Agribusiness Sugar Cane in Brazil: a Case Study Celso Daniel Seratto, Ednaldo Michellon and Natalino Henrique Medeiros Abstract: This work evaluated the feasibility of increasing the production of electricity and Certified Emission Reductions (CERs), in the sugarcane industry, from a case study in UsinaSanta TerezinhafromParanacity (Parana State, Brazil), projecting to supply the deficit of sugar cane bagasse with chips of Eucalyptussp.We tested thevariation in theaverage radiusof forest dedicated areas, with effects, in the variation of the NPV and the Payback, the MARR of 13.75 %. The project has shown to be viable if the areas of forest cultivation are located up to 117.7 Km of the plant, which reduces the payback of 13.1 to 10.9 years and produces an incremental NPV of U.S. $ 1,996,869.73. Keywords: Brazilian sugarcane agro-industry; incremental innovation; electric energy;biomass chain; forest biomass
1. Introduction Data from Brazil’s National ElectricityAgency (ANEEL) haddemonstrated that installed renewable sourcesofelectricitywere 79.71% of the total country’s installed capacity by mid-2010, while biomassfired power plantsin operation totaled381 in number, andtheir installed capacitywasable to generate 7,579,201 KW. Of those units, 311 ran on sugar cane bagasse and accounted for a 4.99% share, in 14 were usedblack liquor (1.04%), 40 operated on wood waste (0.28%), 9 were filled with biogas(0.04%)and7 used rice hulls as a fuel source, accounting for only 0.03% of installed capacity. These data indicatethe importancethat theBrazilian sugar caneagro-industryacquiredina renewable energy matrixof Brazil(ANEEL 2010).On the other hand,the supply of electricityby sugar caneagroindustriesareseasonaland linked to the harvest period, when the traditional fuel –sugar cane bagasse – is available. Data on theactions to meet the electricitydemanded by the market between 2006 and 2009 indicate that profile. On those occasions, 145 thermoelectric power plants linked to sugar cane processing mills were put in service, and it was observed that 97.48% surplus energy production, on average, were available only between the months of May and November and 99.58% of the supply was concentrated between April and November (Seratto2010). This is due to the usual operation schedule of those mills, because the supply of the traditional fuel depends on the sugar cane harvest, which leads the companies to underuse their installed capacityfor energy production; that, in turn, results in a shortage of fuel raw materials in the periods between harvests and in the off-season, and leads them to underuse their installed capacity for energy production.Thus, partial use of the installed capacitycontributes to increase the fixed costs of these thermoelectric units, and consequently increase the cost of the produced electricity, thereby having negative effects on the internal rate of return (IRR) and payback of these investments. Another factor that hinders this process is that, in the short term, the main challenge of the sugar caneagro-industry to increase the supply of electricity from biomass is the supply expansion of traditional fuel raw materials – bagasse and straw (Finguerutet al. 2008, Seabra 2008). Nevertheless, new technologies must be adopted to improve the efficiency of internal process and allow savings in the steam required for internal processes as well as in spending energy and fuel. Moreover, improved efficiency of straw recovery is expected as well (Bajay, Nogueira and Souza 2010).Therefore, the fueling of sugar caneagro-industrieswith fuel produced using cultivated plant biomass, residue and other cultivated forestry productsmay represent a new source of energy to supplement bagasse and
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straw(Goldenberg, Nigro and Coelho 2008).However, in that regard, not were found records of similar initiatives in the Brazilian production database of ANEEL (2010). In that sense, the integration between this chain and the forestry production chain can in the future represent a new challenge for entrepreneurs and professionals, and be decisive for the actual viability of companies within that field against competition from other sectors. As such, the reduced seasonality and increased electricity surplus can also contribute to improve the economic indicators of sugar cane agroindustries. Over there, that can be achieved by increasing the supply of this type of renewable energy in the domestic market and, in addition, the diversification of the energy can represent a security measure in the future, even to governments and society at large.Nevertheless, it can be observed that the share of residue and other cultivated forestry products as sources of fuel raw materials employed in electricityproduction can be considered modest and geographically restricted within Brazil’s energy mix (ANEEL2010). Thus, to supply the sugar cane agro-industries with fuel using cultivated biomass require investments of the forestry production, and even,the resultsensureeconomic advantages to investors by guaranteeing a return on invested capital. Additionally, because they are incremental innovations to these companies, there must be a possibility of assuring and mitigating the risks associated with the business, which must be known as thoroughly as possible, as well as its institution. In that context, the study of economic relationships, production factors and the treatment of risk factors, as well as the lack of expertise and technical-economic parameters, may constitute an important factor to reduce and mitigate as much as possible the risk factors of this type of business. That may help entrepreneursin their decisions