Interview: Dr. Jessica Morris, Expert Engineer in Atmospheric Dispersion, Exponent
We are inspired by people who are passionate about insurance and technology that solves pressing global challenges. In this interview series, our chief actuary, Sherry Huang, talks with friends of New Energy Risk whose work makes a difference, and whose journeys will inspire you, too.
This interview has been lightly edited for clarity.
Dr. Jessica M. Morris is a senior associate specializing in fluid dynamics and safety in the Thermal Sciences practice at Exponent, an engineering and scientific consulting firm. I reached out to Dr. Morris through Dr. Sean Dee, someone we have worked with in the past. I enjoy talking with women scientists and engineers to learn about their unique career paths, and I had a terrific time getting to know Dr. Morris, who is positive, disciplined, and passionate about helping and inspiring others.
You have such an interesting and impressive career path. How did you decide to pursue a PhD in engineering and get to where you are today?
I completed my undergraduate coursework in chemical engineering at the University of Minnesota at Duluth. Due to a clerical error in my graduation date, I was required to continue with courses for an additional semester in the fall. I decided to make the most of the additional learning opportunity. I continued working part-time as a pharmacy technician, as well as working as a teaching assistant for the Chemical Engineering department. I attended a talk on “fracking” presented by a professor at the University of Arkansas. This professor was super nice, very personable, and most importantly very into what he researched. After the talk, this professor asked several students if they were interested in graduate school. The idea of earning a PhD in engineering had not crossed my mind before, since it was not an option when I was contracted with the Air Force, but I had received news of approval for an honorable discharge two days prior. I was at a crossroads and needed to figure out my future and pursue other opportunities. This professor received my resume from our department head the next day, and several days later offered me a full-ride scholarship and stipend for graduate school. I was thrilled to tour the university where I had the opportunity for a fully-funded doctorate in chemical engineering.
Research focuses at the Chemical Hazards Research Center were highly applicable to a real-world industry setting, which set me up for success. I felt at home with focus areas that were directly related to my interests, having minored in aerospace and environmental engineering. The mentorship was another selling point for the program; I was set up with a very well-respected and attentive advisor, Dr. Tom O. Spicer. I was grateful to have funding through DNV GL and the Dutch government, which gave me the opportunity to work in London during my PhD. Everything fell into place. While a myriad of factors played a role in my choice to pursue a doctorate in engineering, I believe my willingness to engage with others, openness to new opportunities, and work ethic were of the greatest importance in the pursuit of my career.
I ended up at Exponent through meeting a representative from Exponent at an industry conference, the Global Congress on Process Safety, during the last year of my PhD. He invited me to participate in the Loss Prevention Symposium committee the following year due to my research, but then took the time to tell me about Exponent and the engineering consulting field. Exponent turned out to be the perfect fit for me, as I get to utilize the expertise I built in my graduate program, communicate technical findings to a variety of clients, participate in numerous professional development opportunities, and continue to learn about new technologies across multiple fields.
What are some of the unique perspectives you and other women engineering leaders bring to the team?
Although growing, there still are not many women in the engineering field. In many situations, I have found myself being the only woman in the room. While sharing stories of biases we have collectively faced leads to greater awareness, more must be done to facilitate advocacy. It is important that we support our peers and do not stand by as witnesses to bias in the workplace. Acknowledging bias supports the individual facing the discrimination, and also has an impact on the overall office culture. For example, in the workplace women are interrupted at a rate much higher than men, which greatly impacts the ability of women to share their ideas in a professional setting. Supporting other women by addressing interruptions can be helpful in changing office culture. The statement “what were you saying before you were interrupted?” can be a helpful way to allow women to continue having a voice. It is important to me to be an advocate for others. I am aware of the challenges women and minorities face in the workplace and if I can make it easier for someone coming in by giving advice or sharing my mistakes to make them more successful, I will always take the time to do that.
What are some of your passions outside of work?
I am passionate about working with kids and acting as a role model for them. I think the challenge of hiring more diverse talents needs to be addressed at a younger age. Kids often decide to pursue a STEM path in middle school, so providing a positive learning environment and more role models for them during this age is so important. I participated in multiple inner-city middle school mission trips in the past and continue to participate in the “Skype a Scientist” program. I am currently in training to become a Court Appointed Special Advocate®/guardian ad litem volunteer to advocate for children who have experienced abuse or neglect.
Do you have a mentor in your career who helped you find the way?
I am grateful to have had positive mentorships in several settings. I have found mentors care about my professional growth, as well as my personal development. Just because someone is assigned to you, does not mean that they are always going to be your mentor or have your best interest in mind. It is on you who you choose to be in your life, to go to for help, and especially to go to for advice. Throughout a career, you will need to seek mentorship through multiple avenues. Each job, each opportunity, each milestone in life, I have had a great network made up of multiple people that are cheering me on. From classmates helping me get through my undergraduate degree, knowledge shared by my advisor while completing my doctorate, supportive coworkers providing real-world experience, and managers who have taken the time to help me in my professional path forward and personal life, I could not have reached each milestone without all of the different mentors and support I have had along the way. I have been lucky to have had the support of the many individuals who have influenced my career path.
Thank you, Dr. Morris!
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Building a Better Backstop
11 Considerations for Project Sponsors Comparing Government Backstops and Private Sector Solutions
By Matt Lucas, PhD; Managing Director, Business Development
At New Energy Risk (NER), we cheered the recent announcement that clean energy leader and icon Jigar Shah would be leading the DOE’s Loan Programs Office (LPO). We share his goal of seeing the office streamlined to maximize its effectiveness. We have interacted with both DOE and USDA loan guarantee programs for multiple years and have first-hand experience: One of my colleagues led his former company’s successful LPO application process.
Given the need to deploy hundreds of billions of dollars to meet climate mitigation goals, create post-pandemic jobs, and commercialize frontier technologies, there’s room for all sources of capital. We hope this post will inform project sponsors and highlight factors to consider when evaluating their project financing options.
Coverage Triggers: Key Differences Between Government and Private Solutions
It is important to understand how government loan guarantees and private-sector solutions work in a downside scenario. Although similar in intent—both solutions protect project lenders—the mechanism of coverage is different, which has significant impacts on project owners, equity investors, workers, and other stakeholders.
For government loan guarantees, the project is expected to exhaust all its contingencies, maintenance reserve, and debt service reserve in the event of revenue shortfalls. If the project is unable to meet its debt service obligations after these measures, then the project would be in Default (with a big ‘D’) of the loan. To recover its investment, the lender is required to foreclose on the project and liquidate the assets. The bank is then audited by the government and only then does the government pay the bank for the portion of the debt it was unable to recover. Project owners and equity are on the outside looking in, with their investment completely wiped out.
