STATUS REPORT 3.0 THE DAWNING OF DANISH BIO-ECONOMY. Summary of the Business Plan

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1 STATUS REPORT THE DAWNING OF DANISH BIO-ECONOMY Summary of the Business Plan 3.0 This report was prepared by MEC I/S consisting of: - Vestforsyning A/S - Struer Forsyning A/S - DONG Energy A/S - Novozymes A/S August 2015

2 INTRODUCTION Over the past four years, Maabjerg Energy Concept has been engaged in planning the technological foundation as well as the business perspectives of this project. The completion of Business Plan 3.0 is now only awaiting the final framework conditions to be settled. Once these have been established, we will be ready to realize one of the best laid-out supply projects in Denmark. utilize the potential which exists in the Danish bio-economy, a business area which holds great potential for employment. The latest estimate, made by Copenhagen Economics, assessed the number of potential jobs at A great number of these jobs will be created in the areas in Denmark which have been losing jobs over a long period of time. We believe we have succeeded in creating a unique demonstration plant of a high international standard - ensuring a climate-friendly, modern and futureoriented heating supply for Holstebro and Struer. At the same time the plant will help to maintain specialized jobs in the area, and it will lead to an increased Danish export of know-how and products. The project contributes significantly to the national economy and to the general employment, and it reduces climate impact without affecting purchasing power. It contributes positively to public finances and thereby makes it possible to strengthen the country s competitive position. This status report lays out the general conditions, including the crucial biofuel blending mandate, which will form the basis for making the final decision to realize the project. The consortium partners expect to make the decision to go ahead with the project once there is sufficient certainty that the general conditions will be met; this is likely to happen during the 2nd half of The MEC developmental work has been going on for four years. It has been detailed and comprehensive, and has resulted in a very thoroughly defined project. The developmental work has proven that it is now possible to produce second-generation bioethanol based on residue biomass at a price level close to that of corresponding food-based pro ducts, but with a much more positive effect on our climate and the environment. The demonstration plant offers a new and strong platform for Danish bio-economy which can be used for future projects both domestically and abroad, benefiting both employment and export. Denmark will strengthen its position as a pioneering country in the use of residue products to replace fossil fuels. The preparatory work was financed by the parties of the consortium with the support of EUDP (Energy Technology Development and Demonstration Programme of the Danish Energy Agency) over the period March 2012 to June It has also been supported by the Green Transition Fund Fonden til Grøn Omstilling under the Danish Business Authority during the period July 2013 to July We are very much looking forward to realizing the project and kick-starting Danish bio-economy. The companies, institutions and researchers working within this field all agree that realizing the project will be the starting signal needed to Jørgen Udby Chairman of the Board, MEC I/S 2

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4 WE ARE BUILDING A BIOREFINERY The fundamental idea of the project is to use biomass residue to produce fuels, and to utilize the nutrients which are found in the raw material in the most efficient, value-adding and environmentally friendly way. We make use of the synergy between the 2G bioethanol, biogas and biomass-fueled cogeneration (CHP) plants, all of which use residue biomass as a raw material. The total capacity has been determined on the assumption that the bio-refinery will be able to supply the primary need for district heating in the supply areas of Holstebro and Struer. MEC is thus a complete and highly efficient biorefinery rather than a number of individual biomass based production facilities t animal manure 45 million m 3 biogas t biomass waste t waste water sludge Biogas Nutrients N: t/year P: t/year K: t/year t vinasse t straw 2G Bioethanol 77 million litre bioethanol Excess heat t lignin Electricity 60 GWh Steam 600 TJ t waste CHP Electricity for households Heat for households 4

5 The figure shows that the production of 77 million electricity, biogas and transportation fuel, and litre of bioethanol results in two surplus products: makes use of fertilizers and nutrients by leading tonne of vinasse, which can be converted them back to the farms. to an extra 25 million m biogas, in addition to the 3 20 million m3 biogas currently being produced tonne of lignin, which can be used as fuel in the CHP plant. Thus the capacity in the existing plants is utilized, and the surplus heat from the bioethanol process, which is generated at the CHP plant, covers the demand for district heating in the two towns. The total refinery produces district heating, 5

