Economic Impact of Incentive Payments on
Willow Biomass Crops in NY
a
b
b
b
Thomas Buchholz, Timothy Volk, Lawrence Abrahamson, Michael Kelleher
a
University of Vermont, Rubenstein School of Environment and Natural Resources
b State University of New York, College of Environment and Forestry (SUNY-ESF)
Presentation to the
8th Biennal SRWC Operations Working Group
Syracuse, NY
October 17 - 19, 2010
© 2010 Buchholz & Volk
1 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Download the model at: http://www.esf.edu/willow/download.htm
© 2010 Buchholz & Volk
2 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Economics of Willow Biomass
Crops in NY
 Base Case (Buchholz and Volk 2010)
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•
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•
•
•
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10 ha
12 odt/ha/year over 22 years
40 km haul distance
Planting density of 14,300 cuttings/ha at
$0.12/cutting
Headlands: 8% of area
Row length: 200m
3 year rotation length
112 kg N/ha application after every harvest
© 2010 Buchholz & Volk
3 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Base Model Input Assumptions
 Delivered wood chip price: $60/odt
 NH single pass cut and chip forage
harvester is model harvesting system
 Harvester cost of $180/hr
 Diesel Fuel cost: $0.56/L ($0.62/L with
road tax)
 Land costs: $85/ha
 Removal of willow after seven rotations:
$740/ha
© 2010 Buchholz & Volk
4 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Base Model Output
 IRR of 5.5% for 3yrs rotation (6.2% 4yr
rotation)
 Breakeven cash flow in year 13
 Startup costs $3,097/ha
 Harvest costs $16.3/odt
 Transport costs
$5.1/odt
 Earnings per ha
$101/ha
 Earnings per ton
$10/odt
© 2010 Buchholz & Volk
5 / 20
Willow Production Cost Structure
Source: Buchholz and Volk 2010
© 2010 Buchholz & Volk
6 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Potential Incentives to Improve
Economics
 What incentive mechanisms are available?
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•
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Establishment grants (EG)
Annual incentive payments (AIP)
Startup loans
Biomass matching grants
 Examples:
• Conservation Reserve Program (CRP)
Willow is an approved cover for CRP in NY
50% EG; $124 -$136/ha AIP for NY
counties
• Biomass Crops Assistance Program (BCAP)
75% EG; AIP up to 15 yrs, match of up to
$50/odt (metric) delivered
© 2010 Buchholz & Volk
7 / 20
Who Receives Incentives?
© 2010 Buchholz & Volk
8 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Objectives
 Compare different incentive approaches
• NPV framework (hypothetical $1,000,000 fund
available at 6% discount rate)
• Quantitative: IRR, payback period, earnings
per ha, area and tons incentivized
• Qualitative: recipient’s potential preferences
 Analyze relation of site productivity and
incentives
• How can incentives be tailored to site specific
productivity?
© 2010 Buchholz & Volk
9 / 20
Establishment Grants
70
60
IRR in %
50
No incentives
40
50% EG
30
75% EG
20
100% EG
10
0
-10
6
8
10
12
14
16
Site productivity scenarios in odt/ha/yr
-yr
$5.7 - $15.2/odt incentives @ 75% EG
© 2010 Buchholz & Volk 10 / 20
Annual Incentive Payments
15
IRR in %
10
No incentives
5yrs $124/ha/yr AIP
5
10yrs $124/ha/yr AIP
15yrs $124/ha/yr AIP
0
6
8
10
12
14
16
-5
Site productivity scenarios in
odt/ha/yr
-yr
$2.8 - $7.6/odt incentives @ $124/ha/yr 10yr AIP
© 2010 Buchholz & Volk 11 / 20
Startup Loans (i)
25
20
No incentives
IRR in %
15
10
Startup loan @2%
interest
5
0
-5
6
8
10
12
14
16
Startup loan @4%
interest
-10
Site productivity scenarios in
odt/ha/yr
-yr
$2.5 - $6.6/odt incentives @ 2% startup loan
© 2010 Buchholz & Volk 12 / 20
