Forest2Market’s Delivered Price Benchmark Reduces Risk for Wood Bioenergy Companies

Wood bioenergy companies can reduce feedstock price risk and increase financing options by indexing their supply and power purchase agreements to Forest2Market’s Delivered Price Benchmark.

Energy companies using fossil fuels reduce the price risk associated with their raw material costs by indexing agreements to an industry-accepted energy source price service. Now, Forest2Market—a provider of market price reports, benchmarks and forecasts for the forest and wood products industry—delivers the same service for energy companies using wood as a feedstock.

With Forest2Market’s Delivered Price Benchmark, companies producing energy from wood can reduce the price risk caused by the natural ups and downs of the wood fiber market. Just as they hedge their operational costs by tying adjustments to the Producer Price Index (PPI), they can use the benchmark to hedge the risk of changing feedstock prices.

“When you look at what we do and what wood bioenergy companies need to succeed, the fit is a natural one,” says Pete Stewart, industry expert and President/CEO of Forest2Market. “By indexing their power purchase agreements (PPAs) to changes in wood feedstock costs via Forest2Market’s benchmark, wood biopower producers can be sure their feedstock costs are in line with fair market prices.”

Indexing feedstock costs also increases the chances a biopower project will be financed. “These projects are just more bankable,” says Stewart. “Investors who are assured that both the power producer and the power purchaser are paying fair prices for feedstock are much more likely to back a project.”

Introduced in 2006, Forest2Market’s Delivered Price Benchmark service is the prevailing standard in the traditional forest products industry. In the U.S. South alone, the benchmark data reported to participating customers represents over 75% of the market, with 200 million tons of forest products annually, including wood fuel, saw mill residuals and chips. In the South, over 25 million tons of raw material move under supply agreements indexed to this price service annually.

The database contains 22 million actual sales records, on a load-by-load basis, and includes delivered cost components like freight and haul distance. Forest2Market's Pacific Northwest benchmark contains similar, though regionally specific, data.

Forest2Market has been tracking the bioenergy industry since 2007. The number of announcements for new facilities grew quickly through the first half of 2008. After oil prices dropped, however, the political will for rapid development declined. In September, as the extent of the recession became clear, financing dried up. Now, it appears momentum has returned.

Says Stewart, "With the incentives offered in the stimulus legislation and the policies of the new administration, including a promise to streamline the funding process for both loans and grants, we don't think this is another false start. As a result of this growth, Forest2Market's client base is expanding. Biopower companies are relying on Forest2Market for the information they need to index their agreements, they also turn to us for resource studies to help them determine feedstock availability, plant locations and procurement strategies."

The benefits of a growing bioenergy industry extend beyond energy. As risk is removed from the system and financing becomes more available, viable markets will open for landowners, loggers, dealers, brokers, consultants and sawmills, many of whom are struggling in the current economy. Even pulp and paper companies, which currently produce 90 percent of all renewable energy in the United States, are positioned to take advantage of this new market, says Stewart. "I can envision energy and paper companies working together to produce electricity from wood on a commercial scale."