6 DANISH GREEN TECH IN A LEAGUE OF ITS OWN INTERNATIONALLY The partners jointly running Maabjerg Energy Concept are experts in biological processes, process technology and incineration technology. They already own and run the CHP plant Måbjergværket, which is fuelled by biomass; the biogas plant Maabjerg BioEnergy; and the district heating system. These systems are all involved in the project. For several years, DONG Energy has been developing its own technology at the Inbicon test-plant in Kalundborg, Denmark. Similarly, Novozymes, who have supplied enzymes for ethanol production for many years, have researched and developed enzymes for 2G bioethanol production based on straw. As a result of this extensive developmental work, the MEC project can now show that the 2G bioethanol production can itself utilize 74 % of the energy contained within the straw that is used. The special synergy between the 2G bioethanol production, the biogas production and biomass based power and heat production unique to Maabjerg Energy Concept means that it will be possible to utilize more than 77 % of the energy of the raw material involved. Furthermore, the important nutrients and fertilizers contained in the raw material are also utilized. The project can be further optimized by using the cooling heat fully. This can increase the energy utilization to a potential 89 %. MEC Energy balance 6

7 INPUT: RAW MATERIAL FROM BIOMASS RESIDUES Raw material in the form of biomass residues The possibility of transporting straw pellets by is already being used for production at the two ship will influence the pricing in Denmark and existing plants CHP and biogas currently at a increase the supply reliability for raw material rate of approximately tonne annually. deliveries. Once the third leg of the refinery the bioethanol plant has been built, another tonne of straw per year will be added. Maabjerg MEC The extra biomass supply which is added to the Distance from MEC km. biorefinery solely consists of tonne of Crops 2011 straw. 100 km. Spring Barley Winter Barley Spring Wheat Winter Wheat Triticale Rye Oats and dredge corn The required amount of straw only makes up 15 % of the straw which is not currently being used in Denmark, and it can be obtained within an area of a 100 km radius around the plant. Denmark has an established market and logistics system for straw delivery, since straw has been used for fuel for a number of years. England is the only neighboring EU country to have a developed market for straw and straw pellets. However, in some of the Baltic States a market is evolving, which will increase the options for obtaining straw. 7

8 OUTPUT: A BLENDING MANDATE IS ESSENTIAL When investing large sums of money in a plant like MEC, it is important to be reasonably sure that the end product will be marketable to secure and stable markets in order to minimize the financial risk. In 2015, The EU Council of Ministers agreed on a draft directive concerning a direct 2G blending mandate of 0,5 % with the option of member states each individually laying down a blending percentage for themselves. The secure and regulated markets, which include heat, biogas, lignin, electricity and fertilizer, will make up 29 % of turnover in the MEC project. In addition, internal sales within the refinery will account for approximately 25 %. Bioethanol, which makes up 46 % of the turnover, or 500 million DKK annually, will be sold under commercial conditions on a market which has not yet been established. The expected distribution of sales is shown in the table. Because of the current climate goals for the transportation sector in the EU, 5 % bioethanol is being added to petrol at present. This bioethanol is a food-based, so-called 1st generation bioethanol. There is a reasonably developed market for this product, and the pricing of the product mainly follows that of the petrol price. The EU has an overall strategy of increasing the share of sustainable energy in the transportation sector by 10 % by One way of achieving this is by adding bioethanol to fuel. This paves the way for establishing a 2G market in the EU, assuming that the member states have the determination to implement this. Before the end of 2016, the member states must inform the EU commission as to how they plan to implement the directive. Sales and pricing will remain uncertain until this new market has been established. A number of countries, including Finland, Italy and Germany, have already agreed upon an additional requirement for 2G blending, and more countries are about to follow. In order for the parties behind MEC to take a final decision to invest in the project, it is necessary to pass the Danish legislation for a biofuel blending mandate so as to create a market and to determine pricing. According to MEC, a mandatory blend of 2.5 % 2G biofuel, commencing in 2018, will be sufficient to initiate the project. 8