The impacts of this are severe: The sponsor and all equity has been zeroed out, the project has been shuttered and liquidated, and the technology has suffered a very public failure that will be adverse to any future financings. The government might have succeeded in making the bank whole (notwithstanding the challenging liquidation and audit processes), but every other stakeholder has been thrown to the wolves, the technology will not be commercialized, and the carbon mitigation and jobs co-benefits go unrealized.
NER has a better solution that ultimately protects the lender while also benefitting other project stakeholders. We also help protect capital at risk, including but not limited to senior debt. While there are efficiencies in time and cost ahead of financial closing (see considerations below), the key difference is that our solutions are designed to avoid a lender default, preserve the project, and secure a cure. Unlike the government loan guarantees, which provide after-default support to the bank, we step in earlier to support the project and avoid a default in the first place. While the insurance might directly benefit a lender, this design also benefits subordinate and equity investors who would otherwise be washed out and workers who would lose their jobs, and gives the technology a chance to be improved and repaired. NER could be compared to a standby lender, providing necessary liquidity to project sponsors to service debt while enacting cures or fixes to restore project health.
11 Considerations for Project Sponsors When Comparing Backstops
Total Cost of Debt
The cost of debt is more than the cost of capital: Government capital is probably the cheapest option on the market, but this is often balanced by other advantages of private debt. As Jigar noted on a trade group call, “[LPO] is a commercial bank so we price where the banks should price. We are not subsidizing capital.” Jigar provided a median estimate for an all-in cost of debt from LPO of 5.5-6.0%, based on a fixed cost of capital from Treasury around 2.0%.Bank or bond borrowing, when coupled with insurance solutions such as NER’s, can provide comparable pricing. As of this writing, 10-year Treasury (1.66%) and BBB spread (1.15%) leave a private cost of capital (2.81%), near the LPO’s cost from Treasury. With 300+ bp of spread for the lender and insurance, it is possible to provide private-sector senior debt on similar terms. Our clients Fulcrum BioEnergy closed on over $100M in financing on 20-year notes in 2017 at 6.25% and Brightmark (formerly RES Polyflow) closed on 20-year paper at 7% in 2019.
Time to Close
There is always a rush to get projects financed. A bank loan can close in three months. A bond offering might take four to five months. NER can close in as little as three months.The government works on a different timescale. Jigar acknowledged that timelines for LPO can be long and he’s working to streamline that. Historically, projects have had to march through a multi-stage process that routinely drags on for a year or more. Anecdotally, one of our clients just took 4.5 months to receive back their initial review.
Underwriting Fees
In his recent podcast, Jigar said that typical underwriting and closing fees (outside the risk premium) are $2M. These fees must be borne by a project even if a closing is never achieved and are accrued prior to receiving a term sheet. For this reason, LPO is most appropriate for larger loans. Anecdotally, one of our clients incurred more than twice this cost just to reach a term sheet (not yet closed).By contrast, NER’s fees for underwriting and closing are more than an order-of-magnitude lower. While LPO can defer and even waive fees, the process is uncertain, while we require no similar efforts.Another distinction is when third-party reports are due, such as market reports and the independent engineering report (and must be paid for by the sponsor). LPO requires these documents prior to offering a priced term sheet. By contrast, a private lender would only require the reports as a condition for financial close. By delaying these transaction costs for the sponsor, private lenders align costs with certainty of reaching financial closing.
Certainty of Closing
Sponsors seek to de-risk their projects and increase certainty. NER has a decade-long track record of delivering The Power of Certainty™ to our customers. 100% of our engaged clients have received priced term sheets and 100% of accepted term sheets have resulted in approved policies.The government has additional requirements that increase execution risk. These include a “policy factors” review by Office of Management and Budget, minimum credit ratings for key counterparties, required credit rating opinion on the project, and in some cases a National Environmental Policy Act (NEPA) review, which can take up to 24 months.
International Expansion and Capital Limitations
Government loan guarantees only support projects in the US and have limits on how many projects of a certain type they will support. Since it takes five to eight years of robust operations to achieve bankability without a government or private backstop, LPO’s limitations can impact domestic growth after project one or international growth. NER can support your entire portfolio, both domestically and abroad. Having a single partner with a single diligence for your entire portfolio smooths execution.
Covenants and Other Restrictions
Loan agreements include standard covenants that ensure good project governance, but additional covenants can be constraining to sponsors in a detrimental way. LPO covenants include dividend restrictions, made-in-America requirements, and qualifications on equity sponsorship. These are not typical of private lending and are not required by NER.
Flexible Capital Structures
NER supports a variety of capital structures including senior debt, mezzanine and sub-debt, tax equity, preferred equity, and combinations of the above. Government loan guarantees are limited to senior debt. We can support other capital tranches, in conjunction with government guarantees, if it makes sense to do so.
A Partner, Not a Bank
NER aims to be your partner in executing your project. In the last few months, we’ve leaned in to connect our clients with EPCs, lenders, equity investors, bankers, and LCA consultants. LPO, as a governmental agency, is restricted in its ability to make connections to key counterparties due to confidentiality concerns and the need for the government to remain neutral.
Project-Level Workout Vs. Bank-Level Guarantee
A government loan guarantee is designed to pay the lender in the event of a loss but does not help avoid the project default in the first place. In contrast, NER seeks to avoid a lender default from occurring by stepping in sooner and achieving an early workout at the project level. This approach is advantageous for the project, benefitting subordinate investors and workers, and allowing the project to return to operational and financial health.
Amount of Debt Capital Required
If a project requires more than $1B of debt capital, then working with a government program is the right choice. However, most first- or first-few-of-a-kind projects require vastly less debt, making a government program less attractive. In any case, larger projects are often best structured as multiple phases/tranches to segment risk, which also allows for private backstops.
Offtake Risks
LPO works with public dollars and helps projects ensure commercial risks are minimized, while often being overly conservative and going beyond levels that the private market would bear. Previously, LPO urged fixed priced offtakes, which are not available for some projects. Jigar shared that LPO will now consider indexed offtakes with Renewable Fuel Standard (RFS) and Low-Carbon Fuel Standard (LCFS) credits for bioeconomy projects, which is promising. NER will work with projects that have commercial risks acceptable in the private markets. We routinely support projects without fixed priced offtakes. In the bioeconomy, offtakes rarely match the debt terms and are typically indexed rather than fixed price, and can be heavily dependent on RFS or LCFS revenues. In some circumstances we can also hedge these credit prices.