to innovate.Therefore, this work tests the hypothesis of economic viability of a project featuring its own logistics, with the objective of supplementing the fuel supply of a thermoelectric unit linked to a typical sugar caneagro-industry – theThermoelectric UnitofSanta Terezinha MillofParanacity/PR – hereby named UTE-STP 1 , in order to expand the production ofelectricityandcarbon credits, or Certified Emission Reductions(CERs). This projectcontemplatesfueling UTE-STP with the alternative fuel– chips of cultivatedforest biomass (Eucalyptussp.),in the period between sugar cane harvests and off-season, when the supply of bagasse is not sufficient to normalize the monthly electricity surplus production, which is the main product of UTE-STP. Forthis, the workaims to evaluatethe Investment Return (IRR) and Net Present Value(NPV)of the incrementalinnovation investment project, testing the effects resulting from the costs with logistics of production and transportation of raw materials, as the mean radius of the areas dedicated to forest cultivation is changed.Following the theoretical framework originated with Schumpeter (1988) and neoschumpeterian authors 2 , risk factors inherent to the innovation processwere treated using a classical solution, which conciliates that theoretical basis with the Capital Asset Pricing Model(CAPM) method, which is traditionally used to analyze this type of investment. To that end, the work was organized into five sections. The second section is dedicated to a literature review on the technique used in the investment analyses applied to an incremental innovation project. The third section carries a discussion on the option for the design of the innovation projectbased on the UTE-STPcase and its results, presenting indicators that can be useful in formulating stimulus policies. In the fourth section, the results and discussions are presented. Finally, in the fifth section, which precedes
1 UTE-STP is located 94 km from Maringáand402.6 km from Curitiba, at 22º 52' 41”S; 52º 10' 56”W, and is registered at ANEEL under the name “UTE Central GeradoraTermoelétrica Santa TerezinhaParanacity” (USACUCAR 2007). 2 The project was developed to evaluate the viability of adopting the innovation, of the process incremental and organizational type, for a typical sugar cane agro-industry (Schumpeter 1988,Nelson and Winter 2005,OECD 2005, Dosi 2006, Rosenberg2006; Freeman and Soete 2008).
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the references consulted, the final considerations are presented, with suggestions for future improvements and new studies.
2. Investment Analysis The analysisof an investmentmust go through the phases of diagnosis, market study and production engineering to reach the evaluation phase, regardless of the objective. The evaluation phase, for its part, represents the economic, financial, institutional, environmental, social and political analyses to which the entire project must be subjected (Canziani, Guimarães, V. and Guimarães, F. 2004, 1). These issues can, in effect, shape the incremental project design.In that sense, the financial engineering techniques applied in the economic evaluationof the projectsrepresent another useful instrument to entrepreneurs when making the decision to innovate(Blank and Tarquin2008). According toBrealey& Myers (1992), when performing aneconomic-financial evaluation of investments, one should always take into account two basic economic principles of the financial markets: the first establishes that a resource that offers risk is worth relatively less than a safer one; the second is that a given asset is worth less in the future than immediately, as interest can be obtained from it. Thus, from an economic perspective, when an investment is made either in new products and processes, in a new form of organization or marketing, whether under the viewpoint of investors or owners, it is not enough to simply obtain a positive return: it is also necessary that the innovation be able to translate into relatively higher profits than those afforded by other available options or more advantageous than those provided by the existing option. Nevertheless, Blank &Tarquin (2008) remember that, regardless of the approach used in the investment analyses, whatever the methodological approach adopted – whether represented by the net cash flow of the project or net cash flow of the venture–, the emphasis of the analysisis peculiarly centered on the future results. This implies admitting that the involved parameters vary, causing – to a lesser or greater degree – changes in expected values, which goes back to the concepts of risk3and uncertainty4in future analyses, as found in Schumpeter-based theory (Schumpeter 1988)5. On the other hand, according to these authors, when it is possible to admit that all value stages of a given parameter have the same chance of occurring, it is also possible to determine the expected values. Another option occurs when a given value is given 100% of chance of occurring. Thereby, the situation is reduced, in a simpler way, to making the risky decisions. Note that adopting the latter two solutions allows the use of the discounted cash flow method to evaluate an investment, but requires consistent value references for the parameters involved in the estimates (Blank and Tarquin2008).Thus, the principles regarding time, as well as those inherent to the risk of the business, can be treated using the approach of discounted flows at present value – as long as a rate is properly computed to compensate for inherent risks, when defining a Minimum Acceptable Rate of Return (MARR)to be adopted as ananalysis criterion (Brealey and Myers 1992).