9 MEC Turnover Million DKK % of the turnover Markets with long-term supply contracts % Heat for VHS % Biogas for CHP 88 7 % Lignin for external buyers 44 4 % VE gas for the natural gas network 86 7 % Liquid fertilizer for the Biogas suppliers 3 1 % Commercial external markets: % Bioethanol % Electricity for the electricity network 17 1 % Internal markets: % Internal consumption of electricity 31 2 % Lignin for BioHeat&Power 76 6 % Vinasse for BioGas 50 4 % Steam for BioEthanol 44 4 % Biogas for VE upgrading 93 8 % Biogas for BioGas 11 1 % Total % 9

10 INVESTMENTS AND FINANCING The total investment makes up 2.2 billion DKK, The largest single investment in the biogas plant shared between the three plants as shown in the is an upgrading plant which cleans the excess above table. biogas so that it can be sold to the natural-gas network. The table shows how the bioethanol plant makes up 1.8 billion DKK or 84 % of the investment The MEC partners have chosen to carry out the budget. Cogeneration makes up 225 million DKK entire project as a heat supply project regulated or 10 %, while biogas and VE upgrading make up by a non-profit principle. the remaining 124 million DKK which corresponds to 6 % of the investment budget. The total refinery represents total assets of 3.1 billion DKK, of which new investments make up In the CHP plant, the largest single investment 2.2 billion DKK. is a new fibre boiler to incinerate lignin from the bioethanol production and fibre from the biogas The new investments are expected to be financed process. This ensures a clean process which through loans guaranteed by the heat supply enables the utilization of the nutrients. companies and the municipalities involved. This leads to the lowest possible interest rate. Production facility Bioethanol Investment Million DKK CHP 225 Biogas and upgrading 124 Total investment

11 CORPORATE FINANCE In order to be granted the operational guarantees through the EU NER 300 program, MEC s corporate finances have been examined and have passed a technical and financial due diligence carried out by the EIB, the European Investment Bank. This has been caused by the current low prices of fossil fuels, combined with the statements put forward by significant players in the market, who predict that a growth in the price is not expected in the near future. The consolidated financial statements for the MEC operation show an expected accumulated profit after tax of million DKK over the entire 20-year operational period. The results are based on a large number of preconditions, which include both results of analysis and research made by the partners and also official preconditions where such are available. The partners, however, have deviated from the official preconditions in one significant respect, since the price condition for 2G bioethanol (petrol) has been reduced compared with the expectations of the Energy Agency. The starting point of the price development in this area now reflects the average prices of fossil fuels over the last four years, which is 20 % lower than the official forecast. The internal sale of resources between the facilities follows market prices. The project presumes a three-year ramp-up period so that the production will be fully operational by the fourth year. The largest business unit is Bioethanol A/S, which makes up 63 % of the turnover. BioGas A/S makes up 19 % of the turnover, while BioHeat&Power A/S makes up the remaining 18 % of the turnover. The sum of operational profit for the three business units is expected to be positive when viewed over the 20-year time frame. The project will have a total return on investment slightly exceeding 8 %, when applying the preconditions mentioned. The following table shows the expected financial results in respect of investment made. Business Unit Investment sum Million DKK Turnover year 4 Million DKK Accumulated profit Million DKK Bioethanol CHP Biogas MEC * * The figure for accumulated profit for MEC as a whole is the consolidated group profit. 11

12 SOCIO-ECONOMIC EFFECTS The effects on the national economy have been calculated with the aid of the standard scenario in the ADAM model used by Statistics Denmark. According to the ADAM model, the investment in MEC will increase GDP by approximately 1.8 billion DKK and create full-time jobs each year during the two-year construction period. The operation will likewise increase GDP by 1.0 billion DKK annually, and will create the basis for permanent jobs. These impressive figures are due to the fact that the production is based on residue biomass and other waste resources, with a minimal need for import. The budget balance is influenced positively by 1.5 billion DKK, while the effect on the current account of the balance of payments is -1.3 billion DKK for each year during the construction phase. The effect on the balance of payments contributed by the operation is an expected yearly profit of 680 million DKK. The basis for this figure is the fact that ethanol production reduces the need for importing similar products. Finally, calculations show that the government budget balance is positively influenced with a corresponding 680 million DKK. Socio-economic Effects Million DKK of the investment per year of the operation per year Net turnover (new activity) GDP Impact Public budget account Net effect on balance of payments Employment

