass plant.

Development of biomass to commercial liquid fuel facilities was further hinderedby the lack of commercially proven conversion technology. Unlike the forestindustry converting existing coal technology to biomass power plants,




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development of new technologyfor converting biomass to liquidfuels would require hundreds ofmillions of dollars and manyyears to conduct research and

development. Although there area number of biomass to ethanoland biomass to biodieseltechnologies that worked at thelaboratory bench scale test leveland even small pilot plants, in theUnited States, none of the technologies had been successfully commercializedusing cellulose biomass materials as feedstock.

The primary challenge to consider inthe development of a commercial

facility is that the biomass to liquidfuels conversion technologies areeffective in converting biomass toethanol or biodiesel, but none of thetechnologies had been developedwhere they could economicallycompete with traditional sources offuel ethanol or diesel. Additional

research and development was needed to evolve a more economically efficientproduction facility. The most prevalent mistake of new technology developers isthat they move to the commercialization stage prematurely, before thetechnology is economically efficient to compete in the market place.Commercializing the biomass to liquid fuel technologies at too early a stage ofdevelopment would result in a commercial plant that could not competeeconomically with fossil fuel raw material product such as diesel, or ethanol.

Thus, the additional, and very significant, risk of developing a new biomass toliquid fuels industry is that there are no commercial plants in operation, and thehigh risk that scale up of technologies from bench scale and pilot plant scalewould result in unpredictable and high risk problems of operating at a commercialproduction level. In addition, it is the opinion of TSS that biomass to ethanol orbiodiesel conversion facilities are much more complex that developing biomassto electricity facilities. Offsetting this more difficult problem is the fact that ethanoland biodiesel are higher value products than electricity.

The recent Afghanistan and Iraqi conflicts along with the rising price of fossilsfuels, has re-advanced the public priority to produce more domestic andrenewable sources of transportation fuel. It also provided major political battlesover mandating liquid fuels in federal and state reformulated gasoline to reducevehicle air pollutants. A long-term major political confrontation between the oil



Although there are a number ofbiomass to ethanol andbiomass to biodieseltechnologies that worked atthe laboratory bench scale test

level and even small pilotplants, in the United States,none of the technologies hadbeen successfully

The most prevalent mistakeof new technology

developers is that they moveto the commercializationstage prematurely, beforethe technology iseconomically efficient tocompete in the market


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industries and the corn industry aligned with the chemical companies thatproduced ethanol as a by-product from corn has resulted in major expansion ofthe corn to ethanol industry. Again this has been driven by the governmentmandates in reformulated gasoline, tax credits, agriculture economicdevelopment needs for expanding corn production, jobs in rural communities and

growing public support for domestic and renewable sources of energy to reducethe rising U.S. dependence on imported fossil fuels.

Thus, the traditional drivers of investments in new biomass to liquid fueltechnologies, avoided waste disposal costs and public support for domesticsources of renewable energy, has been given even stronger support by the newconcerns for reducing the U.S. dependence on foreign oil along with the recentsignificant increases in the costs of gasoline and diesel. The wholesale and retailprices of gasoline and diesel have doubled during the last 2 years. And thepredictions are for the gasoline and diesel prices to stay at these new higherlevels, with prices most likely to continue increasing.

C. Commercialization Framework For Evaluating Stages Of DevelopingNew Energy Technologies

TSS has developed a Commercialization Framework, which includes thefollowing stages of new energy technology development:

Concept development, documentation and peer reviews. A potential

developer (or researcher) has a concept for a new way to manufacture anenergy product for the market place, usually with assumptions that a

product can be made at less cost and/or higher value for the same cost. Ifthat developer is tenacious in their belief, and is willing to commit the time,money and effort, the proposed technology may be developed to the nextstage. The new technology concept is then documented and reviewed byknowledgeable experts that can be retained by the developer. The go/no-go decision occurs when the developer cannot find a deal-killing issue, atleast to the developers satisfaction. To go on to the next developmentstage, the developer forms a technology development company andacquires funding for technology development costs. Source of funds areusually investments made directly by the developer and their close friends,relatives and acquaintances. Occasionally, the developer may be a

successful businessperson with sufficient assets from otherdevelopments, has independent wealth, or is proficient at private/publicand/or non-profit foundation fund raising. A go decision requires securingfunding for the next stage and uncovering no deal-killing issues thatwould prevent the technology from being developed.

Laboratory bench or empirical testing to prove the efficacy of thebasic technology processes. This stage is usually the laboratory bench




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scale testing essential to confirm that the process technology will actuallywork on a micro scale. Depending on the technology and product, thisstage can vary significantly in costs. Risk investment capital is needed tosuccessfully implement this stage. The go/no-go decision point requiresthat no deal-killing issues are encountered that causes the project to

stop. A significant number of technologies reach the end of this stage, findthat the technology works and will produce a product, but cannoteconomically compete and displace other manufacturers productsin the market place. To go to the next stage requires significantadditional risk investment capital, and a credentialed and competentresearch team, with experience in testing these kinds of technologies.

Engineering scale pilot plant . Depending on the ultimate size of thecommercial facility, a pilot plant is typically scaled to between 1/3 and 1/40(sometimes less) of a full-scale commercial facility. It should also achievecontinuous productionruns at an engineering

scale. The evaluation ofthe engineering scalebecomes the primary datafor designing thecommercial scale facility.Again, as in the laboratorybench scale testing stage, many of the new technologies are proven towork and produce a product at the pilot plant stage, but cannoteconomically compete and displace other manufacturers products in themarket place. The results of the pilot plant run(s) must be analyzed andthen extrapolated to a full commercial facility model, with projections and

risk assessments made to determine if there is a business deal in themarket place. If the results of the engineering scale pilot plant dataevaluation show that a demonstration commercial facility can bedeveloped, permitted, financed, constructed and brought into long-termoperation, then the concomitant challenge becomes sculpturing of thebusiness deal that will attract the private capital necessary to go forward.

Significant depth and breadth of expertise andknowledge is required to get beyond this stage.The critical mass of expertise shifts fromresearch and technical expertise to business

development, marketing and financialexpertise. Attracting a competent businessteam becomes critical to getting the equity anddebt financing that is essential to move to thecommercialization stage. Risk capital isrequired at this stage, usually $1 $6 millionfor the development stage.



