« PROJECT DEVELOPMENT
A New Financing Paradigm
As installed pellet production capacity migrates towards facilities that produce upwards of 500,000 tons per year, their associated construction costs climb to a point where outside investors and lenders must be secured to move a project forward. Offering a rule of thumb for quickly estimating the equipment costs associated with plant construction, Astec’s Swanson notes, “equipment cost is about $1 million per ton per hour of pellet production capacity. This includes woodyard, chipping, production and load out. The average may be a little higher than that, now that backend VOC control has entered the equation and this number does not include site work or construction.”
Such costs are driving these new facilities out of the reach of the local lending community that historically has financed construction of smaller pellet mills. Additionally, with the exception of pellet mills being funded by the utilities they will ultimately supply, these export-scale facilities will not be supported by balance-sheet financing. As a result, pellet project developers must also engage in extensive capital drives. Invariably, pellet project developers and their investors must make a decision about who ultimately will take on the risk associated with a project. Lenders and investors want guarantees that their investment is a sound one and the pressure for developers to adequately de-risk a project mounts.
The average PLANNED capacity for the 14 pellet facilities currently under construction is 347,172 tons per year. year
347,172 The average output capacity of the 149 operational pellet mills in North America not built to satisfy the export market is 58,563 tons per year.
22 PELLET MILL MAGAZINE | Q1 2014
58,563
An incredible amount of a project’s risk profile can be found in the construction and commissioning phases. Developers can choose between two paths to build and commission a production facility. They can act as their own general contractor and take on the risk themselves or they can engage a qualified engineering, procurement and construction company (EPC) and pay a premium for the EPC firm to carry the risk for them. Explaining the differences between the two approaches, Price notes, “Obviously the lowest cost is moving in to a design, bid, build approach, but that requires the operators or owners to have enough credit or cash to make the purchases themselves.” Recognizing that the pool of interested parties capable of financing a pellet mill themselves is quite limited, he continues, “The investors and developers that realize the opportunity in the market and are looking at it, may or may not have enough cash to support that bid/build approach, so they are going to seek more financing and they are going to need more guarantees. Thereby, they will have to move to an EPC approach simply because of the ‘what-ifs.’” Expanding on the crucial role that EPCs will play as this industry continues to deploy capital, Easterlin says, “The reason you would use an EPC is the financial communities are not used to financing this process. They want to see someone that can guarantee the actual delivery schedule and that the machines actually work when they are put together. It’s a production guarantee, in essence. They want some kind of financial credit behind that guarantee.” EPC companies demand a premium for this type of guarantee, and developers and their investors must balance the overall cost of this method of risk abatement and questions of project equity with the costs associated with an EPC wrap. For Easterlin, the use of EPCs is all but assured as the industry moves forward. “There are some investors out there that will invest without an EPC contractor, but they are few and far