13 CONSUMER ECONOMICS AND COMPETITIVE POSITION During recent years, EU institutions have worked on the implementation of a 2G blending mandate, within the framework of the general requirement for sustainable energy in the transportation sector. This requirement within the EU will be 10 % in In 2015, the EU Council of Ministers and the European Parliament agreed on a proposed directive which requires a direct 2G blending mandate of 0.5 %, with the option of setting higher standards nationally. annually, corresponding to an additional price of only 0.03 DKK per litre when filling the tank. The table below shows the additional cost in consumer price per litre when adding 2.5 % 2G biofuel. Theoretically, there is some lost revenue related to cross-border shopping. This amounts to approximately 50 million DKK/year, estimated by the ADAM model. This improves the possibility that a basis for a 2G market in EU can be established, if the member states buy into the idea. Before the end of 2016, the member states must inform the EU Commission about how they plan to implement the directive. It is important to MEC that Denmark will seize the opportunity of setting a higher standard for a national biofuel blending mandate from 2018 on. The Danish Oil Industry association has made an analysis showing that the added cost in the best case scenario will be 0 øre/litre (0.00 DKK), when taking into account a number of technical aspects concerning the biofuel blending mandate. When assessing the competitive position, it is important to notice that a 2G blending mandate relates to petrol only, whereas Danish business vehicles use mainly diesel for transportation purposes. More specifically, the consortium recommends an blending mandate of 2.5 % for 2G, which could help to fulfill the goal of 10 % sustainable energy in the transportation sector by In 2013, the Danes used 1.9 billion litre of petrol. The petrol currently used in Denmark contains just over 5 % of 1G bioethanol. If a Danish requirement of 2.5 % of 2G bioethanol is passed, there will be a demand for over 71 million litre 2G bioethanol, even when taking into consideration the fact that both 1G and 2G ethanol have a lower calorific value than petrol. The expected price of 2G bioethanol per litre is approximately 0.80 DKK higher than 1G bioethanol. This means that car owners will have a total additional expense of 57 million DKK The additional cost of 57 million DKK annually (or 0.03 DKK per litre for the car owner) must be regarded in relation to the profit on the balance of payments previously mentioned. Here the projects generate a profit of 680 million DKK annually. This gives the state an option of choosing to use a smaller share of the profit to compensate for the increased expenses caused by reducing related taxes. Thereby, the consumers would not notice any change in fuel prices. Additional costs by 2G blending At 2.5 % Consumption of petrol (million litre) G bioethanol amount (million litre) 71.3 Additional costs for Danish car owners (million DKK) Additional costs for car owners - DKK/litre at the petrol station

14 IMPACT ON EMPLOYMENT The investment and the operation of the plant create and jobs respectively each year. The figure shows the distribution of business sectors as estimated, based on the construction sector s input-output tables in national accounts. As the figure illustrates, the investment in MEC will create jobs especially within the building and construction sector, and also within the industrial sector. In the following figure the distribution of jobs is compared to that of an infrastructure investment of similar size in Denmark. The comparison shows that the operation of MEC creates a significant number of jobs in businesses which are strongly represented in the local area. These are, for instance, the primary occupations of agriculture, energy production and building and construction Please note: The calculation does not include the extra effect on employment which will result from the MEC demonstration plant, where there will be business delegations and a number of specialized jobs within research and development. Neither does it include the jobs which will follow an increased export of expertise, technology and products. Distribution of sectors - impact on employment of the investment in MEC Number of jobs Agriculture, fishing and extraction of raw materials Industry Energy and heat supply Building and construction Trade, transportation and communication Financing and Business Service Public and personal services 14

15 The impact on employment of the operation of MEC when compared to a traditional investment Number of jobs Agriculture, fishing and extraction of raw materials Industry 6 Energy and heat supply Building and construction Trade, transportation and communication Financing and Business Service 21 Public and personal services MEC Typical investment in Denmark 15