Many of the new technologies

are proven to work and producea product at the pilot plantstage, but cannot economicallycompete and displace othermanufacturers products in the

The critical massof expertiseshifts fromresearch andtechnicalexpertise tobusinessdevelopment,marketing and


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Development stage of a demonstration commercial facility . The firstdemonstration commercial scale facility serves two primary purposes: (1)Demonstrate the economic viability of the technology in the market placeand to generate a profit for the investors in the project. Success ismeasured in its capability to operate pursuant to design specifications, its

success in actually displacing other manufacturing products in the marketplace, obtaining market share and making a profit that creates a return onthe investment higher than the capital markets alternative investments,and; (2) If the first demonstration commercial facility is very successful,then this results in a go decision for development of multiple commercialfacilities. If the first facility is unsuccessful and cannot compete in themarket place, or if it is only marginally successful, then additional facilitieswill not be able to attract the capital needed to go to the next stage ofdevelopment.

Multiple commercial facilities at different locations. This stage isreached when there are a number of commercial facilities in the market

place and the technology has become off the shelf with sometimes 100%leverage financing available at low interest rates for new commercialfacilities. The market place now has experienced employees from otherfacilities who can be hired to operate a new facility. The number offacilities in the market place is limited primarily by the demand for theproduct produced ethanol or biodiesel. Competition increases, marginson products become squeezed, and the industry is concentrating oneconomic efficiency increasing changes in designs to produce productsmore cost effectively.

All developing technologies can be classified in one of these stages. It is notuncommon with new and existing technologies to have different companies withvarious proprietary technologies producing the same product, but in differentstages of commercialization. Modifications to existing technologies also gothrough the same development/commercialization process stages.

The investments required to move a technology from the concept stage to fullcommercialization are usually referred to as development capital in the privatemarket place. Development capital is high-risk monies. The high risk isconsidered by investing capital into the technology, that a commercial facility willactually be developed (following a go decision), and the facility will be financed,

constructed and operate as a profitable commercial facility creating a revenuestream and allowing the investor to recover the development capital.

The risk of development capital recovery decreases as the technology movescloser to the multiple commercial facilities stage. In other words, a dollarinvested to move the technology from the laboratory test stage to the prototypetesting stage is higher risk than a dollar invested to move the technology from thefirst commercial facility to the multiple commercial facility stage.




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It must be noted that the market place rewards two things: Adding value andtaking risks (if value is added). The development capital investor must: First, be

convinced that the technology will addenough value to displace some other

company's market share; i.e., produce aproduct that is cheaper or adds morevalue at the same price. Second, theinvestor must also be convinced that themarket share and margin of the

proposed product will return the development capital and provide significantreturn on that investment. Third, a highly successful investor is cognizant thatonly a fraction of the new technologies invested in will be very successful in themarket place.

The varying development capital risk of moving technologies through each

successive commercialization stage is also reflected in the expected return fordevelopment capital at each stage. For example, an investor at the laboratorytest stage would expect to receive a multiple return (3 times to 100 times theoriginal investment, usually returned as profit), if the technology is successful inthe market place and repays the investment. On the other hand, an investmentto build the second commercial facility may only return a fraction of theinvestment (in the 1. 5 times to 3 times the original investment, usually returnedas interest on debt).



It must be noted that themarket place rewards two

things: Adding value andtaking risks (if value isadded).


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ll. CONDUCTING FEASIBILITY STUDIES

A. Risk Assessment

So, you want to be a developer of

a new biomass to liquid fuelsfacility? If you have neversuccessfully developed a newbusiness of any kind, no matterwhat your technical, marketing,management or operationalexpertise, this is a very high-riskventure. High- risk businessventures translate into a very high percentage of business failures.

High-risk business ventures also means that unless you have a deep financial

pocket, you could be risking all of your assets, along with any friends, relatives,acquaintances, and business associates that invest in your proposed businessventure. With the odds so much against succeeding in any new businessventure, much less one that has not been successfully done in a new technologysector before, why are there an increasing number of proposed developers ofnew biomass to ethanol or biodiesel facilities? Because only a few technologycompanies will likely be successful in developing biomass to ethanol or biodieselcommercial facilities during the next few years. Those few companies that winthe technical and economic footrace of successfully developing commercialbiomass to fuel facilities will be significantly rewarded by the marketplace foradding value and taking the market risk.

Another similar way of evaluating the odds of succeeding is to look at the numberof biomass technologies being developed worldwide. TSS has over 400 differentbiomass technology companies listed in its database. Of these, it is the opinionof TSS that only a few will successfully develop a new commercial facility. It isquite likely that only one or two of the different biomass to fuel technologies willsucceed in displacing traditional product manufacturers in the market place.

Most new commercial scale businesses (that are far less complex than building anew industrial scale business that produces fuel from new biomass technologies)close within the first 6 months of operation. Five to seven years are a milestone

threshold for any business survival as viewed by investors and the banks. Inmost cases this period carries a new business through their respective industryeconomic cycle of peaks and valleys- the key to survival is economic viabilityeven during industry recessions.

Even large corporations, with the depth and breadth of expertise and financialresources, do not invest in new technologies until they are proven in the marketplace. Although there are exceptions, large companies do not have a good track



If you have never successfullydeveloped a new business ofany kind, no matter what yourtechnical, marketing,management or operationalexpertise, this is a very high-risk venture.

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record in developing a significantly different way of producing a product. Instead,large manufacturing organizations excel in making incremental changes toexisting products.

As a result, most large companies let the private market place screen out the

multiple failures of developing new technologies by new startup companies,waiting until much of the development risk is gone and a new technology isproven in the market place. Even companieslike Microsoft that dominate the software industrystruggles with their ability to compete withinternally developed products, and purchasesrights to software or the companies that own thesoftware to acquire the most economicallyefficient product that adds more value than itscompetitors.

The usual approach by large companies is to either plagiarize a new proventechnology or purchase the small company that successfully developed a moreefficient product technology that can add more value than the traditionalmanufacturing facilities. The new technology has to be significantly moreeconomically efficient that traditional manufacturing facilities. To successfullycompete commercially, a new commercial technology facility must produce aproduct that will displace part of another businesses product market share.

There are many risks in developing new technology biomass to liquid fuelfacilities:

Industrial engineering and technology risks: Such risks are inherent inthe scale up of a pilot plant to a large commercial scale facility. It isimperative that the production process works on a continuous basis, 7days per week and 345-plus days per year. There is a key technology riskthat the economic efficiency of the biomass technology will produce aproduct more economically efficient than existing manufacturing facilities,such as ethanol being produced from corn or biodiesel from soybean. Fora new unproven company to penetrate existing product markets, there is agreater risk for the customer to commit part or all of its supply contracts tonew companies with a new technology and no history of operation. This is

one of the more common mistakes of developers of new biomasstechnology facilities that are usually not reflected in their financialproformas. Developers of new technology facilities view the market placeas static and that the existing market price can be secured by newsuppliers of products. The marketing section (below) goes further into thisrisk issue.