3
The term risk is used conceptuallywhen it is possible to obtain one or more observable values for a given parameter, when it is possible to carry out estimates on its chances of occurring. Therefore, the chance element is naturally established when determining its measure of value – an artifice adopted to accommodate the variation in those parameters. 4 The term uncertainty, on the other hand, implies that conceptually there can be two or more observable values for a parameter in which the chances of these values occurring cannot be estimated or calculated. Thus, when the chances of these values occurring are unknown, the risky decision cannot be made, based on the expected value. In those cases, in order to determine the value of a parameter, simulation techniques can be employed to randomly estimate chance and its value, which makes it possible to make inferences on the measure of the value 5 The term uncertainty in Schumpeter (1988), Dosi (2006), Freeman &Soete (2008), Nelson & Winter (2005) and Rosenberg (2006) accommodates both concepts – uncertainty and risk.
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That is the concept of the Capital Asset Pricing Model (CAPM), developed by economists Jack Treynor, William Sharpe and John Linter in the 1960s. This method has been used traditionally to calculate a given additional component in the expected rate of return –E(ri), which meanwhile counts towards covering the risks over profitability, based on the opportunity cost of theinvestmentin relation to the market. ToBrealey& Myers (1992) andDamodaran (1997), this method has served as a reference point for other risk calculation and analysis models, and is the most used in devising corporate policies, as it provides implications that can be tested, and has the advantage of being simple and intuitive. Therefore, the ANEEL has adopted this model to estimate the profitability of thermoelectric plants in the Brazilian market and order them within energy auction edicts, as it does for distribution companies. Thus, the criterion adopted was that their internal rate of return should be 13.75% annually in electricitycontracts (ANEEL 2006).Therefore, that value was adopted as the criterion in order to stipulate the MARR of the incremental innovation projectunder study6.