16 CLIMATE IMPACT MEC bases its production on non-fossil fuels; this results in a significant reduction in CO 2 -emission by: replacing petrol with 2nd-generation ethanol replacing natural gas with biogas and sustainable natural gas replacing waste with lignin As the table shows, MEC will reduce the total CO 2 -emission by tonne annually. Of these, the emission in the transportation sector, which is traditionally difficult to influence, will be reduced by tonne. EU parliament are beginning to take these factors into account when estimating the true climatic effect of various types of bio-fuels. The use of 2G ethanol will in fact give a significant 27 % reduction in the impact on climate when compared to the use of 1G ethanol based on sugar cane, and a 48 % reduction when compared to 1G ethanol based on wheat (these are the figures obtained when using the low estimates for the climatic impact of 1G ethanol). The transportation of straw has a marginal influence of only 1 % on total CO 2 emission. Apart from the direct effect on CO 2, there is a supplementary climatic effect as a result of replacing biofuels which were based on food products. Area of Impact CO 2 reduction tonne/year 2G bioethanol replaces petrol Sustainable natural gas and biogas replace natural gas Lignin replaces waste Total The reason for this is that food-based production of bio-fuels requires more land to be given over to farming in order to maintain the same level of food production. This in itself would lead to increased CO 2 -emission, which could be even greater if the reclaimed farm land had poor soil, and therefore needed additional artificial fertilizers in order not to be exhausted. CO 2 emission equivalence Low estimate for LUC/ILUC High estimate for LUC/ILUC These sustainability criteria are 100 known as Land Use Changes (LUC) and Indirect Land Use Changes 50 (ILUC), and they are attracting more and more attention in the climate 0 Petrol 1G ethanol from wheat 2G ethanol from straw 1G ethanol from sugar cane debate. The EU commission and the Source: Energistyrelsen: Alternative drivmidler, May

17 GROUP STRUCTURE The partners behind Maabjerg Energy Concept I/S have chosen an interest-based group structure for realizing the project. parties will invest new capital in the consortium so that the net worth will amount to 280 million DKK. More specifically, Novozymes A/S and DONG A/S, along with the two local heat supply suppliers, form the company Maabjerg Energy Center A/S, which is responsible for constructing and operating the refinery consisting of the three production units. By adding the existing facilities and assets to the MEC total assets, the overall financial asset is strengthened, and the turnover gains robustness because part of the total turnover will develop in markets which are secure in terms of both price and quantity. This creates a strong organizational framework and management for the refinery, involving parties who together possess the expertise and competence needed to construct and run a biorefinery of this character. The group structure paves the way for some significant large-scale operational advantages and synergies. These will help to optimize the project during both the construction and the operational phase. The main shareholders in the new company are the local heat suppliers, as the project is planned as a heat supply project in accordance with the non-profit-making principle, which is common when Danish public or semi-publicly owned utility companies invest in new production facilities. The The parties are also planning to establish another company in close collaboration with the operational organization. It is to be named International BioResource Center I/S, and will be communicating the expertise represented by the demonstration plant. It will also work on the continuous development of the refinery. The centre is planned to cooperate with national research units in the area. Currently, the potential partners are engaged in defining the tasks of the centre, its cooperation interfaces and its organization. 17