Thinking about how to fund your project? New Energy Risk is often the first partner aligned to help with the financing of a project, so we serve as a sounding board and advisor to sponsors as they consider their multiple capitalization pathways. We look forward to partnering with you to help your project achieve funding.
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Oil and Ethanol Fight at the Supreme Court Over the Word “Extension”
By Brentan Alexander, PhD; Chief Science Officer & Chief Commercial Officer
A protracted legal and political fight that has pitted two pillars of the Republican base against each other reached its apex last week as the Supreme Court heard arguments in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association. At issue is the authority of the US Environmental Protection Agency (EPA) to provide relief to refiners under the Renewable Fuel Standard (RFS), which mandates blending requirements in the domestic fuel supply for biofuels, primarily corn-ethanol. Refiners argue that EPA’s authority (including to offer waivers) is broad, while the farm lobby counters that the authority is limited. The outcome of the case rests on how the nine justices interpret the meaning of the word “extension.” Their decision has the potential to enormously affect the value of ethanol in the US, directly driving corn prices and economies in the US heartland.
The RFS regulation was established by Congress with the Energy Independence and Security Act of 2007. Formulated during a time of falling US oil production, the RFS biofuels blending requirement strategy was seen both as an economic benefit to Middle America and a way to fortify domestic energy security. Under the RFS, the EPA sets annual “Renewable Volume Obligations” for a variety of biofuels that refiners must blend into finished fuels. To track compliance and enable burden sharing, the RFS established a market-based system that allows obligated parties to trade compliance credits (RINs). These RINs have a fluctuating value depending on supply and demand of biofuels in the market, and the D6 RIN, which relates to corn-ethanol, has been an important economic driver for growers in the Midwest. The program underpins the ethanol industry, which generated more than $46 billion in revenues in 2018 alone.
The cost of the RINs is borne by refiners (and eventually the consumer), who must purchase sufficient RINs to ”retire” with the EPA to satisfy their mandate. To aid small refiners from the added compliance costs, the RFS includes a waiver process designed to exempt qualifying refiners from the obligations of the RFS. Through a petition to the EPA, qualifying refiners can be granted temporary exemptions from blending mandates if the EPA, in consultation with the Department of Energy, finds that RFS compliance would lead to “disproportionate economic hardship” for the petitioner.
The difficulty for corn growers is that this exemption program was expanded considerably during the Trump administration. The number of waivers granted to refiners skyrocketed from under 10 to over 30 in the first two years of the administration. Even large refiners were given waivers, and the EPA failed to increase mandates on other refiners to compensate for the missing gallons, effectively reducing demand for biofuels by billions of gallons overnight. Prices for ethanol and the D6 RIN collapsed. Many ethanol plants closed as a result. Incensed, Chuck Grassley (R-IA) noted that the EPA “screwed us” and the lobbyists for farmers and ethanol producers unloaded criticism on administration officials. A lawsuit followed, claiming the EPA overstepped its bounds in issuing the waivers.
That lawsuit was decided by lower courts on the interpretation of the statutory language. The RFS rules state that small refiners (under 75,000 bbl/day) did not need to comply with the RFS until 2011, and those refiners meeting the disproportionate economic hardship threshold were allowed a temporary exemption valid for an additional two years. The next paragraph in the statute further allows that a “small refinery may at any time petition for an extension of the exemption.” The 10th Circuit focused on the word “extension” and ruled that exemptions are only valid if they are extensions of exemptions previously and continuously granted from the start of the RFS. Most exemptions put in place under the Trump administration therefore didn’t qualify. The decision was a major win for the ethanol industry, and the value of the corn-ethanol D6 RIN has increased over 400% since the decision was handed down.
Three small refiners in Wyoming, who have not had continuous exemptions, challenged that ruling, paving the way for last week’s oral arguments at the Supreme Court. As expected, the justices focused on the word “extension,” working to determine if the law’s intent was to increase compliance over time as exemptions lapsed and weren’t renewed, or to allow for regulatory relief due to hardship. The justices questions did not provide much guidance on which way the court is heading, but a win for the ‘hardship’ interpretation pushed by the refiners would work to undercut the RFS, opening it to further political meddling (beyond the EPA’s authority to set annual blending mandates), and likely leading to further efforts by Midwestern politicians to shore up the RFS program. Either way, both the corn and oil industries will be watching this summer for the final opinion on the matter from the highest court in the land.
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Meeting Biden’s Climate Goals Requires Giving Exxon a Seat at the Table
By Brentan Alexander, PhD; Chief Science Officer & Chief Commercial Officer
Earth Day 2021 saw the release of major climate announcements from players seemingly on opposite sides of the greenhouse gas debate. President Biden took the stage at the Leaders Summit on Climate to pledge a net-zero US economy by 2050. Meanwhile, ExxonMobil published a detailed call to action for wide-scale carbon capture investment with a first focus on the Houston, Texas area. Carbon capture is required to reach the ambitious goals laid out by Biden, and petrochemical majors will most likely be involved. So finding a place for these fossil fuel giants in a low-carbon future will be important, though not clear cut. Whether Exxon’s announcement was a public relations stunt or serious strategic shift, policy makers and environmentalists need to get ready for big oil to pull up a seat at the table.
Competitors big and small, foreign and domestic, have seen the writing on the wall for a few years now: BP has set a 2050 net-zero goal and has been active in shifting to renewable fuels. Royal Dutch Shell has a 2050 net-zero goal of its own and a burgeoning portfolio of biofuels investments, including one that turns trash into fuel. In Exxon’s backyard, Occidental Petroleum’s CEO, noting that the future depends on lower greenhouse gas emissions, has formed a joint venture to utilize technology from Carbon Engineering to suck carbon dioxide directly out of the air and store it permanently underground. To be sure, these companies' efforts are still a small part of their overall budgets and expenditures, but their growth demonstrates that the energy market is changing. As the world moves on from fossil carbon, business as usual will lead to stranded assets, heavy losses, credit downgrades, and ultimately no business at all. What happened to coal will inevitably come for big oil.
It’s not yet clear if Exxon has come to this realization given that it has no net-zero pledge despite growing shareholder pressure. Its proposal last week read less as a change in strategic thinking and more as a trial balloon aimed at the new power brokers in Washington. Exxon says it is seeking to enable carbon capture and sequestration on the Gulf Coast, but offers no upfront commitment and no further deployment plan, yet asks for significant amounts of public money. Reaction from the climate community, which has spent decades watching Exxon actively bury climate research and gaslight the public, ranged from anger to eye-rolls.