Most largecompanies let theprivate market placescreen out themultiple failures ofdeveloping newtechnologies by new

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Facility siting and permitting : There are at least three risk areas insiting and permitting a proposed industrial chemical plant such as abiomass to ethanol facility: unacceptable environmental impacts; thecosts of mitigating the environmental and socioeconomic impacts ofbuilding and operating a new biomass facility; and the potential for

community, regional and national stakeholder opposition to the technology,project, or environmental impacts including the potential impacts fromsecuring the biomass feedstocks (collection, processing and transport).

Raw material supply risks: In most biomass technologies, the majoreconomic driver is the cost of collection, processing and transportingbiomass to a user facility. Toattract the equity and debt capitalneeded to develop, construct andoperate a new biomass to fuelfacility, usually requires 50 70%of the biomass raw material

supply be secured under long-term contracts (usually a minimum of 10 years) from multiple vendors whocontrol the raw material and who appear like they will be in business fiveyears from now. Since development of a small industrial scale biomass tofuel facility usually will take from 2 years to 3 years (if there are nounforeseen problems), this means before you have obtained financing orstarted construction, you have to obtain a long term supply of raw materialunder contract, or at least under a binding letter of intent. In addition, arule of thumb for available biomass inventories to a proposed facility is tohave available 2 to 3 times more biomass inventory available than isneeded for the proposed commercial facility that is economically and

environmentally available. This available biomass inventory is net aftertaking into account existing and potential future demand/competition forthis raw material.

Market risks: All business survives based on their generation of revenue.To obtain revenue, products must be produced, marketed and sold. Therisks in the marketing of a new biomass to liquid fuels product are:

Obtaining long-term product sales contracts (a minimum of 10 years ispreferred) for a new commercially unproven technology facility to givecomfort to the financing sources that the facility will be able to sell itsproducts for a minimal period and assure recovery of the debt on the

facility. Similar to long-term biomass material contracts, thepurchasers of the product should be financially stable enterprises thatlook like they will be in business at the end of the contract period. Asubstitute for long-term contracts is a growing market for the product,rising prices and a future market that has upside potential forexpansion in the coming years. Multiple purchasers of products in the



In most biomasstechnologies, the majoreconomic driver is thecost of collection,processing, and

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market place also reduces the risks of not securing long- termcontracts, and;

As referenced earlier, the capability to survive a price war from largertraditional sources of ethanol or diesel is required. A marketassessment would project the potential for a price war from traditional

suppliers of ethanol or diesel. Included would be how low thecompetitors production costs could go in terms of surviving pricingcompetition; and the potential for the market to adapt to changes ingovernment policies, mandates or incentives. Currently, there aresignificant ethanol tax incentives that are economically essential tomany corn to ethanol facilities surviving in market place. What are thepotential for subsidy changes and how do you mitigate against thosepotential changes affecting the market place?

Development and Operating Team Risks: Can a developer of aproposed biomass to liquid fuels facility attract and afford to engage a

strong development, financing and operational team with provenexperience of developing similar type facilities? Although a developer mayhave strong business experience or technology expertise, development ofeven small industrial facilities such as biomass to liquid

fuel facilities requires broadmultidiscipline expertise in newfacility and business development;engineering design and construction;technology expertise; financialanalyses and risk assessment; rawmaterial procurement (usually the

number one economic driver ofoperational costs); siting, permittingand environmental impactassessments; marketing and sellingthe products produced; and, politicalskills in working with communities,

public officials and stakeholders (a few of which will oppose the projectunder any conditions). This is another way of saying that the worlddoesnt beat a path to your doorstep if you invent a better mousetrap (ornew biomass to liquid fuels technology).

Other Business Risks:

Patents: There are patent rights risks and potential for infringement onother similar technology patents that must be investigated to avoideconomically devastating lawsuits after a facility is in operation. Therisks are present because so many companies are developing similartechnologies and unless a patent has been issued, there is a riskanother company may have applied earlier for the same patentabletechnology. Until a patent is issued for one of the companies, you must



Although a developermay have strongbusiness experience ortechnology expertise,development of evensmall industrial facilities

such as biomass toliquid fuels facilitiesrequires broadmultidiscipline

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investigate the potential for infringement on existing patents (the U.S.Patent Office does this analyses, but it can take months before ananswer is available). You must also try and discern if there is a similarpatent proposed that is being reviewed in parallel with your currentpatent request. The key question is which was filed at the earliest

date. Union versus Non-Union Construction and Operation: There have

been numerous energy-related projects delayed for a year or morewith regulatory and legal challenges brought by unions to negotiateuse of union members for construction and facility operations. This isusually specific to certain regions with active unions. In some areas ofthe U.S., unions monitor potential new industrial facilities and havevery competent law firms and consultants that review theenvironmental assessments and safety records to find issues fordelaying projects. Delays in the development of any industrial projectcan result in significant cost increases for the project.

In addition, there are site specific risks that may become critical, such asgeologic hazards; infrastructure needs such as availability of vendors andequipment for collecting; processing and transporting biomass material to afacility; or, local government services needs to provide fire protection to a newindustrial facility (often in a rural area, without local government precedence indealing with potential fire and safety hazards from hazardous materials used orstored at the facilities). In fact, typicallythe most significant risk of all isoverlooking a deal-killing issue that isnot evident until a considerable amountof development risk capital is spent; thefacility is under constructed or fullyconstructed, or possibly even inoperation. This is when overlooked riskissues cause a project to be halted orshut down. This concern drivesdevelopers, equity investors and debtfinancing institutions to endlessly askworst case analyses questions to determine if there is an economical solution tothe possibility of the project not being developed, financed, constructed andoperated according to its business plan.



Typically, the mostsignificant risk of all isoverlooking a deal-killingissue that is not evidentuntil a considerableamount of developmentrisk capital is spent; thefacility is underconstructed or fully

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B. Preliminary Feasibility Studies

Because of the multiple risks involved in developing a new biomassto fuel facility, TSS recommends that developers not commit what

could be millions of dollars to develop a new proposed commercialfacility without doing a Preliminary Feasibility Study (PFS). A PFSidentifies and focuses on the major deal killingissues, i.e., issues that cannot be economically andenvironmentally addressed,

or that could terminate theproject. These dealkilling issues sometimesreferred to as fatal flawsshould be evaluated withenough analyses and

intelligence gathering toconclude that none ofthem alone, or incombination, will likelyterminate the projectduring the development,financing and operationalphases.