18 FRAMEWORK CONDITIONS The following is a description of the political and administrative framework which is required in order to take a decision to realize the project. Danish biofuel blending mandate In order to create a real market for selling 2G bioethanol, MEC needs Denmark to seize the opportunity of nationally setting a higher standard for 2G biofuel blending. To be precise, MEC suggests a 2.5 % 2G biofuel blending mandate from 2018, as measured by the energy content. This will contribute significantly to Denmark reaching the 2020 goal of 10 % sustainable energy in the transportation sector. A 2.5 % blending mandate will mean adding 71 million litre of 2G bioethanol per year, which is less than the projected MEC production of 77 million litre per year. Amending the Heat Supply Act It is a precondition for realizing the MEC project that the total refinery will be defined as a heat supply project in accordance with the Danish Heat Supply Act. In this connection, it should be noted that the three production facilities of the refinery (bioethanol, CHP and biogas), all directly and indirectly serve heating purposes, and will be operated in accordance with the non-profit-making principles of the Act. Governmental and municipal involvement The MEC project will be operated in accordance with "non-profit-making" principles, common in Danish heat supply projects with municipal participation. By choosing the "non-profit-making" principle, the total financing of new investments can be made through loans taken out with a municipal guarantee with pre-existing guarantees from the heat supply companies. This traditionally is the most favourable (and cheapest) form of financing within the heat supply sector. It is assumed that the guarantees will be offered on market terms in compliance with EU legislation on state support. There is no obligation to notify or apply the EU regarding the use of the 100 % guarantee. But MEC is nevertheless urging the Danish government to get the EU Commission to accept the 100 % municipal guarantee for the necessary loans. This can secure the total financing on favorable conditions. Due to the impact the MEC project will have on further development of Danish bio-economy and the extra costs that a first-mover project naturally faces, it is expected that the project will receive financial support as a demonstration plant, through the subsidy schemes established by the state for such purposes. The formal recognition as a heat supply project is a precondition for local participation in the project, and thus for the partnership between private and public players. This partnership is essential to the financing of the project, and therefore essential to the establishment of the bio-refinery. Electricity network payment With regard to the economics of the project, it is crucial that the electricity produced by the refinery and used for processes internally in the plant should not be subject to payments of fees to the national electricity network. MEC specifically suggests that the implementation of the necessary adjustments and adaptations of the legislation be carried out by the Danish Parliament. 18

19 MEC has arranged its production and ownership MEC is asking the relevant authorities to give structure in a way that meets the requirements advance approval of this exemption. for obtaining exemption from the terms of the net settlement act. TIME LINE Assuming that the framework conditions are investment budget and performance prospects settled during the 2nd half of 2015, and that a will be further tested through a detailed projected decision to realize the project can be taken, the planning work and tender procedures all facility can begin test-running three years later, in included in the so-called commercial phase. the autumn Assuming that the testing proves positive, a final A decision to realize the project means that the decision to invest in the project can be taken project will enter a phase where the assumptions within a year, and the construction work can be put forward in the Business Plan regarding initiated and completed within two years. 19

20 FACTS The development company Maabjerg Energy Concept I/S was founded in August 2011, with the purpose of promoting the concept of a local heat supply project in the form of a bio-refinery, and leading the idea towards realization. The consortium is owned by DONG Energy A/S and Novozymes A/S, and a local consortium from North West Jutland consisting of Vestforsyning A/S and Struer Forsyning A/S. The MEC project will cost 2.2 billion DKK, of which 1.8 billion will be invested in a new bioethanol plant, and the remaining 0.4 billion will be used to rebuild the current plant as well as to upgrade biogas so that it can be sold to the natural-gas network. The total annual turnover for the refinery will be approximately 1.0 billion DKK. Apart from the additional tonne of straw that will be supplied, the existing plant already receives tonne of biomass and tonne of waste. The bio-refinery will produce approximately 80 million litre bioethanol and 45 million m 3 biogas, as well as electricity and district heating for about households. In addition, more than tonne of fertilizer and nutrients will be returned to the farms. One of the residual products from the 2G bioethanol production is lignin. This product can replace the tonne of waste which is currently being imported for incineration at the CHP plant in Måbjerg, and will thereby contribute to an increased reliability in fuel supply. The heating consumers in Holstebro and Struer will be the primary owners of the plant. In addition to the increased reliability in fuel supply, they will get a 10 % reduction on heating prices. Maabjerg Energy Concept will reduce CO 2 - emission by tonne per year. Emission within the transportation sector, which is known to be a very difficult sector to influence, is reduced by more than tonne. The project will create jobs during annually during the two-year construction phase, and 1000 permanent jobs during the operational phase. The bio-refinery will increase GDP by 1 billion DKK annually, and increase the balance of payments by 680 million DKK annually, primarily because Denmark will reduce the need to import bioethanol. This import would otherwise be necessary for Denmark to meet the climate requirements set by both Denmark and the EU. This represents a 10 % reduction for the transportation sector by Maabjerg Energy Concept has received 293 million DKK support from the EU NER300- program, which will serve as an operational guarantee for the first five years. The bio-refinery can be operational three years after the framework conditions have been determined. Maabjerg Energy Concept Nupark 51 DK-7500 Holstebro Denmark Tel vestforsyning@vestforsyning.dk maabjergenergycenter.dk