And yet the proposal has merit. The Gulf Coast is home to a concentrated collection of carbon intensive industries. The local geology is perfectly suited for long-duration carbon sequestration. Exxon is well-positioned to enable carbon capture and sequestration given its personnel and expertise. And government action is needed to change the economic balance between clean and dirty energy.
Carbon capture is just one of many approaches needed to reach the ambitious goals laid out by President Biden, as a recent report from Energy Innovation demonstrates. A net-zero economy requires a little bit of everything: renewables, energy storage, electric vehicles, hydrogen, building efficiency standards, advanced nuclear, biofuels, carbon capture and sequestration, and more. It’s hard to pick a winner when everybody needs to finish first. As a result, the Biden administration’s announcement last week was heavy on ambition but light on details, which created a policy void. That allowed others to fill in the blanks, from Exxon’s aforementioned vision for carbon capture, to a relaunching of the Green New Deal by progressives, to a bad-faith effort by Biden opponents to use literal red meat issues to rile up their base.
The fact is that most, if not all, of the technologies and companies best positioned to enable a net-zero future have environmental blemishes (or worse) on their records. It’s possible to find something to like and dislike about nearly every solution. For example, batteries require vast amounts of minerals unearthed in environmentally destructive mines; biodiesel has led to mass deforestation in Asia; the list of companies that can enable the quick and effective deployment of carbon capture technology heavily overlaps with the list of companies most responsible for extracting fossil carbon. Giving money to enable a carbon capture and sequestration hub along the Gulf Coast may make for good climate policy, but the optics are poor when the companies most likely to benefit are Exxon, Schlumberger, Halliburton, Chevron, or another major petrochemical player.
Nearly all solutions to the climate crisis have tradeoffs, but not all are actively embraced by the climate community. So far, carbon capture run by petrochemical majors has been a hard pill for some to swallow. Getting the climate community to come to terms with this is going to be difficult because distrust rightfully abounds. Do these companies truly see a profitable and responsible future in climate-friendly business lines, or are they making a cynical calculation to avoid more drastic regulations that threaten their core business? We don't know the answer to that yet. What we do know is that the companies most experienced with drilling wells and moving vast quantities of molecules are also the best positioned to help enable the carbon capture sector. They deserve a seat at the table, even if it's an uncomfortable one.
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Blackouts in Texas and California Teach a Hard Lesson
Climate Change is Costly
By Brentan Alexander, PhD; Chief Science Officer & Chief Commercial Officer
A record-setting polar vortex, which brought intense cold to a majority of Americans, has led to massive blackouts in Texas; significant amounts of energy generating capacity have been knocked offline. The Texas grid operator, the Electric Reliability Council of Texas (ERCOT), announced early Monday morning the need for short-duration rolling blackouts across the Texas grid to balance demand with available supply. Within hours, those short duration blackouts had morphed into massive outages impacting more than four million residents for hours on end. As of last week, millions from Houston to Austin still did not have power restored and utilities were advising consumers to be prepared for further outages. ERCOT projections pointed to roughly 54 GW of generating capacity being available by end of day last Tuesday (above the 48 GW available at this time of writing), far short of the 69 GW in demand the system saw a week prior.
If this all sounds familiar, it's because California went through a similar situation just a few short months ago. Faced with an unprecedented heatwave, residents of the Golden State found themselves losing power for hour-long periods as the California Independent System Operator (CalISO) struggled to match supply with demand statewide. CalISO had dealt with heat waves in the past, and generally called upon electricity imports from neighboring states to balance the load in prior years. But the heat wave that hit California last year was particularly extreme and beyond what scenario planners had ever envisioned: a region-wide event impacting the entirety of the western US. The usual route of shoring supplies through electricity imports failed because other states in the region were experiencing the same heatwave, and blackouts were ordered before the entire grid went down.
All indications point to a considerably worse scenario that unfolded in Texas. Despite the uproar, California’s blackouts were modest by comparison, with around 500,000 homes and businesses losing power at the height of the blackout period for between 15 minutes and 2.5 hours. Texas, however, suffered from an unprecedented loss of generating capacity, with early reports pointing to roughly 30 GW of primarily gas-fired capacity offline, representing more than a third of generation capacity in the state. Some have taken the chance to blame wind and renewables for the issues plaguing Texas. But supposedly resilient fossil-fired assets are primarily impacting the region. Compounding matters, Texas is the lone state in the lower 48 with its own power grid and has limited ability to import power from neighbors. The Southwest Power Pool, another grid operator in the central United States that had indicated earlier this week that it may begin blackouts of its own, avoided a similar disaster in part by leaning on neighbors.
While it’s too soon to identify a root-cause for the catastrophe in Texas, it’s likely that planning failures analogous to California’s are to blame. A cold snap of this severity and longevity was likely not considered by ERCOT or Texas utilities in their resiliency planning scenarios. The failure of such a large portion of the generating fleet suggests that infrastructure designed for less extreme weather was left defenseless to the extreme cold. Equipment is icing, natural gas lines and distribution points are freezing, and fuel supplies are being prioritized elsewhere. Technologies exist to keep the wheels in motion during extreme cold (just ask Minnesota), but the added expense for the cold weather upgrades was likely deemed unjustified in traditionally mild Texas or cost-prohibitive in the deregulated Texas electricity market.
As climate change worsens extreme weather events, we should expect more of these failures. Aging infrastructure built around 20th century weather patterns will be continually tested by the more extreme weather now becoming commonplace. Reliability plans based off similar assumption sets will need to be reworked entirely. Industry analysts peg the cost of upgrading and modernizing the US grid in the trillions of dollars alone, which doesn’t even account for the trillions more needed to replace aging fossil-fired assets and build gigawatts of energy storage to support further renewables penetration. No matter your policy positions or thoughts, climate change will find its way into your utility bills. These grid failures are wake-up calls and provide further proof that the impacts of climate change are not geographically constrained, nor do they take aim at one political party. One way or another, the cost of climate change on each of us will make itself known: in this, both California and Texas can now agree.
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Carbon Capture: 11 Highlights From the Finalized 45Q Rules
A summary of key points from the 187-page final regulation
By Matt Lucas, PhD; Managing Director, Business Development
I’m excited about carbon capture technology; it’s critical for decarbonizing hard-to-electrify industrial infrastructure and other facilities whose emissions are challenging to mitigate. So, like many others, I’ve been waiting for the IRS to release its final carbon capture regulations on 45Q, the federal tax credit.