Rather than conduct a Comprehensive Feasibility Study (CFS)which is very expensive and time consuming, for developing andimplementing the information needed for completing development,along with financing of the proposed commercial biomass facility, itis more cost effective to do a PFS. A PFS can assisting in assuringthat there are no upfront, deal killing issues or fatal flaws.

Although there may be other site specific issues that should beaddressed at this stage, the following areas are usually addressedin a PFS:

Technology Assessment: Will the technology likely work as expectedwhen scaled up to a commercial facility size? Has a mass energy balance

(assessment of energy/materials inputs relative to net energy/materialsoutputs at each stage in the biomass conversion process) been preparedand reviewed on the technology? What are the risks and uncertaintiesthat the technology may not work at a commercial scale? What specificadditional testing and evaluation is needed to provide comfort to aconstruction company and a process engineering company that will beasked to provide vendor guarantees with part of each companys assetsbacking those guarantees that the facility will work as specified? These



TSS recommends thatdevelopers not commitwhat could be millions ofdollars to develop a newproposed commercial

facility without doing aPreliminary Feasibility

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guarantees are required for financing the proposed facility. How do youspread any technology risks among the technology company, vendors andequity investors? Is it possible to spread the technology risks bypurchasing a performance bond or other form of insurance to covertechnology performance problems when the facility is operational?

What parts of the technology and the facility are available off the shelfversus new unproven processing equipment? Has the technology beenused in similar commercial applications producing a different product?Usually the biomass to ethanol or biodiesel conversion process isunproven in the commercial market place. In this situation, the scale upissues to a commercial facility size come under intensive scrutiny. Howmuch larger is the commercial facility versus any pilot plant that hassuccessfully produced a biomass to fuel product? Is the scale-up of thepilot facility to the commercial facility, particularly in the biomassconversion vessels, negligible, in the 3 to 10 X, 11 100X or 100 1000 x

or more? Large scale-ups of small pilot plants can surface newengineering and processing issues not identified in the smaller lab or pilotplant tests. If the scale-up is excessive, should a larger processing unit orpilot plant be built and tested to reduce the scale-up risks? How muchtime and money will this cost? Is this a fatal flaw requiring more researchand development of the technology?

Siting, Environmental Assessment and Permitting: If a site has notbeen picked for the proposed biomass to fuels facility, then the first stepshould be to identify alternate sites for locating the proposed facility. If asite has been chosen, then most of the following analyses will apply both

to a single or multiple sites. It isthe experience of TSS that inmost rural areas, there are only afew sites available for a newindustrial facility. Shut down orexisting industrial facilities aregood alternatives to compiling alist. Checking with the planningand permitting agencies for zoning and land use criteria is a valuablesource of information regarding alternative sites.

The approach to consider for siting a facility includes the following steps: Determine that the site is or can be zoned for the proposed industrial

use.

Prepare a permitting plan that identifies all of the required permits, thepermitting agencies, and projected timelines/costs for obtainingpermits.



Checking with theplanning and permittingagencies for zoning andland use criteria is avaluable source ofinformation regarding

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Prepare a preliminary environmental assessment to determine thelikely environmental impacts (particularly air emissions, water demandand discharges, land use impacts on the community, other businesses,transportation systems, citizen support/opposition, and toxic orhazardous materials or wastes that will be brought into the facility or

produced by the facility.Using this preliminary environmental analysis, confer with the regulatoryagencies, public officials and possibly likely opponents to the project, todetermine likelihood of community acceptance and that permits can beobtained. This is a high risk analysis at this preliminary stage becausemuch of the detailed environmental impact information, along withpotential mitigation alternatives cannot be developed until the CFS phase,where vendors are identified along with the process guarantees, detailedengineering drawings are completed along with the equipment lists andfinal decisions are made on the facility configuration, footprint and sizethat will be covered in the Engineering, Procurement and Construction

(EPC) contracts. However, enough detail is needed to assure there is notan obvious deal killing environmental, permitting or communityacceptance issue.

Results of this analysis is usually summarized in a matrix that identifiesand rates each of the land use zoning, environmental impacts, permittingand community acceptance categories in terms of likely success in sitingthe proposed facility. Gross estimates are also made projecting anysignificant environmental and community impacts/mitigation costs thatcould affect the proposed project financial viability.

Biomass Availability Study: As referenced in the risk section above, inmost biomass technologies, the major economic driver is the cost ofcollection, processing and transporting of biomass feedstock to a userfacility. To attract the equity and debt capital needed to develop, constructand operate a new biomass to fuel facility, often requires 50 70% of thebiomass raw material under long-term contracts (usually 10 years) frommultiple vendors who control the raw material and who appear like theywill be in business five years from now. To address this majorrequirement, prepare a Biomass Availability Study (BAS), that includes adetailed analysis of economically and environmentally available biomass

inventory from all viable sources within

an economically transportable distance(typically 25 to 75 mile radius), projectedfor 10 years after the facility is projectedto be operational. This requiresobtaining biomass data on such thingsas urban wood wastes currentlygenerated and disposed of as part of thewaste stream going to landfills; any



To attract the equityand debt capital

needed to develop,construct and operatea new biomass to fuelfacility, often requires50 70% of thebiomass raw materialunder long-termcontracts (usually 10years) from multiplevendors who controlthe raw material and

who appear like theywill be in business

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forest products manufacturing facilities(such as sawmills) generating of woodwastes; residues from wood productsindustries that use wood as a rawmaterial to produce products (furniture

manufacturers, etc.); residue fromtimber harvesting operations; wildfirefuel reduction projects; and, agricultural

operations generating usable biomass residues (orchard prunings, walnutshells, etc.). There may also be other organic biomass non-traditionalsources that could be used as raw material, either in a raw materialmixture or as a primary raw material source. Examples are bio-solids fromwastewater treatment facilities, green wastes (prunings, tree removals)from landscaping, highway or utilities right-of-way clearings, and wastesfrom food processing facilities. Mixing raw material can increase thecomplexity of the commercial facility. It is always reflected in additional

capital investment in raw material handling and processing equipment atthe facility, and possibly reduction in yields of ethanol or biodiesel per tonof raw material used as feedstock.