3. Incremental Innovation Any innovation investmentproject involves different activities, all of which aim to obtain the same products – increase the production of electricitysurplus and CERs 7 . Therefore, the demand for supplementary alternative fuel–forest biomass chips– was calculated to stabilize the monthly electricityproduction during off-seasonandthe period between harvests at the Plant under study.8end9The project also contemplated that the cultivation of that raw material should occur in areas dedicated exclusively to that objective, leased from third parties at the cost of 20% of production. Therefore, it would be necessary to cultivate 843.30 ha/year with Eucalyptus, totaling 5,059.80 haby the sixth year. Those areas, however, should be located beyond the mean radius of 23 km - in which sugar canegrowing areas are located. As such, the estimated yield is only 702.80 ha/year, resulting in 114,751.1 t ofraw biomassyearly. Theincremental innovation projectrequired a forestry production system with harvesting in the sixth year followed by regrowth for six more years. Thus, the plan was for six subsequent units to be set up, consisting of 843.30 haof eucalyptus, totaling 5,059.80 haat the end of the sixth period. The recommended spacing between rows and plants is 3.0 x 2.0 m, using cloned hybrids of speciesEucalyptus grandisW. Hill ex Maiden,as well as clones obtained from the cross between that species and two others: Eucalyptus. grandis W. Hill ex Maidenx Eucalyptusurophylla S. T. Blake, known commonly as Urograndis, and species Eucalyptus.grandis W. Hill ex Maidenx EucalyptuscamaldulensisDehnh, known as Grancam. In order to calculate the energy available in the biomass, the parameters found in the literature, which most resembled the reality of the case study, were adopted10.Thus, the estimated mean HigherCalorific Value(HCVs) for biomass during the project specification was18,782 kJ/kg,andthe proportion of 6 For comparison effects, the SELIC tax reached 10.75% by mid-2010. This would be another option to use as a criterion to determine capital remuneration, it´s is the referencial rate given by Brazil’s Central Bank for the interbank transactions. 7 To calculate CERs, the proposed methodology AM-0042 - Grid-connected electricity generation using biomass from newly developed dedicated plantations – version II was adopted, which only considers the emissions avoided with the energy generation activity, excluding possible emission reductions that could be counted with forestry activity. For details on the criteria established by methodology AM-0042 – v. II (UNFCC 2010, 1-2).Additionally, to calculate emissions in the base line, the proxies found in the work by (Pereira et al. 2008) were used. The calculation of the CERs can be consulted in Appendix D in Seratto (2010). 8 According to the literature and engineers of the agroindustry, sugar cane bagasse and forestry biomass chips can be used, combined or exclusively, in Rankine systems, as long as they are adequate for the physical conformity criteria of the combustion equipment in use (Balestieri2002, Carvalho 1983, Meneghetti pers. comm., Nogueira and Lora 2003, Walter and Nogueira2008). 9 The offseason is regarded as the periods during the harvest in which the facilities and equipment of the industrial plant are not being used in full capacity. 10 These parameters can be found in Barreiros et al. (2007, 107), Brito, (1994, 7) and Müller (2005, 59-64).
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thebarkwas13.80% with HCVsequivalent of 15,803 kJ/kg and thetrunkwas86.20% with HCVsequivalent of 19,259 kJ/kg 11 .However, when computing forestry productivity for hybrids of E. grandissp., an Annual Growth Increment of41.5 m3/ha/year was considered for the forest, which results in 168.1 t/haofbiomassby the end of the six-year growth cycle, total 114,751.1 t/year/unit. In order to cover any transportation and stocking losses of that fuel raw material, another 5% were reserved in the project, which results in net effective chip consumption of 109,286.8 t/year required by the agro-industry12. To measure the costs with freight movement logistics and transportation, a proxy of 0.467 t/m3 was applied to the apparent density of ready-to-use biomass, with moisture level of 35% on a moist basis, to be reached by drying the raw material in the field, stocked for two to three months after harvest, prior to processing and transportation to UTE-STP.The industrial demand calculations for this type of fuel raw material were made based data available from UTE-STP on the equipment installed in the extraction/condensation-type thermal generators. The project also foresees the use of existing machinery, equipment, sugar cane freight vehicles and available staff, by paying rent and the equivalent to their wages.The parameters used in the calculations for transportation and overall logistics costs, as well as the references on their costs, were obtained based on the real costs found in the reports obtained at the Plant13,14. A cost estimate of agricultural use equipment applied to the forestry production processes was obtained from FloagriIndústria e ComérciodePeçasLtda.,fromTelemacoBorba/PR/BR (Oliveira pers. comm.).Financing for the equipment required for the mechanized biomass collection, as well as the machines required for processing into chips and loading were calculated through a simulation leasing operation, directly with the manufacturer. The estimates and their specification were made with the support from the license Caterpillar