After nearly three years of anticipation, we finally have both the regulations and the IRS’s commentary. As then-Treasury Secretary Mnuchin said, “These final regulations provide taxpayers and the American energy sector with needed clarity on utilizing the section 45Q credit.” Finally!
For carbon capture to continue to iterate, scale, and improve, it needs non-recourse project financing and the traditionally conservative tax equity community to come to the table. Tax equity is critical for monetizing 45Q.
There’s a great deal to glean from the IRS guidance, but I would guess most people don’t have the time or patience to sift through its 187 pages. Here’s your cheat sheet: I’ve summarized the key points, which collectively provide the additional clarity and certainty that investors need to invest in carbon capture.
11 Takeaways from the 45Q Final Guidance:
- Removing the Cap: One of the key reforms to the 45Q regulation was to lift the 75 million ton cap on credits. However, the cap still applies to qualified carbon capture facilities placed in service before February 9, 2018 (i.e. before the reform was passed). In the interim, several 45Q credits have been ‘disallowed’—IRS-speak for ‘revoked’ because the taxpayers claiming them were not complying with the regulations. The IRS clarified that those disallowed credits will be returned to the 75Mt pool. To keep track, the IRS publishes an annual running tally (page 925) of claimed credits and will continue to do so until the cap is reached. In June 2020, 72,087,903 credits had been claimed, so I suppose the cap will be hit soon, even with the exclusion of the disallowed credits, and this annual report will then become irrelevant.
- Clarifying Who Gets the Credit: Some carbon capture projects (including many of the early demos) were vertically integrated from capture through geologic storage, so there was no question about who could claim the tax credit and who had responsibility for secure storage. However, this becomes more complicated when the capture and storage are completed by different parties. The IRS ruled that the credit belongs to the party that owns the capture equipment, and only they can elect to transfer the credit. Furthermore, the owner of the capture equipment may be different than the owner of the industrial facility, which the equipment is capturing from. This is important for carbon capture entrepreneurship; third-party capital can be brought to existing emitting facilities that don’t understand carbon capture but still want to benefit from the emissions reduction.
- Contractually Ensuring CO2 is Stored (Sort of): Beyond ownership, a greater complication is the contract between the capture company and the storage company. After all, if the storage company leaks the CO2, the capture company would be the responsible entity in the eyes of the IRS, since they were awarded the tax credit. The IRS thoughtfully allows for multiple CO2 storage contracts, as well as a string of contracts (say from a general contractor to subcontractors), but has only minimal rules about what liability the storage company is required to take on (“must include commercially reasonable terms and provide for enforcement of the party’s obligation”). As business hates ambiguity, I think this is a prime opportunity for investment-grade insurance solutions, like those from New Energy Risk, which can indemnify the capture company against leakage from storage.
- Timing the Credit: Legislation states the 12-year period for claiming the credit starts when the equipment is originally placed in service. Some rejected comments sought to stretch the timeline, by delaying the ‘Placed in Service’ date to account for MRV plan approval or a commissioning ramp-up period. The current policy design rightfully incentivizes the fastest possible commissioning schedule.
- Lifecycle Accounting Is Only for CO2: Some CO2 utilization pathways mitigate greenhouse gases other than CO2, and mitigation may be greater than the Qualified Carbon Oxide directly utilized. To comply with ISO 14044:2006, the IRS required lifecycle analysis reports (LCAs) to ensure the overall carbon utilization process was reducing greenhouse gas emissions, but expressly limited those LCAs to account for carbon oxides only for purposes of the tax credit. The credit volume is capped by carbon oxides that are captured rather than also including those that are mitigated. This is an admittedly messy area with many different processes. In particular, there are issues with defining system boundaries, defining a baseline, and verification generally. Overall, I doubt any of this nuance will contribute meaningfully to overall credit volumes since geologic storage projects will be much larger.
- Defining Carbon Capture Equipment: Earlier drafts from the IRS had attempted to list the included and excluded equipment, which turned out to be confusing given the diversity of carbon capture technology and processes. The final regulations allow for inclusion of all equipment related to carbon capture up to the point of transportation.
- What Is an Electric Generating Facility: One would think this is obvious, but some facilities, like combined heat and power facilities, may sell incidental electricity to the grid even if power generation isn’t their primary purpose. Many are not large enough to meet the 500,000 ton per year minimum requirement. The IRS defines these facilities by their MACRS asset classes, which are used in calculating depreciation. Since MACRS classes are well defined, this should put to rest any questions about which facilities have to meet the higher minimum capture volumes of an Electric Generating Facility.
- Holding the Line on Tough EOR Regulation: The IRS appropriately held firm that enhanced oil recovery (EOR) operations had to have their MRV plans or ISO certifications in place before claiming the 45Q credit and could not do so on a provisional basis.
- Expansively Defining a ‘Qualified Carbon Capture Facility’: A previous IRS document, Section 8 of Notice 2020-12, provided a broad definition for how to define a Qualified Facility. I applaud the IRS’s flexibility, allowing projects that share some features including:
- common ownership
- common loan agreement were planned under the same FEED study
- share common operations and management
- share infrastructure
- are part of the same contractual offtake
- are combined in regulatory permits and reporting
- and/or are proximally located to qualify as a single unit.I see no compelling reason to disqualify facilities solely for being too small. Technoeconomics will dictate a minimally viable facility size, but I see no reason for the IRS to put its thumb on that scale. However, Placed-In-Service requirements will still require any distributed projects to be commissioned simultaneously, which I think will limit the utility of this broad definition. - Slammed the Door on Photosynthesis and Soils as “Direct Air Capture” and “Secure Disposal”: For proponents of photosynthesis and soil carbon as climate solutions, ‘direct air capture’ sounded like plants and regenerative agriculture sounded like ‘secure storage.’ The IRS rejected these comments and preserved the Congressional intent of the tax credit to support ambient capture facilities and geologic storage in deep formations, not soils.
- Lookup Period is Shortened: Any CO2 leakage is deducted on a last-in, first-out basis. Earlier rules provided a five-year lookback period for ensuring geologic storage, but the IRS shortened this to a three-year period. Class VI storage sites are not exempt from recapture requirements. The shorter lookup should be helpful as it lowers the compliance burden on the taxpayer. Insurance solutions from New Energy Risk can mitigate this further.
If you have additional questions about 45Q, we’d be happy to hear from you. Here at New Energy Risk, we are geared up to play a substantial role in helping to scaling new carbon capture technologies. So for us, the finalization of 45Q is the bedtime reading we’ve been waiting for. And now we can finally get some rest.