Included in the BAS should be an existing and projected competitionanalysis for the biomass. Is any biomass material being used by othertypes of user facilities, such as biomass power plants, sawmills capable of

utilizing small logs, or otherwood products that woulddecrease the available biomassinventory for the proposedcommercial biomass to fuelsfacility? Similarly, gatherintelligence from local public andprivate sources, as well as the biomass industry networks to determine ifthere are any proposed biomass facilities in the area that would createnew demand for the available biomass inventory.

Identify the existing owners or contractual owners of the biomassmaterials that could be used in the facility. Again, consider the longer termof facility operation. As referenced in the risk section above, sincedevelopment of a small industrial biomass to fuel facility usually will takefrom 2 years 3 years (if there are no unforeseen problems), thismeans that your BAS should project/target biomass availability 13 yearsinto the future. If the proposed commercial facility operation scheduleslips for any reason, then this BAS should be updated and extendedfurther into the future.

Cost information for collecting, processing and delivering availablebiomass should be developed for each biomass source of material. These



Included in the BiomassAvailability Study shouldbe an existing and

projected competitionanalysis for the biomass.

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can be crosschecked with any existing vendors delivering biomass in thearea, or in other regions that have similar biomass and biomass userfacilities. Because there are wide variations in the characteristics ofbiomass raw material, there are similar variations in the equipment andrelated costs for collecting, processing and transporting the biomass. It is

important that these systems be identified, along with their productionlevels, and translated into hard biomass delivery costs that will beacceptable to financial due diligence experts who specialize in thesesystems. If there are biomass vendors in the areas, prepare a listing andcontact them as potential contractors for delivering biomass to theproposed facility.

There are three important functions of the BAS:

Assure there is an ample supply of biomass available to the proposedfacility on a long-term basis. As stated earlier, a minimum rule ofthumb for available biomass inventories to a proposed facility, is to

have available 2 to 3 times more biomass inventory than is neededfor the proposed commercial facility. This available biomass inventoryis the net amount after taking into account the competition fromexisting and potential future biomass facilities.

Identify the specific sources and vendors who own or control the

biomass raw material on a long-term basis. These are potentialcontractors for obtaining assured supplies of biomass.

Determine the available infrastructure for collecting, processing andtransporting biomass to the proposed facility. Identify the related costsfor delivering each of the multiple sources of biomass to the facility.

This BAS should be done at a level of detail and diligence that will providethe foundation for developing one or more detailed Biomass ProcurementPlans in the CFS phase.

Preliminary Market Assessment: The only way to recover investmentsin a new biomass to fuel facility is to develop it, get it into production andsell the product. To determine the likelihood of selling the product (ethanolor biodiesel), a preliminary market assessment should be done.

This includes determining the existing

markets for ethanol or biodiesel, markethistory of volumes consumed andwholesale prices, and the changes thatare occurring in the market place thatcan cause the future demand to reduce,increase or become static. An analysisof the current market drivers must becompleted, i.e., who is currently



To determine thelikelihood of sellingthe product (ethanolor biodiesel), apreliminary marketassessment should be

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supplying the products and the potential to compete in future markets withexisting sources of product?

As stated above, a new, usually shallow pocket company, with no historyof operation is often competing with established manufacturers with more

financial resources, credibility with customers from a history of productdelivery, and with part of their fixed costs already paid off. A key questionis how low can the competitors sell products such as ethanol or biodieseland still make a return on their investment, yet compete for sale of theproduct? Similarly, how does the competitors cost structure compare tothe costs of producing ethanol or biodiesel from the proposed facility?New companies trying to capture market share from existing companiesrun the risk of getting into a price war, which squeezes profits and returnon investments. Can the new proposed biomass to ethanol or biodieselfacility sell products at prices lower than their potential competitors?

Another important part of this preliminary market assessment is toevaluate the government mandates, policies and incentives that areaffecting the current markets. For example, the federal ethanol subsidyhas been extended to 2007. Will it be extended beyond that date? If it isto be extended, for how much and how long? What is the future of thetariff on imported ethanol that basically eliminates the ethanol subsidy toforeign producers? As a result of international North American Free TradeAgreement (NAFTA) negotiations, will this be lowered or eliminated in thefuture? If so, how does the foreign produced ethanol prices (delivered)compare with a proposed domestic biomass to ethanol facility?

Similarly, biodiesel is primarily made from soybeans, with subsidies thatmay not be available for biomass to biodiesel. Similar questions need tobe addressed in terms of capability to economically compete with existingbiodiesel from soybean suppliers.

The key information from this preliminary market assessment is the futuredirection of the market demand - is it increasing, decreasing or static?What is the economic efficiency of producing ethanol or biodiesel from abiomass facility versus the existing product sources i.e., ethanol from cornand biodiesel from soybeans? A clear understanding and assessment ofhow much lower you will need to price products from a new technologycompany with no history of operation is critical.

Preliminary Financial Proformas: The first four parts of the PFSdiscussed above all generate financial information that are used as inputassumptions, along with a number of financial assumptions to createpreliminary financial proformas on the proposed biomass to liquid fuelproject. A sophisticated financial model is needed for this kind of projectand must have enough detail in the assumptions, input and financial




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project viability to allow a go/no-go decision to be made by the projectdevelopment team. The financial criteria used are targeted towardmeeting the requirements of equity investors and debt lenders to achieveproject financing. Multiple sensitivity analyses are run to determine worst-case scenarios from a financing perspective. These draw on the analyses

in the four bulleted items above and the financial risk assessment of theinvestors and lenders, with specific cost of capital, cost of financing,Internal Rate of Return (IRR) and Return on Investment (ROI) rangesidentified, along with other costs to protect the investment and debtSpreading the financial risksamong the lender, equityinvestors, technology company,EPC contractors and vendors,bond or insurance companies,raw material suppliers andcustomers is the art of developing

a proposed biomass to liquid fuelcommercial scale facility.Sculpturing this spreading offinancial risk is the key to

eventual project financing. The information generated from thispreliminary financial analysis is whether the project is likely to be financed.

Depth and breadth of development team: Although this is not as criticala preliminary feasibility deal killing issue, it is important the weaknessesin the development and eventual operating team be identified early on.Typically, a new biomass to fuels project developer is either a successful

entrepreneur in other businesses or the developer of the new technology.Sometimes they are both in that entrepreneurs purchase the rights to ownor use the technology. Coincidently, in this preliminary phase of

commercializing a new biomass to liquidfuel technology, the developer/entrepreneur and technology expertiseare the most critical. Without either, theproject will not be developed. Most ofthe rest of the expertise can be hired asconsultants or employees. Thefollowing areas of development team

expertise are needed to develop a new biomass to liquid fuelscommercial facility:

Experience in developing new businesses, particularly new technologyindustrial businesses. If you are going to invest in a new business, youwant the developer to have a proven track record in developing similarbusinesses. There is a significant distinction between developing anew technology, industrial-scale facility than in developing smaller



A sophisticated financialmodel is needed for thiskind of project and musthave enough detail in theassumptions, input andfinancial project viability to

allow a go/no-go decisionto be made by the projectdevelopment team .