reseller in the State of Parana, specifically for the case study (Brandalisepers. comm).For investments that do not involve the leasing operation, the credit line for forest reforestation, recovery and sustainable use was projected by credit line “BNDES Florestal”, which encompasses the production of forests for energy purposes, financing up to 80% of the total amount at a yearly interest rate of 7.9% per year. The payment term cannot exceed 132 months, and the waiting period and frequency of amortizations are defined in the project, according to cash flow and financial results15(Almeida pers. comm). Theincremental innovation projectpresumes the use only of the extraction/condensationgeneration system 16 . This choice was adopted considering the market conditions for a venture classified as an independent electricityproducer and based on the contingency of investments that would be required if 11
Also regarded as proxies were: a) Basic biomass density: bark and trunk = 0.500 t/m3 on a moist basis. However, plant stems with diameter smaller than 6 cm were not counted, which can represent a safety margin. That biomass, which can be used, represents 4.59% of raw materials produced at the end of each six-year cultivation cycle. 13 It was also consideredthat the transport capacity of thetrain consisting of a Volvo truck, model FM 13-440 6 x 4 and two Usicamp trailerssting cane, originally equipped for sting cane,with transport capacity to115.5m3of biomass, i.e. 53.94 ton perjourney, average speed of 40 km/h. 14 For purposes of estimating the cost of logistics in general, it was considered that the size of the plots offorestcultivation must have an average of 16.5 ha. 15 This line of credit supports theacquisition of machinery and equipment locally manufactured, with the interest rate called TJLP -estimated at 6% per year, adding toBNDES fees– set at 0.9% per year and also the accredited financial institution fee – portion negotiable and,finally, addingthe rate of credit risk - which can vary from zero to 3.75% per year, at the discretion of BNDES and the purpose for whichthe credit is intended to be used.The rate intermediationin this casewas set at 0.5% per year, whichis added to therate of return oncredit risk, totaling 1% per year (Almeida pers. comm.). See also: http://www.bndes.gov.br/SiteBNDES/bndes/bndes_pt/Areas_de_Atuacao/Meio_Ambiente/BNDESflorestal.html. 16 This system is classified by the type of generation, comprising a TGM turbine model TMC 25000 A and a WEG generator - SPW800 model. This set has a nominal capacity of 20.0 MVA and can generate up to 18 MW of power. The power supply of this system is performed by two Dedini aqua-tubular boilers, which has been recently reformed presenting production capacity designed to deliver, respectively, 90 and 70 ton of steam/h, and together, 160 t/h, at a pressure of 21.0 kgf/cm2 and a temperature of 320 °C. 12
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the choice was made to produce the incremental electricitysurpluses by using a back pressure system17.In order to work withdiscounted cash flowin this process, the costs and expenses with the operation, depreciation, taxes, fees, administration, consulting, sales, etc., were assessed and estimated, as well as operational or nonoperational revenues, before and after taxes and fees were discounted18. However, the correction of future values was carried out at 6%/year19, which is already standard practice at the holding that controls the mill20. Thus, in order to calculate real profit, in order to calculate income taxes, both operational and nonoperational revenues and expenses are accounted21. The expenses and costs of the industrial section of UTE-STP that originated with the incremental innovation projectwere calculated based on the use of the industrial systems involved in electricity production. Therefore, maintenance expenses related to fueling the boilers, steam production systems and energy thermal generators, as well the maintenance services hired out to third parties were recalculated and based on the rate of incremental electricity production.The expenses with drafting the project concept document for MDL, in order to obtain the CERsforincremental innovation projectwere calculated based on the original Project Design Document for Clean Development Mechanism Project (CDM-PDD): Santa Terezinha Cogeneration Project - Paranacity- STCP Paranacity. According to the mill, they represent 5% of the sale value of CERs. In addition, a rate of 1% was applied to cover the expenses with trading the carbon credits. However, both were accounted annually, at the same rate as the energy trading (Meneghettipers. comm.). The sale value of CERs stipulated in the incremental innovation projectwas € 12.00/tCO2e, which is equivalent to U.S. $ 15.18/tCO2e22 –although thisvalue isconsidered high, it is the same value found in the forecasts in PDD previously drafted for the mill. The same criterion was adopted for the value of incrementalelectricity, which was set at U.S.78.690/MWh,on the same basis as the current supply contract signed with the São Paulo buyer. The economic analyses were made by analyzing only the center of costs comprised by UTE23; to that end, the discounted cash flow was adopted in order to identify the NPVand payback of theincremental innovation project. In effect, using electronic spreadsheets, variations were simulated on the mean radius of the location of areas dedicated to eucalyptus cultivation, as that directly influences biomass production costs, seeing that the costs of transporting raw materials, support machinery and equipment as well as the administrative costs increase with it, in addition to directly impacting biomass transportation costs.Sensitivityanalysiswas carried out by testing the variation in the most representative 17