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Interview: Kara Owens, Global Executive Underwriting Officer – Cyber & ESG
We are inspired by people who are passionate about insurance and technology that solves pressing global challenges. In this interview series, our chief actuary, Sherry Huang, talks with friends of New Energy Risk whose work makes a difference, and whose journeys will inspire you, too.
This interview has been lightly edited for clarity.
“You should meet Kara Owens,” my reinsurance broker friend suggested to me last summer. “She is a cyber risk underwriting executive and is heavily involved with Markel’s ESG initiatives.” I had mentioned to him that NER is refocusing on our own ESG efforts: the ways we engage in business that is positive for environmental, social, and governance goals.
So, I reached out to Kara who shared the story of her career and her latest initiatives at Markel. Markel provides coverage for specialty insurance and reinsurance for commercial niche markets. Markel is one of the reinsurance partners of AXA XL that works with us at NER.
Kara, tell us about how you get to where you are today, and some of the mentors who showed you the way.
It’s been quite the journey. I am one of those odd ducks that majored in Risk Management and Insurance rather than falling into the industry. I went to Temple
University and had numerous insurance internships in college. After graduation, I accepted a role at Guy Carpenter. I decided after a couple of years that underwriting was more my passion, so I moved to TransRe. I spent eight years at TransRe, moving up from a line underwriter to a global P&L manager for Cyber before age 30. My role at TransRe took me all over the world – from South America to Europe to Asia doing presentations and helping insurance companies start cyber portfolios. I helped form the Women’s Group at TransRe and was on the Board of a project with the Singapore government. I was out of my comfort zone a lot. I truly think being outside of my comfort zone helped to shape my career.
I moved to Markel about three years ago and now I can work with all of the (re)insurance divisions, from fronting paper to Insurtech to alternative capital. I’m on the board of the Association of Professional Insurance Women (APIW), which helps me to give back while doing something I’m passionate about. I am also now engaged on the leadership team for the Markel Women’s Network. I recently became a strategic advisor to a start-up company that advises individuals and firms on how they can measure their impact in building a more sustainable world. When the role of global executive underwriting officer for ESG was established, Markel recognized my passion and I was graciously offered the position. I’m thrilled to continue this adventure!
I have been incredibly lucky with mentors throughout my career. I keep in touch with them all regularly and still need to seek advice to this day! I don’t think that will ever change. What has changed is that I am now acting as a mentor to several mentees. It’s important to me to give back to this industry.
What is your vision for Markel’s ESG practice?
My role is still very new and I’m so excited for what is to come! I think there’s a lot of work to be done in the industry that will really make a difference (while at the same time reducing risk). At Markel, we have always had a strong commitment to our communities and ESG is a natural fit with the culture. I’m in the process of working with colleagues to create an underwriting framework and strategy to allow Markel to better understand, prevent, and reduce ESG risks. There is also a lot of opportunity for product development by enhancing, creating, and supporting products that promote responsible environmental and social efforts.
I see a lot of ways for more collaboration in the insurance industry. We have seen examples already with the United Nations Environment Programme Finance Initiative Insurance Working Group and Principles for Sustainable Insurance initiatives where insurers and stakeholders collaborated on the proposed ESG standards. In addition to the insurance space working together, [the industry can embrace] other partnership opportunities with other industries and initiatives.
What do you enjoy the most about your job? What is the most challenging aspect?
What I enjoy most and what is the most challenging is the same thing for me.
Being involved in two areas that touch nearly every product line provides me the opportunity to constantly be learning, which I really enjoy. But sometimes I feel like I’m drinking from a firehouse as I evaluate numerous products’ exposure to cyber and now ESG.
I really enjoy the concept of ‘round-table’ in underwriting, which describes the need to look at each transaction from many perspectives, including how current events might affect our business and how each transaction/risk might affect our portfolio. I also love the potential to really make a difference with the ESG role.
What is your advice for people entering the insurance industry today?
One piece of advice is to never stop taking advice! There’s always room to grow.
A few more takeaways that have really helped me:
- Even with technology coming full-force at the insurance space, relationships are still the heart of the industry. Make sure to build a network and a support system including mentors.
- Join organizations and take leadership roles within those groups. This will help to build your confidence while building a network!
- Raise your hand when no one else wants to (this is what I did with cyber). Also: speak up. I always loved Ruth Bader Ginsberg’s quote, “Speak your mind even if your voice shakes.” Don’t be afraid to get out of your comfort zone often.
- Never stop learning—whether it’s taking classes or getting designations, going to conferences, taking a new job, or just reading the news and applying it to the insurance industry—there are always opportunities to grow.
- Find your passion. My passion seemed to change over time, but I always let it guide me in my decision making.
- Give back! This is an area where this industry never ceases to amaze me. I have met some of the most charitable people in insurance. Also, as you grow in your career, give your time to mentor and to organizations such as Gamma Iota Sigma or [elsewhere] such as universities to recruit talent into our amazing industry.
- Take care of yourself. It’s often difficult to balance it all, but it’s more important now than ever! Meditation, building in small breaks to my workday and going for walks outdoors have really helped me.
Thank you, Kara, for this interview. You inspire me with your can-do attitude, your desire to give back, and your passion for insurance-related ESG potentials!
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$100 Million from Elon Musk Won’t Enable Carbon Capture
By Brentan Alexander, PhD; Chief Science Officer & Chief Commercial Officer
Last Thursday, Elon Musk announced (in well under 140 characters) his intention to donate $100 million to the “best” carbon capture technology, chosen through a competition whose details and judging criteria are yet to be announced. Musk promised further details next week. The problems holding back the mass deployment of carbon capture technology are primarily economic. As such, funding for research and development of carbon capture technologies is most welcome, and Musk’s donation will surely lead to technological advances. However, a Silicon Valley mindset like Musk's, one that champions disruptive innovation as the solution to all problems, is the wrong fit for this important industry.
One difficulty with carbon capture technology is that uses for its recovered CO2 are still limited. The predominant usage today is in enhanced oil recovery, a process that increases oil reservoir yields by injecting CO2 into the well. Multiple other commercial uses are in development, but until there is an offtaker willing to purchase CO2 at scale, projects are having a hard time gaining traction with capital investors.
Those investors are direly needed, however, because carbon capture technology is costly. For example, separating CO2 from the emissions of power plants or industrial facilities (e.g. Petra Nova in Texas) doesn’t happen spontaneously: it takes loads of energy. Separating CO2 from air (e.g. Carbon Engineering) is more costly still because the CO2 is thinly dispersed, making up only 0.04% of the air we breathe. Then on top of the expensive power needed to perform the separation, the equipment itself is still extremely expensive. Even as equipment costs come down, no technological advancement can overcome the laws of nature and make this process free.