Startup Loans (ii)
Average earnings in $/ha
250
200
150
No incentives
100
50
0
-50
Startup loan
@2% interest
6
8
10
12
14
16
-100
-150
Startup loan
@4% interest
-200
Site productivity scenarios in odt/ha-yr
While loans might be of interest to investors, (smallscale) farmers might not be interested in loans
© 2010 Buchholz & Volk 13 / 20
Biomass Match
30
25
IRR in %
20
15
No incentives
10
$25/odt match
5
$50/odt match
0
-5
6
8
10
12
14
16
-10
Site productivity scenarios in odt/ha/yr
-yr
$12 and 23.9/odt incentives @ $25 and $50 match
© 2010 Buchholz & Volk 14 / 20
$ paid per IRR percentage
point gained
Comparative Cost Analysis of
Incentives
500
EG 50
EG 75%
400
EG 100%
300
Loan 2%
Loan 4%
200
AIP 5yrs (124$/ha)
100
AIP 10yrs (124$/ha)
AIP 15yrs (124$/ha)
0
61
82
3
10
4
12
Scenario
Site productivity
in odt/ha-yr
5
14
6
16
Match 25$/odt
Match 50$/odt
Only scenarios generating profits (IRR >4%) after incentives are reported
© 2010 Buchholz & Volk 15 / 20
IRR (%)
Conservation Reserve Program (CRP)
Baseline scenarios
30
25
20
15
10
5
0
-5
-10
EG 50%, 5yrs AIP @ $124/ha/yr
EG 50%, 10yrs AIP @ $124/ha/yr
EG 50%, 15yrs AIP @ $124/ha/yr
EG 50%, 22yrs AIP @ $124/ha/yr
EG 50%, 5yrs AIP @ $136/ha/yr
61
82
103
12
4
14
5
16
6
Site
productivity
in odt/ha-yr
Productivity
scenario
EG 50%, 10yrs AIP @ $136/ha/yr
EG 50%, 15yrs AIP @ $136/ha/yr
EG 50%, 22yrs AIP @ $136/ha/yr
Neglible difference of AIP $124-136
Neglible difference if AIP paid for 10 to 22 yrs with increasing productivity
© 2010 Buchholz & Volk 16 / 20
Economics of
willow
Biomass Crop Assistance Program
(BCAP)
Types of
incentives
80
Objectives
60
Conclusions
IRR
Incentive
analysis
CRP
and BCAP
Baseline scenarios
Full BCAP
EG 75%
15 yr AIP $124/ha/yr
Match 50$/odt
EG 75% + AIP
40
20
0
-20
16
8
2
10
3
12
4
14
5
16
6
Site productivity in odt/ha-yr
Productivity scenarios
The BCAP program provides IRRs of over 43% across all
productivity scenarios analyzed.
The EG and match contribute most to these high profits
with fairly equal shares.
© 2010 Buchholz & Volk 17 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Conclusions
 Of all incentives analyzed low-yielding
sites (~6 odt ha-1 yr-1) can only be profitable
with a match program providing $50 odt-1
delivered or a combination of incentives
 Medium- to high-yielding sites return
reasonable profits with75% establishment
grants or incentivized loan programs
 Loan programs are very cost effective but
decrease earnings per ha
 Match programs are very expensive and do
not contribute to overcoming the investment
hurdle during crop establishment.
© 2010 Buchholz & Volk 18 / 20
Economics of
willow
Types of
incentives
Objectives
Incentive
analysis
CRP
and BCAP
Conclusions
Conclusions
 Incentive programs should be tailored to
grower’s needs (e.g. small or large scale, investor,
farmer) and sponsor’s intentions (max. biomass, focus
on low-productivity sites, min. admin costs).
 From a grower’s as well as a sponsor’s
perspective EGs of 50% to 75% with AIPs for
medium to low productivity sites are a good fit.
 It might be useful for sponsors to establish
profit targets for a specific yield estimate and then
tailor an incentive approach to this envisaged profit
while considering potential preferences of growers
towards some incentive approaches.
 Incentive programs are expensive and need to be tied
to proper crop establishment to ensure that funds are
used to produce significant quantities of biomass.
© 2010 Buchholz & Volk 19 / 20
Comments…questions!
Thank you for your attention!
Thomas Buchholz
thomas.buchholz@uvm.edu
Timothy Volk
tavolk@esf.edu
Free download of EcoWillow v 1.4 (Beta) at:
http://www.esf.edu/willow/download.htm
© 2010 Buchholz & Volk 20 / 20