A trading strategy defined for the project assumes as basis the expansion of the supply of this type of fuel that may increase the supply of marketable surplus of electricity and stabilizing the supply monthly as much as possible at an average annually . This is expected to make a contract in quantities and mean values by month for the incremental surplus, which can provide greater security to obtain the projected revenues, like occur the contract of UTE-STP with the current purchasing company. 18 According to Normative Instruction of the Federal Revenue of Brazil, n. 011/2006, at 21/02/2006. 19 Applied to cover the variations in cash flows, by the effect of inflation, i.e., before calculating the Net Present Value (Blank and Tarquin2008). 20 It is important to remember that this rate is slightly higher than the average of the National Index of Consumer Prices – INPC from Brazilian Institute of Geography and Statistics (IBGE), whose average rate was 5.73% in the last seven years and serves as a parameter to the adjustment of energy prices and tariffs that apply to the production process. 21 The UTE in study began functioning in 2009; its lifetime is estimated at 30 years. Thus, to match the aspect of the economic analysis of both projects - the current and incremental - the projection was made in 18 years, equivalent to one and a half cycle of forestry. In these terms, the cycle of eucalyptus cultivation in the Innovation Project is equivalent to twelve years, which covers the period between planting trees and the end with the second cut of them. That, in the Project assumes driving coppice for more than six years after the first harvest. 22 The exchange rates, represented by the weighted average of trades in the interbank foreign exchanges for settlement in two business days prior to 16/07/2010, according to the Brazilian Central Bank, was of R $ 2.3021/€, and R $ 1,7792/U.S. $. 23 The projections were made from the data found in: a) the balance sheets of UTE-STP for the year 2010, b) a summary of the project approved by BNDES in 2008 (SANTA TEREZINHA PLANT LTDA 2007, Baptista pers. comm. c) the PDD which was prepared in 2008 to obtain CERs (SANTA TEREZINHA PLANT LTDA 2008), d) prices paid by farmers during the month of May 2010 (PARANÁ2010). Besides, may be included the technical data on visits and consultations with engineers and plant managers.
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parametersof20% of the total operational cost. The simulation was performed changing the parameters to 20% above and 20% below the reference value, thus considering optimistic scenarios - upper limit and pessimistic scenarios - lower limit.
4. Results and Discussion Theincremental innovation project results in increased electricity production – from 8.05 MWh under the current design to a monthly average of 12.84 MWh. Thus, surplus production is expanded by 57,434.5 MWh/year. Furthermore, it can obtain 8,330.3tCO2e in CERsper year. Electricityproduction under the current and experimental situations is shown in Table 1. The revenue from the sale of new electricitysurpluses is projected to grow by 39.8%, and 34.8%from the sale of CERs, within a time span of 18.0years. Table1.Monthly production of tradable electricity and CERs surpluses at UTE-STP : current, projected, incremental and total Current project Projectwithincremental innovation Projected Projected Incremental Total Incremental Total Productio productioni production productioni productio productioni productio Month nin 2010 n in 2017 n 2017 nin 2016 n 2016 in 2012 n 2011 (MWh) (MWh) (MWh) (MWh) (MWh) (MWh) (MWh) January 6,659 6,659 13,318 13,318 February 6,014 6,014 12,029 12,029 March 2,062 2,153 2,209 6,659 8,868 13,318 15,526 April 10,098 10,543 10,815 1,802 12,617 3,604 14,419 May 10,451 10,912 11,193 1,553 12,746 3,106 14,299 June 10,801 11,278 11,568 1,206 12,774 2,412 13,980 July 12,224 12,763 13,092 13,092 13,092 August 12,224 12,763 13,092 13,092 13,092 September 11,294 11,792 12,096 788 12,884 1,576 13,673 October 10,930 11,412 11,706 1,133 12,840 2,267 13,973 November 10,113 10,560 10,832 1,789 12,621 3,578 14,409 December 1,114 1,114 2,228 2,228 Total 90,198 94,177 96,604 28,717 125,321 57,435 154,039 Source:Prepared by the author. Note: only ten business days in operation are counted in the month of December, because it is necessary to perform maintenance of turbo generator systems and boilers; for 2016, only half of the production of the following year (2017) was accounted, when the projectedproductionof theincremental projectstabilizes. The economic performance of the project is inversely proportional to the variation in the mean radius of the forestry cultivation areas. Nevertheless, considering a yearly MARR of 13.75%, economic viability was achieved if the areas reserved for forestry cultivation are located up to 117.7 km from the mill.Moreover, the results indicated that the NPV of the project with incremental innovation reaches U.S.$ 1,996,869.73, and the payback of the endeavor can go from 13.1 to 11.9 years of the areas dedicated to the project are located within a mean radius of 117.7 km, as shown in Graph 1. Under those conditions, the cost of the chip carried on the conveyor belts of the boilers was calculated inU.S. $ 41.23/t.