Commercializing anew biomass to liquidfuel technology, thedeveloper/entrepreneur andtechnology expertise

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commercial businesses, particularly those with already commercializedtechnologies. Industrial facilities are many times more complex todevelop, finance and operate. The application of a new unproventechnology in an industrial facility is an even greater risk. Assuming allof the other risk issues can be economically and environmentally

mitigated to the satisfaction of project finance, reputation in themarketplace is often one of the key final determinants in whether tofinance a proposed project.

The technology team is critical. Do the scientists and engineers haveexperience, expertise and the reputation for developing similar processtechnologies in the marketplace? How are they viewed by theirindustry peers and competitors? Often obvious technology expertiseweaknesses can be identified from competitor intelligence gathering byasking what is wrong with the developed technology and what willprevent it from becoming commercialized?

Project finance expertise is a critical part of the development teamqualifications. Without expertise to prepare financial proformas,develop alternative equity and debt financing plans, evaluate financialrisk assessment of the proposed project, and respond to the multitudesof financial issues from all other members of the development team, aswell as the potential equity investors and debt lenders, the project willnot be developed. The positive side of this need is there are a numberof experienced project finance professionals in the market place, withtrack records in related industries. This project finance expertbecomes essential, as you get closer to financing the project.

Market Expertise: Usually, the developer and or project finance team

members can negotiate market off-take agreements to sell the product,after a good market analysis and creditably penetrating the marketnetwork of product purchasers. Often a consultant with access to themarket purchasers can provide access to the right customers.

Environmental assessment/permitting expertise is another critical partof the development team, particularly for complex industrial facilities.The developer usually has a designated team member to oversee themulti-discipline team needed to evaluate and successfully permit aproposed new facility. As with the other development team members,the history and experience of the environmental team in this or related

niches is important when their analyses and recommendations arereviewed by the financing due diligence teams.

Project engineering expertise is essential to manage the total project,including the technology process engineers, project schedule,development of preliminary engineering drawings, interface among theother team members to assure information affecting each of the teammembers is disseminated, critical project issues are identified and




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addressed, the project engineering information is completed that willanswer all of the questions of the financing entities, the EPC contractsare developed and awarded, the project is constructed to thespecifications of the contracts, on time and within budget, and, last butnot least, the commercial facility operates as projected. Early on, an

experienced project engineer as part of the project team can save timeand money by identifying and addressing project engineering andmanagement problems.

Raw material procurement expertise is required. As discussed above,raw material is usually the number one economic driver of the costs ofa producing ethanol or biodiesel from biomass. Usually biomassconsultants are used during most of the development phase, with theraw material procurement manager being hired after financing.

Other Project Specific Business Issues: Often there are project or sitespecific potential deal killers that should be included in the PFS. Theseare usually only identified after the project site is identified and discussionsare held with community leaders, regulatory agencies, public officials, andother local stakeholders who can influence successful projectdevelopment. These are added as identified to the PFS. It is not

uncommon for these other issues to not surface until the CFS phase.

It is important that when a deal-killingissue is identified, it becomes thehighest priority problem to address. If adeal killing issue cannot beeconomically and environmentallymitigated, then developers, equityinvestors and debt lenders do not wantto spend one more dollar developing the

proposed project.

C. Comprehensive Feasibility Studies



The results of this preliminary development/management

team assessment are to identify weaknesses that if notaddressed will prevent a project from being developed,financed, constructed and operated.

If a deal-killing issuecannot be economicallyand environmentallymitigated, thendevelopers, equityinvestors, and debtlenders do not want to

spend one more dollar

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Go/No Go Decision

Once a PFS is completed, the results provide a go/no go decision point for thedevelopment team. A good test of the judgment of the development team indeciding whether or not to proceed with the proposed project is the response from

equity investors, joint venture partners and potential debt lenders. If the decision ismade to proceed with project development, it is critical that the development capitalbe obtained that will cover the costs through the financing stage. For even a smallindustrial scale facility, completing the initial CFS is very expensive often requiring$1 to $6 million (or more). Delays and unanticipated problems can cause these riskcapital development costs to increase even more.

Prepare a Comprehensive Feasibility Study (CFS)

A primary product of the CFS is a business plan that expands on the informationdeveloped in the PFS. The CFS should include:

The project development schedule;

alternative financial proformas showing best to worst case developmentand operational scenarios;

preliminary environmental drawings, environmental assessment,mitigation requirements and permitting plan;

project development and operating team;

raw material procurement plan including procurement contracts or legallybinding letters of intent, marketing assessment and commitments to

purchase product ; risk assessments of developing the project;

financing plan including risk development capital, any construction bridgeloans and operating capital, equity investors and debt lenders ifdetermined, and;

staffing plan for operating the facility, and other information that will berequested by potential equity investors, debt lenders, and potential jointventure partners in the project.

During this CFS development stage a number of other activities should bestarted and completed before the project can be financed:

Apply for and obtain permits to construct and operate the proposedbiomass to liquid fuel facility. This requires implementing the permittingplan developed in the PFS. Depending on the state and geographiclocation of the proposed facility, this could be a relatively simple processcosting as little as $100,000 plus permitting fees, or a very sophisticated




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and expensive effort requiring extensive consulting studies, publichearings, infrastructure use fees, and extensive mitigation requirements.The more expensive process can run into the millions of dollars.

Prepare preliminary engineering drawings, including plot plans, equipment

lists, specifications and costs, environmental emissions or discharges andcontrol technology required to meet permitting and mitigationrequirements. This information along with other data gathered will beused to develop the EPC contract(s) and request for proposals. Obtainproposals and award contract(s) subject to financing.

Finalize the Biomass Procurement Plan. This requires obtaining legallybinding letters of intent or more preferably consummating the finalprocurement contracts, with all the details of volumes, specifications of thebiomass that meets the proposed facilitys raw material needs, penaltiesfor non delivery, delivery prices, and conducting due diligence on the

biomass suppliers to assure they are likely to be delivering biomassfeedstocks during the term period of the contracts.