Proposals to avoid the need for complex equipment by utilizing kelp, trees, soil, and other natural processes to capture and sequester carbon face the usual challenges associated with funding, creating, and managing forests or farms, but with the additional challenge that the true efficacy of these potential carbon sinks is still widely debated.
Whether the technology performing carbon capture is chemical, biological, or otherwise, somebody has to buy the resulting CO2 or otherwise incentivize its capture and sequestration to make the upfront and ongoing costs worthwhile.
To find markets for the captured carbon, some are looking at chemically converting CO2 into high-value products, like carbon nanotubes. The downside of this approach is scalability: the most attractive products hold high value precisely because they are hard to make or have small and limited markets. As one scales up carbon capture technology to impact climate change, the sheer quantity of produced material would swamp the niche markets for these high-value products, cratering prices and undermining the original business case.
A more scalable solution aims to create a circular economy wherein CO2 is used to make fuels; the kerosene used by Musk’s SpaceX could be made this way. Even here, however, fundamental laws of thermodynamics show that the energy input required to convert CO2 into chemicals or fuel is higher than the energy available in the products themselves. For an idealized system that converts CO2 and water into gasoline using only exactly as much energy as ends up in the fuel, the cost of the energy to perform the conversion would be $3.69 for each gallon of gasoline produced, assuming electricity at 10 cents per kilowatt-hour. It’s physically impossible, no matter the advancement of technology, to use less energy to synthesize that fuel. Real systems aren’t 100% efficient, and further, add in the cost for maintenance, overhead, water, energy for the CO2 separation from its source, and financing costs for the equipment to do all this work, which leads to still higher costs per gallon produced. Competing against cheap fossil fuels on a dollar for dollar basis is nearly impossible.
The only durable solution that enables the scaling of carbon capture technology is a regulatory regime that makes it more expensive to emit CO2 (through taxes, fees, or otherwise), that pays companies to capture CO2, or that does some combination of the two. Thankfully, some of these tools are already in place. Just weeks ago the United States Internal Revenue Service (IRS) finalized its rules for a program colloquially referred to as 45Q, a tax credit that provides projects with up to $50 per metric ton of CO2 stored underground. The California Low Carbon Fuel Standard (LCFS) provides credits to facilities that capture and store CO2, with the value of the credit floating based on a mandated trading market and the number of granted credits dependent on the overall carbon intensity of the process. Similar programs exist in the Pacific Northwest and a federal program is under development in Canada.
These programs are not enough. 45Q is temporary and will expire in a few short years. The LCFS program has limited scope and jurisdiction, and its market would be quickly overwhelmed if carbon capture reaches scale. But these programs provide mechanisms to help support the burgeoning industry today and provide blueprints for new programs in the future. The solution to carbon capture deployment lies in expanding financial programs like these to provide further incentives to technology developers.
Carbon capture today looks a lot like solar technology did 20 years ago, when it was on the brink of growing 500x over the next two decades. Research and development money did not unlock the solar market at the turn of the century; rather it was the emergence of a viable business model driven by mandated renewable energy targets that allowed solar to rapidly expand and run down the cost curve, driving further growth. Carbon capture is ready to make that jump.
Musk’s prize will surely help some firms further their technology and reduce their costs, but Silicon Valley-type solutions won’t create the market that unlocks carbon capture. Instead, carbon capture is ready for Wall Street and Capitol Hill. It will take the deployment of today’s technologies supported by billions of dollars in incentives and investment from governments, banks, and corporations to demonstrate the much-needed business case for carbon capture and truly enable it to scale.
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Interview: Audrey Lee, PhD, Clean Energy Senior Executive
We are inspired by people who are passionate about technology that solves pressing global challenges. In this interview series, our chief actuary, Sherry Huang, talks with friends of NER whose work makes a difference, and whose journeys will inspire you, too.
This interview has been lightly edited for clarity.
I first ‘met’ Audrey through a few shared online interest groups. One day I saw that she had posted about being a co-chair of Clean Energy for Biden. (I subsequently found out that Matt Lucas, NER’s managing director of business development, is also involved in the same organization.) This piqued my interest, and I then learned that Audrey has an impressive background with a wealth of diverse experiences. She has done everything at work from scientific research, policy and regulation, big data and analytics, product and market development; she is now a Board director for ArcLight Clean Transition Corp, a special purpose acquisition company with a focus on sustainability and clean energy. I spoke with Audrey on the eve of Election Day with great anticipation. Audrey is personable, open, driven, and enthusiastic about the work she is doing to promote the clean energy sector.
When did you first start working on energy-related technologies? Was there a pivotal opportunity or individual who led you to working in the renewable energy sector?
I first discovered energy policy in graduate school while struggling with my PhD in electrical engineering. I took classes in public policy with Professor Denise Mauzerall at Princeton and I loved how directly impactful to society it is. Professor Valerie Thomas was also an early believer in me and she helped give me a lot of confidence. When I graduated, I joined the Department of Energy through a Presidential Management Fellowship. I highly recommend that program, which targets recent graduates with an advanced degree for federal government public service. At the DOE Policy Office, under the guidance of Carmine Difiglio, I found a way to be the bridge between the technical analysts and modelers at Brookhaven National Lab and White House policy decision-makers.
Can you tell us about the most rewarding project that you worked on in the last few years? Between being an advisor to the California Public Utilities Commission, running Sunrun’s Energy Services group, and co-chairing the Clean Energy for Biden initiative, I am sure it’s hard to talk about only one!
I love proving that something new can be done. At Advanced Mircrogrid Solutions, we replaced fossil fuel power plants with an aggregation of batteries at customer sites. With Sunrun, we entered the ISO-NE capacity market with the aggregation of rooftop solar and batteries. Most recently, it has been great to be involved in Clean Energy for Biden – a volunteer organization – and witness the impact that we made from hundreds of active volunteers and 10,000 members.
Tell us a little more about the Clean Energy for Biden initiative.
We have three goals: fundraise, get out the vote, and provide policy recommendations. We leverage diverse skills of volunteers, across the country with more than 30 state/regional/affinity teams. Check out the upcoming policy summits on November 16 (4-6pm PT) and November 23 (4-5:30pm PT):
https://www.cleanenergyforbiden.com/policysummit
Do you have any advice for women who are pursuing a STEM career, who wish to maximize their impact using their backgrounds and skills?
