Boosting Bioenergy: Challenges and solutions for project financing

In recent times, meeting carbon neutrality targets has become a priority for many countries. This holds true for In­dia as well, with the country committing to achieving net zero emissions by 2070. Bioenergy can play a significant role in this endeavour, given its vast untapped po­tential in the country at present. The segment broadly comprises biofuels such as ethanol, compressed biogas (CBG),  bio-LNG, biodiesel, bio-hydrogen and briquettes/pellets. Biofuels such as ethanol and CBG possess a high capability to green not only the power sector, but also other integral sectors such as transport and manufacturing. However, compared to the solar and wind energy segments, the­re has only been modest growth in bioenergy deployment, until now.

The bioenergy sector in India is now rapidly evolving and the government has been taking proactive steps in this regard. Over the past year, the Government of India has rolled out several policies and financial/non-financial incentives to catalyse growth in the sector. In November 2022, the National Bioenergy Programme was notified by the Ministry of New and Renewable Energy. The progra­m­me comprises two phases, and Rs 8,580 million has been allocated as capital under the first phase. Central financial assistance (CFA) has also been offered for various subsegments of bioenergy. For brique­tte/pellet manufacturing plants, CFA of Rs 0.9 million per MTPH has been designated, with a maximum CFA cap of Rs 4.5 million per plant; whereas for biomass (non-bagasse generation) cogeneration projects, CFA of Rs 4 million per MW of installed capacity has been provided.

Meanwhile, a new pricing formula for CBG, at 80 per cent of the gas station sale price, has been approved by the Mi­nistry of Petroleum and Natural Gas (MoPNG). The new price is higher than the previous one, making it a welcome step for potential in­ve­stors in CBG. The MoPNG’s Sustain­able Alter­native Towar­ds Affordable Trans­portation initiative is also a promising move to boost bioenergy and make the transportation sector more sustainable.

As of October 2022, 38 plants have been commissioned under the initiative, and over 3,600 letters of intent have been is­sued. Moreover, to further streamline the sector and enable global integration, the idea of establishing a Global Biofuels Alli­an­ce, in line with the International Solar Alli­­ance, has also been making the roun­ds in recent months. Due to the proactive approach taken by the government as well as other stakeholders in the bioenergy supply chain, India achieved its target of deploying 10 GW of bioenergy by 2022. Yet, the current pace of gro­wth in the sector may not be sufficient to truly capitalise on India’s total bioenergy potential to de­carbonise the power, commercial and transportation sectors. Fin­ancing measu­r­es and streamlined funding arrangements can go a long way in boosting the sector.

Financing bioenergy projects

Broadly, there may be three ways of finan­cing bioenergy projects; equity investme­nts, debt financing and viability gap funding. Bioenergy projects demand large capital expenditure funding, which is not always accessible to small- and medium-sized developers. Funding a project wholly through equity might be a challenge for many, thereby diverting them to the debt route or the viability gap funding route.

Debt financing is often contingent on the strengths and weaknesses of the given project, with a lack of debt guarantees at present. While banks and financiers are now showing eagerness to fund bioenergy projects, they continue to have conce­rns regarding various factors that may play key roles in determining the viability and bankability of bioenergy projec­ts. Fe­edstock arrangement is one of the most crucial. Loans for these projects are typically disbursed for a period of 10-15 years. Ensu­ring sustainable and quality supply of feedstock on a continual basis is a key challenge for many developers, the­reby creating hurdles in raising sufficient funds. Moreover, in the long run, commercial viability for bioenergy projects can only be achieved by establishing econo­mies of scale. At present, however, most projects run at a scale too small for them to be able to achieve such economies.

Pricing is another aspect that lenders consider when evaluating a project. In the case of bioenergy projects, the pricing of both the end product and the by-products is crucial. To improve lender confidence, price fixation is important. Furthermore, the price must also be adjusted as per the demand-supply movement in the market.

The credit ratings of small- and medium-sized enterprises constitute another area of concern for financiers. Moreover, in­ves­ting in a particular technology is considered risky by lenders at this stage, as most technologies have been adopted on a small scale and are at a nascent stage of commercial utilisation. These projects also typically ha­ve long gestation periods, not in terms of construction, but of return to service.

Key challenges and solutions

Going forward, to catalyse investments in the sector, it would be crucial to ensure that feedstock is sourced from sustainable streams. A collective feedstock collection project can be undertaken, incorporating agri-waste collection by farmers and municipal solid waste collection by civic bodies, and be integrated with a long-term offtake agreement with project developers who can ensure the supply of feedstock in this manner, and continue to operate smoothly. Ensuring the quality of feedstock is also critical, as the quality may be dependent on seasons, which in turn affects the end product.

Identifying the correct technology in the Indian scenario is also important, as most technologies that exist in India today have been adopted by small-scale projects, the­reby providing no evidence of large-scale viability.

Another crucial way of generating greater confidence among potential financiers is by using data. At present, data related to bioenergy projects is highly limited and disorganised. A systematic and centra­lised data portal that underlines and regularly updates all key developments in different types of bioenergy projects could enable both investors and policymakers to evaluate the sector more comprehensively. This is likely to create a more sound ecosystem for funding upcoming bioenergy projects. Land aggregation and procurement challenges also exist. Many bioenergy proje­cts require timely procurement of large areas of land, which in turn requires finan­cing support.

Currently, a lot of funding arrangements and CFA are contingent upon the commissioning of a project. The project cost is borne directly by the developers throughout the project implementation cycle. Thus, long-term financial support through innovative instruments would be crucial in maintaining sustainable cash flows for developers and encouraging them to take up bioenergy projects. Additional funding avenues such as interest-free loans and credit enhancement measures such as guarantees can be provided by state and central governments, as is being done in several other sectors already.

Bioenergy projects also produce large quantities of by-products. Timely evacuation and price fixation for these by-products would also streamline the income str­eams for developers till the very end of the project cycle. Additionally, in the initial ph­a­se of development, an integrated app­roach may be undertaken, wherein small- and medium-sized enterprises would function under the umbrella of oil marketing companies and government bodies. Moreover, research and planning on business models and the optimum size of projects across various subsegments in the bioenergy sector would be key to improving the efficacy of these projects. Most ethanol and CBG projects in India run at small-scale capacities today. Therefore, in the long run, achieving economies of sca­le would be critical in ensuring that India utilises its bioenergy capacity effectively.

Finally, bioenergy must not be looked at in isolation during the planning and development stage. Policies and financial assistance, covering everything from raw materials to end products and utilisation of by-products, would go a long way in increasing the viability and bankability of bioenergy projects in India.

By Kasvi Singh