Negotiate and obtain binding letter(s) of intent or preferably the finalmarket off-take agreements to purchase the ethanol or biodiesel fuel fromthe proposed facility. These sales agreements will include the volumes tobe delivered, term periods for the deliveries, product specifications to meetcustomer requirements, penalties for non-delivery and penalties for nottaking the product as specified under the procurement agreement (take orpay contract).

Other tasks and information required to be developed by the equityinvestors, debt lenders or joint venture partners.




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III. OBTAIN PROJECT FINANCING

Using the business plan, identify potential equity and debt lenders. Debt lendersfor the proposed project, joint partners and equity investors will individually

assemble a risk assessment due

diligence team of multi-disciplineexperts to review the business plan.The developer is required to reimbursethe debt lender for their costs inconducting the due diligence.

Following is a listing of categories of expenditures that are included in financialproformas:

Capital Investment: Typically included in this category are all the onetime costs required to develop, finance, construct, and startup the

proposed biomass to liquid fuels commercial facility, including initialworking capital, financing, legal and development fees, reserves and anycapital required for one time environmental, community and infrastructurerequirements beyond the commercial plant facilities. At the point offinancing, all of this one time capital investment usually comes from theequity investors and the lenders. Development costs and fees are oftenrecovered from the final project financing. Depending on the projectfinancial viability and its margins for return on investment, inclusion of allthe development costs are negotiable between the developers, otherequity investors and debt lenders. Project financing can range from 50 100%debt, but in the current market are usually in the 70 90% debt

range.

Operating Expenses: These are the annual operating expenses,including biomass procurement, labor, debt repayment with interest,depreciation, insurance, utility, maintenance, supplies, annual permitting,government, waste discharge or infrastructure fees, taxes and otherannually occurring expenses. Operating expenses are usually divided intofixed (costs that are incurred whether or not the facility is operating suchas insurance, taxes, debt payments) and variable (costs that are incurredwhen the facility is operating such as biomass raw material usage andprocess chemicals). These costs are projected based on the datagenerated by most of the PFS and CFS tasks described above.

As the project is developed, more detailed cost information and harderassumptions are required to eventually satisfy the financing entities anddeveloper. Thus, the financial proformas are continually being updated withmore and better information as a result of the development team efforts.



Using the business plan,identify potential equityand debt lenders.

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As referenced in this Handbook, multiple financial proformas are run to assessproject sensitivities to changes in the market place, worst cast assumptions onfacility operation, raw material cost changes, potential competition, and a numberof risk issues that require additional financial scenarios as required by thedeveloper, equity investors and debt lenders. Be assured that almost every

worst case that can be imaged by the investor and lender due diligence team willresult in another financial proformaprojection. Thus, developers try to investheavily during the early developmentstages in identifying these potentialproblems and run the alternativefinancial proformas. There is aniterative and credibility issue betweenthe financial entities and the developer,i.e., have all the worst-casescenarios been identified and assessed before the financing team asks the

questions? The more those scenarios have been critically examined, the greaterthe comfort levels of the financing entities. The fewer that have been identifiedand financial proformas run, the lower the probability that a proposed project isready for financing.

Presented in Table 1 below is an example of a summary financial proforma for abiomass to ethanol facility displaying the information, including basicassumptions that drive the financial proforma projections? Custom financialproforma models are developed for each type of industrial facility. The moresophisticated ones are very detailed and expensive to develop. The financialproforma models that are developed, evolved, and improved on actual biomassto liquid fuels project are the most valuable and usable by developers andfinancing entities. The following table contains a base case summary ofbusiness assumptions, projected revenues, capital investments and operationalexpenses. Actual financial models have multiple spreadsheets that are thesources of most of these figures, along with information gathered from the marketplace reflected in the development tasks in this Handbook. It is not unusual tohave 10 20 spreadsheets of more detailed information and calculations as inputto the base case summary shown in Table 1.



Be assured that almostevery worst case that canbe imagined by theinvestor and lender duediligence team will resultin another financialproforma projection.

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Table 1. Base Case Summary- $1.35/Gallon of Ethanol

SAMPLE ANNUAL PROFIT/LOSS PROJECTION



ASSUMPTIONS:

Capital Investment $25,000,000Depreciable (St. Line) 20Equity $5,000,000Debt $20,000,000

Interest Rate 8.00%Loan Amortization 10 yearsEthanol/Selling Price/gal $1.35 100%Per Gallon Shipping, Commission, Etc. $0.051Operating Expense Inflation Rate 0.00%

Production - Gallons Per Day 26,400Number of Days in Production Year 329Annual Production - Gallons 8,685,600Biomass BDT/Day 240BiomassBDT/year 78,960Biomass Cost/Green Ton $24.00Moisture Content 40%Biomass Cost/BDT $40.00

ANNUAL REVENUES: $11,725,560.00

ANNUAL OPERATING EXPENSES:

Biomass $3,158,400Labor $1,000,000Labor Overhead - @ 35% $350,000Marketing/Sales Expenses $500,000Taxes $300,000

Natural Gas $255,000Repairs and Maintenance $300,000Electricity $300,000Misc. $250,000Water $100,000Insurance $250,000

Debt Payment, P&I $2,426,550

Depreciation $1,000,000

TOTAL OPERATING EXPENSES $ $10,189,950

PRE-TAX INCOME: $1,535,610

Income Taxes @35% ($537,464)NET INCOME, AFTER TAX: $998,147

ACME INC. BIOMASS TO ETHANOL PLANT

ANNUAL PROFIT/LOSS STATEMENT

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It should be noted this is a sample of part of the financial proformas and includessome basic financial proforma information. It does not include calculations for anumber of other items, including IRR, ROI, net present value of the project,discount rates, which are among other essential information necessary forfinancing. There are a variety of formats for financial proformas, but all of them

that are accepted for financing contain the above key financial information. Inaddition, the table references a fictitious company and project, and the numbersdo not reflect an actual biomass to ethanol technology.




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IV. PROCURE EQUIPMENT AND CONSTRUCT PROJECT

The equipment procurement, final engineering designs, and constructioncontracts are usually prepared prior to financing. The contracts may be let prior

to financing, subject to financing occurring to save some time after financing andto expedite project construction. An alternative, due to the uncertainty infinancing, is to release the Request for Proposals before financing, and negotiatethe EPC contracts, but not sign the contracts contingent upon financing.

The major issues in letting the EPC contracts are:

The costs of each contract falls within the financial proforma parametersfor maintaining a financially viable facility. The final contract costs cannotbe so excessive that they are a financial deal killer making the projectfinancially unviable.