Personally, my education in applied physics and electrical engineering provided a good foundation. I would encourage women to explore, talk to people, and understand the problems they are trying to solve. I’ve always loved learning from other people – including from my own family. My Dad is a physicist, and my mother is an entrepreneur. My general advice is never be too comfortable; ask yourself how can I learn more, how can I apply a quantitative, analytical approach to solve a problem.
Which areas require the most work in advancing clean energy solutions? Policy/regulation, innovation in technology solutions, or private investment?
Many technology solutions are economically competitive for clean energy already, and private investment, such as ArcLight, is ready to deploy investment and reduce the cost of capital. On the technology innovation front, we need more technology solutions for negative emission, such as carbon capture, to help achieve a rightfully aggressive clean energy goal of net-zero emissions by 2050. I think we have the most need for policy at this moment. Policies that set the rules of the game, set mitigation goals, and let competitive technologies and market solutions participate. Such policies can go hand in hand with economic recovery as more jobs are created in the clean energy sectors.
Thank you, Dr. Lee, for talking to me for this interview series!
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One Small Step for Torrefaction, One Giant Leap for the Bioeconomy
Commissioning of the US’s first commercial torrefaction facility is a milestone in its own right, and a potential game-changer for the bioeconomy’s inroads against fossil fuels
By Matt Lucas, PhD, Managing Director, Business Development
Moonshine: It might not sound synonymous with the bioeconomy, but at a massive scale, the fermentation of traditional sugar to create ethanol was where the bioeconomy got its start. Leaving behind tasty feedstocks and inebriating bioproducts until happy hour, today we see that the bioeconomy includes a growing and wide variety of feedstocks, processing technologies, and products. Importantly, when the feedstocks are cost-advantaged wastes that are converted into value, the bioeconomy is good for both commercialization and environmentalism.
One processing technology of the bioeconomy is torrefaction, a member of the trifecta of dry thermochemical waste processing technologies, which also includes gasification and pyrolysis. With the completion of the Restoration Fuels (RF) commercial scale torrefaction facility in Grant County, OR, the US now has a complete set of all three technologies in or nearing commercial operation. Each process has its own strengths and weaknesses, but all of them are important contributors to a new wave of bioeconomy innovation.
What is torrefaction?
Torrefaction is a thermochemical process where organic material feedstock (“biomass,” e.g. wood chips) is heated in the absence of oxygen to drive off water and volatile organic compounds (VOCs). The VOCs are burned to provide process heat, but the vast majority of the feedstock’s mass remains in solid form and exits the process as the product. The product, termed “bio-coal,” is more energy dense than biomass, is hydrophobic (important for shipping and storage), and is far more resistant to rotting (important for storage). Bio-coal is used as a drop-in replacement for coal as a global energy source, more on this below.
Torrefaction’s thermochemical counterpart, gasification, instead applies an oxidant to the feedstock so that most of it converts to a gaseous product stream. (Gasification makes gas, go figure.) The other counterpart, pyrolysis, uses the same oxygen-starved environment as torrefaction but typically operates at higher temperatures to drive further reactions that convert more of the feedstock to gases and liquids. (The meaning of pyrolysis is “pyro” for heat and “lysis” for break down. Incidentally, to torrefy means to roast, so I like to loosely think of torrefaction as the slow-cooker barbeque in the bioeconomy kitchen.)
What happened?
In 2019, the RF commercial-scale torrefaction facility started operations. The facility is co-located with an existing lumber mill. It processes forest residues from a forest restoration project on public lands, making use of what would otherwise be wasted or what would become a wildfire hazard. This is the first commercial-scale torrefaction facility located in the US.
The project had been a long time coming. It originated from the Consortium of Advanced Wood-to-Energy Solutions, a public-private partnership between the US Forest Service and the US Endowment for Forestry and Communities, a non-profit. The Consortium supported bio-coal production for a test campaign at Portland General Electric’s Boardman power plant.
Bio-coal as a coal substitute?
The bioeconomy has long been making inroads as a source of fossil fuel substitutes. Ethanol displaced gasoline (within limits). Biodiesel displaced diesel (within limits). Then renewable diesel came along to displace diesel entirely (without limits). Also, various biofuels can blend into the aviation fuel supply. Finally, let’s not forget renewable natural gas, which displaces fossil natural gas.
But throughout this bioenergy revolution, coal remained untouched. And that makes some sense. Coal is cheap and already losing ground to other fuels, so why chase a replacement for the lowest-margin product in a declining market? However, there actually are compelling reasons to pursue bio-coal. The coal-fired power generation fleet in much of the world is still young and critical to national grids. There are calls for a just transition from coal, which means prioritizing workers and keeping their jobs. A drop-in replacement, bio-coal, lets that happen, but also allows for these fleets to be an integral part of the energy transition. RF’s new facility takes advantage of this upside.
Lessons learned
Although it was ultimately successful, the reality is that RF had a tough time getting to market. What lessons can we learn? New Energy Risk’s products and some more general lessons from project financing could help for future projects:
- No offtake: RF didn’t have a long-term purchase agreement to enable project financing of their facility. For new products where market demand is not yet clear, it can be tempting to build an entirely merchant project. If possible, it is more desirable to establish market demand and a fit between your product and your customers’ specifications at sub-scale before the big dollars are at risk. Fortunately, subsequent torrefaction projects are securing letters of interest from overseas utilities for bio-coal, so we feel hopeful about the potential for creditworthy offtakes to support future projects.
- Minimal scale: RF can process 100,000 tons of feedstock per year, which is modest for a bioeconomy facility. Thermochemical processes almost always see improvement in capital efficiency at larger scale, so a larger facility would likely have been cheaper. RF has stated that part of their thesis is to match facility size to the local forest residue resource, so they targeted a smaller facility near a smaller forest. Luckily, there’s an opportunity to co-optimize facility sizing and location with forest restoration contracting. New Energy Risk’s insurance solutions can facilitate the technological and financial de-risking required to unlock larger capital projects.
- Feedstock uncertainty: The site that hosts the RF facility almost shut down in 2012 owing to a lack of wood fiber from the public forest lands in the area. The need for certainty in a long-term feedstock supply is critical to project financing. New Energy Risk is developing insurance solutions to help mitigate feedstock risk.
At New Energy Risk, we’re excited to see the trifecta of dry thermochemical processes—gasification, pyrolysis, and torrefaction—reaching commercial scale to support the waste-to-value and bioeconomy sector. These projects are even more impactful when the feedstock comes from forest restoration, both reducing the risk of wildfires in the forest while creating bioenergy and bioproducts. It’s an uncommon win-win for forest managers, coal workers, and environmentalists alike; may they celebrate together with a glass of moonshine and a toast to the future of the bioeconomy.
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