This document should be cited as:
Sikanen, L. (2014). BioPAD: Value chain of bioenergy and socio-economic contributions.
Available online from www.biopad.eu.
Value chain of bioenergy and socioeconomic contributions
Introduction
Bioenergy systems create value for biomass like any other industries using biomass as a raw
material. In bioenergy, biomasses are often bulky and low quality materials. Harvesting, moving,
sorting and storing of materials are creating added value. Biomasses are often scattered and
operations require human effort more than per corresponding amount of fossil fuels. Bioenergy at
its best is decentralised energy production based on local fuels. Local value chains or “value
systems” are important to understand especially when comparing feasibility of different energy
production alternatives. It is important to understand how added value is created and how it will be
divided in order to support sustainable development and welfare. Equally important this
understanding is, when developing new businesses and bioenergy systems.
Value chain in general
The idea of value chain was introduced by Michael Porter (1985) in his book Competitive Advantage:
Creating and Sustaining Superior Performance. Since that, value chains have been used widely in
literature and theories of competitiveness and process development. The idea is that all phases and
2
Socio-economic effects of the use of bioenergy
steps of production are creating value for the product. It can be based on costs and labour input but
finally value will be defined by customers, i.e. “markets”.
Porter’s value chain in original and simplest form fits well for industrial processes of manufacturing.
It starts from raw material logistics and ends to after sales. This most simple description of value
chain works well also with bioenergy system and, it helps to understand the value creation in
processes.
Supply chain or value chain?
In forest energy studies terms “supply chain” and “value chain” are used quite freely and clear
distinction is seldom done (e.g. Shabanin et al. 2013). When forest biomass is used for energy,
supply chain in common form has 5 main steps. Biomass growing and delivery can be included as
well to the process (Figure 1).
Figure 1. Forest energy supply chain in “universal form”.
This “supply chain” is changing to value chain, when added value is described in each step. Added
value is a combination of costs and “selling price”. Every step in the process is generating costs.
Steps are also changing the form of the product and making it “worth of paying” for the next step.
The optimum situation is, that all generated costs and profit margin can be claimed from the next
“stakeholder” of the process. In Figure 2 the average situation for Finnish heat entrepreneurs’ value
chain is described. Added values are adopted from statistics and studies.
3
Socio-economic effects of the use of bioenergy
Figure 2. Forest energy value chain. (Typical “heat only” case in Finland).
The value chain is closely connected also with selected business model. If you have decided to
concentrate on one specific phase of the value chain, e.g. harvesting and forwarding, you do not
need to pay attention to the purchase price of the stand or will your transportation distance be too
long to the mill. You are only focusing to take care of the harvesting and forwarding of trees so
effectively, that the negotiated price paid by your customer covers all your costs and profit margins.
(And that quality meets the expectations).
The another end of business models could be that large scale forest owner establishes heating plant
for local customer and takes care of all phases by himself. (These cases exist in Finland and Sweden).
Then the whole value chain is controlled by one stakeholder and it can “sell the most valuable
product”, heat+service. It does not matter, how effectively single phases are done. The added value
created in chain can be shared, however preferred.
Socio-economic contributions in value chain
When studying value chains in energy production, it is important to pay attention also for the
distribution of added value among society and stakeholders. Especially this can be done, when
different fuels and energy conversion techniques are compared. If the development is supported by
public funding, it is important to understand, how subsidies effect on different value chains. In
Figure 3 the distribution of added value is described in each phase of the chain.
4
Socio-economic effects of the use of bioenergy
Figure 3. Value chain with socio-economic descriptions. Data sources: Statistical yearbook of forestry
(2013). Energiapuun hintaseuranta (Energy wood price monitoring) Metsätilastotiedote (Forest
Statistical Bulletin) 25/2014.
Value chain in BioPAD case “Kuittila”
The Case “Kuittila” has been described more precisely in the BioPAD case study reports. In this
report, Kuittila –case is studied in order to get one real case to demonstrate value chains.
Kuittila farm is generating both electricity and heat from wood, which is coming from own forest
near by the farm. Farm is using very good quality feedstock in order to avoid problems in the running
of their Volter chp-unit. That is why the value of wood is higher than described in figure 3.