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Graph 1.Accumulated net income, paybackwith the current design and with dedicated forest areas at a mean radius of 117.7 kmfrom UTE-STP. Source: Prepared by the author. As seen, the economic indicators of the project varied as the mean radius of dedicated forestry areas was changed, due to variation in costs with overall logistics24, followed by costs involved in transporting the biomass to the mill25, as shown in Graph 2. In that case, when the mean radius of eucalyptus sources is 117.7 Km, the result in overall logistics costs reaches U.S. $ 10.30/t and transportation costs stand at U.S. $ 8.17/t.Under that rationale, sensitivity analysis was performed for the parameters that represented more than 20% of the total operational cost. Therefore, the result caused in the IRR was assessed, with effect of the variation in the price of electricity, cost of biomass chips, value of the investment in the forestry project and the opportunity cost of bagasse, as shown in Graph 3.
24
Refers to the costs of supply of inputs, provision of mechanized services, rural moving workers, administration, technical assistance and financial services costs. 25 Ref. to the use of trucks and trailers originally used to transport the sting cane.
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Graph2.Effect of the variation in the mean radius of forestry areas on the cost with overall logistics for the incremental innovation projectfor UTE-STP. Source: Prepared by the author.
Graph3.Sensitivity analysiswith the main parameters of the incremental innovation projectfor UTE-STP. Source: Prepared by the author. To that end of the sensitivity analysis, for the hypothesis that the mean radius is 117.7 km, the starting point for biomass chips was U.S. $ 41.23, the price of electricity was stipulated at U.S. $ 78.69/MWh, and the opportunity cost of sugar cane bagassewas estimated at U.S. $ 9.55. Variations were tested in the simulations to the upper limit of 20% more and lower limit of 20% less. The value of CERs was not an object of the sensitivity analyses, as its gross revenue represents only 5.1% of the total operational cost. Thus, it was observed that the parameter with the greatest effect on theIRRof theprojectwithincremental innovationis the price of electricity. In that case, a reduction of only 5.69% in the base price – resulting in
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U.S. $ 74.21/MWh –, would deny the viability of theproject, if using the equivalence criterion between projectIRRandMARRof 13.75%. Alternatively, if a profit margin equal to the IRRof the current project design is 10.67% a year at the break evenpoint –was acceptable,a negative variation of up to 9.36% in the price ofelectricity could be tolerated, resulting inU.S. $ 71.32/MWh. The observed effect onIRR variation, resulting from the variation in the cost of fuels, bagasse and eucalyptus chips was inverse, which was already expected; however, the effect of the variation of the opportunity cost of bagasse on the IRRis stronger than the effect of the variation in the cost of biomass chips, but less sensitive than those resulting from the variation in the price of electricity.The effects of the variation in the investmentcost and the total cost of eucalyptusbiomassplaced on the boilers feature the same behaviour, as the price of the latter is the result of the former. As such, when the investment cost varies positively by 16.36 % – reaching a total annual value of U.S. $ 11,130,842.06 –, the IRRof theincremental innovation projectwould be reduced to 10.67 %, the same as the current UTE-STP design, reaching the break even point.