Of great concern to equity investors and debt lenders is the vendorguarantees backing the contracts. Thisis a major factor in spreading thefinancial risk. The process engineeringhas to work as reflected in thetechnology specifications; theequipment has to perform to thevendors specifications as installed inthis facility, and when the facility isconstructed, the facility has to operate to

the standards reflected in theconstruction contract. Particularly in thecase of new unproven technologies,intensive negotiations will occur amongthe developer, equity investors, debtlender and the process engineeringcompany, equipment vendors andconstruction company as to how muchof each companys assets will back the

guarantee to perform in each respective contract. Even at this late stage,this can often be a deal killer. The antidote is to bring these vendors into

the process as early as possible before these final stages of negotiations.



Particularly in thecase of newunproventechnologies,intensivenegotiations willoccur among thedeveloper, equity

investors, debtlender and theprocess engineeringcompany, equipmentvendors andconstructioncompany as to how

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V. STARTUP AND OPERATE FACILITY

Project development challenges are never over in new industrial facilities. Dealkilling issues can surface during the startup and operating phases. Problems inthe process engineering, mechanical engineering, civil and electrical engineering

designs, equipment flaws, and actual construction errors will eventually surfaceduring the startup and operationalphases. Six months is not an uncommonstart up period before the facility isoperating at full production. During thestart up period, the lower levels ofproduction should be taken into accountin the financial proformas with reducedrevenue, additional working capital needs, lower raw material usage and thedelivery schedules in the biomass procurement contracts. As mentioned in theintroduction, a new business has to survive through at least one business cycle,

usually five to seven years of successful and profitable operation to be consideredviable.



Six months is not anuncommon start up periodbefore the facility isoperating at full production.

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APPENDIX A

SUMMARY CHECKLIST FOR DEVELOPING A BIOMASS TOLIQUID FUELS COMMERCIAL-SCALE FACILITY

For quick reference, the following is a checklist for potential developers ofbiomass to ethanol or biodiesel commercial scale facilities.

1. Allocate risk capital needed to do the initial project development (at leastthrough Step 7 below).

2. Obtain rights to biomass to fuel technology through development andpatents, purchase technology company or purchase license to usetechnology.

3. Create legal entity for proposed commercial biomass to fuels facility.

The alternatives vary state by state. The legal entity alternatives areusually a Corporation, Limited Liability Company, Limited LiabilityPartnership or a General Partnership.

4. Assemble development team. At this early stage, the team must includethe developer, technology engineers and scientists. A plan for bringingon the remaining development team members as employees orconsultants with a time line for each should be considered.

5. Develop criteria and identify alternative sites for a new facility. Ranksites and choose the best site.

6. Obtain option or purchase site for the proposed facility.

7. Conduct a Preliminary Feasibility Study (PFS) to determine "deal-killingissues", i.e., economical, environmentally available and sustainablebiomass feedstock , probability of obtaining permits, infrastructureneeds, community support/acceptance, market viability, preliminaryfinancial proformas, etc. Based on the results of the PFS, determine ifthe project can be financed and make a go no-go decision to developproject.

8. If the decision is to go forward, obtain and/or allocate developmentcapital to complete project development, at least through the financingstage in Step 11 below.

10.Prepare a Comprehensive Feasibility Study (CFS). A primary product ofthe CFS is a business plan that expands on the information developed inthe PFS and includes:

The Project Development Schedule;

alternative financial proformas showing best to worst casedevelopment and operational scenarios;




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preliminary environmental drawings, environmental assessment,mitigation requirements and permitting plan;

project development and operating team;

raw material procurement plan including procurement contracts or

legally binding letters of intent, marketing assessment andcommitments to purchase product;

risk assessments of developing the project;

financing plan including risk development capital, any constructionbridge loans and operating capital, equity investors and debt lendersif determined, and;

staffing plan for operating the facility, and other information that willbe requested by potential equity investors, debt lenders, andpotential joint venture partners in the project.

10. Apply for and obtain permits to construct and operate the proposedbiomass to fuel facility.

11. Prepare Engineering, Procurement and Construction (EPC) contract(s)and Request For Proposals. Obtain proposals and award contract(s)subject to financing (see step 12.).

12. Obtain project financing. Using the business plan, identify potentialequity and debt lenders. Debt lenders for the proposed project, jointpartners and equity investors will individually assemble a riskassessment due diligence team of multi-discipline experts to review thebusiness plan. The developer is required to reimburse the debt lender

for their costs in conducting the due diligence.13. Procure equipment and construct project.

14. Startup and operate biomass to liquid fuels facility.




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APPENDIX B

GLOSSARY OF COMMON TERMS

As noted in the introduction, this Handbook is designed and intended forthe use of private developers and public agency personnel. Typically thistarget audience is well versed in the basics of biomass utilizationtechnologies and terminology. However, for those readers that are notfamiliar with biomass conversion terms, a short glossary is presented here.

Listed below are some of the more common terms/abbreviationsreferenced in this Handbook. These definitions are from a variety ofsources (USDA Forest Products Lab, Society of American Foresters Forestry Dictionary) and are defined here based on TSS experience with

biomass conversion technologies.

BAS Biomass Availability Study.

Biomass - Organic matter in trees, agricultural crops and other living plantmaterial. Carbohydrates are the organic compounds that make up biomass.These compounds are formed in growing plant life through photosynthesis, anatural process by which energy from the sun converts carbon dioxide and waterinto carbohydrates, including sugars, starches and cellulose.

Bone Dry Ton Traditional unit of measure used by industries (pulp/paper,biomass power) that utilize biomass as a primary raw material. One bone dry ton(BDT) is 2,000 pounds of biomass (usually in chip form) at zero percent moisture.Typically biomass collected and processed in the forest is delivered green tothe end use facility at 50% moisture. One BDT at 50% moisture content is twogreen tons (4,000 pounds at 50% moisture content).

CFS Comprehensive Feasibility Study

Cogeneration The combined generation of both heat and power at one facility

using the same fuel source. Typically the heat is used to generate steam that isutilized on site (process steam). Power generated is in the form of electricity thatis utilized on site or sold to a local utility.

EPC Engineering, Procurement, Construction.

Gasifier A combustion device that produces biogas from solid biomass.




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Generation The process of creating electricity. Typically generation isaccomplished to supply electricity to an on site facility and/or for sale to a electricutility.

IRR Internal Rate of Return.

Moisture content - The amount of moisture contained biomass material.Typically expressed as a percentage of total weight.

PFS Preliminary Feasibility Study.

ROI Return On Investment.

new mexico biomass project development handbook final

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