Harvesting is outsourced for local harvesting company KME ltd. as well as chipping and
transportation. Chips are artificially dried in drying facility of the farm. Drying cost are difficult to
calculate, because dryer is used also for other purposes. Conversion happens in Volter –chp unit,
generating about 45 €/MWh conversion cost from capital costs and variable costs (figure 4).
The alternative source of energy for the farm would be electricity from the grid and heat production
either by light heating oil or wood chips. Wood chips for heat only would be costing about 21€/MWh
and electricity from the grid would be 80€/MWh. If heat oil would be used, the fuel cost only would
be over 100€/MWh. Because also other energy forms require infrastructure at the farm, 100€/MWh
was taken as comparison value.
5
Socio-economic effects of the use of bioenergy
Parts of value chain owned by Kuittila Farm
Goes directly
to forest
owner. In
Finland
20% of
population
have direct
connection to
wood sale
revenues
KME is local
small firm.
Cost
structure:
labour and
local service
50%, fuel,
capital and
others 50%
8 €/m3
15 €/m3
4.4 €/MWh
20 €/odt
8.3 €/MWh
37.5 €/odt
Price of
wood before
harvesting
Cost of
felling and
forwarding
Biomass
growing
Biomass
purchase
Harvesting &
Forwarding
Value change of
one MWh
4.4
12.7
KME ltd.
Takes care of
chipping and
transport.
Labour and
local service
50%, fuel,
capital and
others 50%
Drying
generates
approximatly
60% capital
costs and 40%
labour and
energy costs.
Energy plants
are
remarkable
investments.
Most of the
costs are
capital costs
for banks and
technology
supplier (80%)
0.11 €/m3
16 €/m3
8 €/m3
81 €/m3
0.06 €/MWh
0.28 €/odt
8.9 €/MWh
40 €/odt
4.4 €/MWh
20 €/odt
45 €/MWh
202.5 €/odt
Min. storage
cost (tied
Chipping and
transportation
cost
Capital and
operational
costs of plant
Capital and
operational
costs of plant
Storages are
on awerage 5
months at
the roadside.
Stems have
minumum
dry matter
loss.
capital 5%ir)
Storage
12.8
Chipping &
Transportation
Drying and
storage
21.7
26.1
Combustion
71.1
Delivery
100*
*Alternative price of energy if produced by
most probable option, light fuel oil.
Figure 4. Kuittila value chain.
As described in figure 4, Kuittila “owns” 5 steps of 8 in value chain. 3 steps are outsourced, which
means that less than 20% of added value goes primarily “out from Kuittila”. However, about 50% of
that remains on local level by salaries. Combustion requires high investments, which are not locally
produced in the case of Kuittila. This means that major part of added value created in combustion is
not staying in local economics.
Further studies
Value chain analysis presented in this paper is not meant to be scientific and exact approach into this
topic. Forest energy value chain as a term is regularly used but seldom understood. Aforementioned
descriptions are on purpose simple and easy going. Nowadays value chains are actually too limited
descriptions of value adding processes. Processes are more often value networks. Value networks
can be enlarged to remain well known input/output –tables, where more interactions of economics
are included.
6
Socio-economic effects of the use of bioenergy
References
Energiapuun hintaseuranta. 2014. (Energy wood price monitoring) Metsätilastotiedote (Forest
Statistical Bulletin) 25/2014.
Laitila, J. 2008. Harvesting technology and the cost of fuel chips from early thinnings. Silva
Fennica 42(2): 267–283.
Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New
York, Free Press. London, Collier Macmillan. 560p.
Shabanin, N., Akhtari, S. & Sowlati, T. 2013. Value chain optimization of forest biomass for bioenergy
production: A review. Renewable and Sustainable Energy Reviews. Vol. 23, July 2013, Pages 299–
311.
Statistical Yearbook of Forestry. 2013. Finnish Forest Research Institute.
7
Socio-economic effects of the use of bioenergy
8
Socio-economic effects of the use of bioenergy