5. Final Considerations The central hypothesis tested in this work was confirmed, as from a technical, economic and financial standpoint it could be concluded that the incremental innovation projectis viable, if the environmental, legal and institutional aspects are observed. In that regard, UTE-STP have all the necessary equipment to control emissions of polluting gases and would be capable of operating at full capacity with the alternative fuel. Moreover, the mill is properly licensed and the proposedprojectdoes not violate existing laws.Notwithstanding the issue of environmental legislation, the project may cause ulterior innovation according to Schumpterian theory - if adopted. For instance, it can be useful to equalize a historical legal and environmental issue if the owners of the leased areas have option to reforest their 20% share.Sensitivity analysis,for its part, showed that the effects of the variationinelectricityprices on IRRare proportional, but are the most sensitive among the analyzed parameters. In that sense, a reduction of only 5.0% of the mean base price used in the analyses, keeping up the other parameters as constants, would make the proposal unfeasible, if MARRinterest remained at 13.75% a year. On the other hand, any effect caused by cost reduction due to technological improvement and involvedprocesses can improve the performance of the incremental innovation project and, consequently, the competitiveness of UTE-STP in the future. Any eventual gains with the expanded scale of the projects or from increased electricity prices corroborate this effect. Moreover, from a social standpoint, it was calculated that the incremental innovation projectfor UTE-STP can generate taxes, collected as IRPJ, CSLL, PIS and COFINS totaling U.S. $ 71,529,062.22in an 18-year horizon, if the cultivation area are on average 117.7 kmfrom UTE-STP. It was also calculated that, under these conditions, 43 additional direct jobs can be added with the investments in forestry biomass production and processing activities. The product of this work can be useful in elaborating projects for sugar caneagro-industries, especially those that already produce electricitysurpluses and are underused in the sugar caneoff-seasonand during the period between harvests. Moreover, given the opportunities for modernization and replacement of combustion techniques, attention must be paid to their role in the use of biomass fuels. However, it is essential that public policies be consolidated for the support of renewable energy production in this type of business – there has not been a single official auction to buy electricityfrom biomass sources in the Regulated Contract Environment. This represents another factor of lack of stimulus to the market, possibly increasing institutional stability, contributing to risk factors for this type of business and turning entrepreneurs away. Thus, from an institutional point of view, it is important that the policy of scientificproduction mustbe improved to produce new knowledge, technical indicators, from data that can serve as regional references on the productive potential of new clonal hybrids of Eucalyptussp. and their attributes for use as a basic
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source of energy in Northwestern Region of ParanaState, Brazil.The last but not least important result of this work is that it should instigate additional academic studies, as well as other geared towards the development of new ventures, on relationships between agroenergy and forestry production chains and on the formulation of support policies.
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About the Authors Celso Daniel Seratto, Agronomist Engineer, MSc. ; Economics from the Graduate Program in Economics, UniversidadeEstadual de Maringá (PCE/UEM). Staff member of the Instituto Paranaense de Assistência Técnica e Extensão Rural (EMATER), Av. Cerro Azul, n. 268, Zone 2, Zip Code: 87010-000, Maringá/PR, Brazil. Phone: +55 (44) 3293-7400. E-mail:
[email protected]. Ednaldo Michellon, Agronomist Engineer, MSc. and Dr. in Economics, Associate Professor of PCE/UEM, Av. Colombo, n. 5790, Block J-45, Room 107, Zip Code: 87020-900, Maringá/PR, Brazil. Phone: +55 (44) 3011-8952. E-mail:
[email protected].
Natalino Henrique Medeiros, Economist, Ph.D. in Economics, Titular Professor at Economics Department/UEM, Av. Colombo, n. 5790, Block C-34, Room 5, Zip Code: 87020-900, Maringá/PR, Brazil. Phone: +55 (44) 3011-4987. E-mail:
[email protected].
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