Roald Suurs, Elsbeth Roelofs
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As part of its general innovation policy, the Dutch government wants to make sure that it provides positive conditions for innovative companies with biobased ambitions. For this reason, TNO was asked to investigate the factors that determine the investment climate for biobased chemical companies in Europe (and more particularly in the Netherlands). The following questions were central:
- Which criteria determine the outcome of planning biobased investment decisions?
- What is the relative country performance within and outside Europe?
- What are the specific barriers for investing in the Netherlands and Europe?
The results of the study indicate that, depending on the development stage of innovation activities, decision criteria will be dramatically different. Europe, and the Netherlands, are doing relatively well when it comes to supporting R&D but key improvements are necessary when the ambition is to move from R&D to demonstration and commercial production.
The results presented here are based on a quickscan, consisting of a short literature study and 20 interviews with industry leaders and venture capitalists. Interviews were directed at identifying key decision criteria for building either R&D facilities or pilots, demonstration plants or commercial scale production lines (see figure). The focus of the study was on companies developing and/or producing biobased chemicals.
- Excluding companies that exclusively produce bioenergy and biofuels.
- Excluding companies that exclusively produce feed and food.
Despite the narrow focus, a large variety of companies was involved, ranging from large waste processors and a sugar company to small pyrolysis or IB oriented technology start-ups.
Figure 1: Three categories of investment and typical budgets involved.
Which criteria determine the outcome of planning biobased investments?
The figure below provides an overview of criteria that were considered most important in deciding on go no-go / location of investments in R&D, demo’s and commercial installations.
Figure 2: For each type of investment the figure shows the average weight of each criterion considered for deciding on a go/no-go and/or choosing a location. Weights are calculated on the basis of a collection of ‘top 5’ rankings. A weight of 5 stands for an average rank score of 1; a weight of 1 stands for an average rank score of 5; a weight of 0 means absence from any individual top 5).
Based on the interviews the following explanations can be given for the relative importance of different criteria for the three categories of investment.
R&D capacity / pilot plants (network oriented)
- Generally speaking, investments are drawn to regions where professionals with the relevant knowledge are situated. The knowledge infrastructure (organisations, facilities, education level) is key in attracting and supporting these professionals.
- Biobased clusters are important for their network effects, pilot facilities and especially for their ‘marketing power’.
- Public financing, subsidies, are a lifeline for biobased pre-competitive R&D.
Demonstration plants / semi-commercial (risk oriented)
- Access to sufficient quantities of biomass feedstock at predictable and affordable costs is a requirement.
- Energy costs are a cost determining factor in the (bio) chemical industry.
- Moreover, investors seek to minimise the high costs and risks associated with this stage. Policy regulations directed at mitigating investment risks is therefore crucial.
- For the same reason, investors will usually look for a fit with existing site infrastructure (e.g. steam supply, heat outlet, logistics, safety services).
Commercial production / Upscaling (market oriented)
- Feedstock, infrastructure and energy costs remain very important criteria.
- The business case perspective is leading. Access to biobased markets is therefore an important additional criterion at this stage. Whether this affects a location decision depends on the type of product and company (how locally organized is the market for that company).
- Labour market conditions (e.g. costs and quality of operators) are key.
What is the relative country performance within and outside Europe?
Based on the key decision criteria for the three investment categories, it becomes clear that Europe’s strengths lie in the development of knowledge and networks. Critical weaknesses are the feedstock situation, energy costs, relative tax level and (other) financial incentives.
Some more detail on the most differentiating criteria for biobased companies making investment decisions are provided below:
- Wood prices (chips, pellets) in the EU are about three times higher than in the USA.
- Cost levels in the EU are modest where wood residues can be collected and transported over short distance. Still the prices are volatile.
- Global prices of sugar are currently highly volatile. Potential for upscaling sugar production is, by most respondents, believed to lie especially in Brazil and SE Asia.
- A key strength of EU is the policy support for R&D.
- The EU has trouble supporting companies in bridging the ‘valley of death’.
- Tax levels are relatively high
- Lack of demand-side policies / public procurement initiatives
- Permits can be important for choosing specific regions within a country, but only after all other business requirements have been met.
Figure 3: Scaling up from pilot to demonstration remains a critical challenge. The key is a combination of measures to support risk mitigation (push) and market outlook (pull).
- The USA and the EU are globally considered leading in biobased R&D.
- Growing competition is to be expected from China and Brazil.
- Important differences do exist between EU countries for specific areas of expertise (for example biotechnology is relatively big in the UK).
- The figure below provides a crude estimation of strengths in terms of R&D spending in general (not specific for biobased). Figure 4: Global R&D spending 2011. Size of circle reflects the relative amount of annual R&D spending by the country noted. Source: 2012 Global R&D Funding Forecast.
- Energy prices are lowest in China and the USA. For the EU, energy prices are relatively high.
- Within the EU price differences are less significant.
- Cheap energy on the basis of coal (China) and shale gas (USA) comes with high ecological costs. Many biobased businesses consider this a liability from a CSR / branding perspective.
What are the specific barriers for investing in the Netherlands and Europe?
High feedstock costs / availability
- Subsidies for bioenergy seem to create artificially high prices for biomass
- Lack of incentives for farmers to innovate e.g. sugar quota
- Regional biomass supply is insecure
- Waste legislation is not adapted to circular economy concept
Lack of ‘valley of death’ capital
- Lack of risk capital
- Lack of government procurement programmes
- Conditions of government financing are often unfit for commercial parties:
- Obligation to form consortia
- Obligation to disclose knowledge
Limited market value biobased products
- Lack of market incentives for biobased products
- Limited consumer awareness of (advantages of) biobased products
- No level playing field for fossil and biobased applications
Burden of regulation
- REACH requirements press on biobased businesses (especially SMEs)
- Permit procedures (province, municipalities) take too much time
Fragmentation and lack of critical mass
- Biobased initiatives are spread too thin
- Lack of cooperation between regions
- Lack of international cooperation across Europe
In the face of international competition, what role is there for a European biobased chemical industry?
Which possibilities are there for strengthening the position of European feedstock producers?
Which possibilities are there for different EU countries / regions in specialising in forestry, agriculture or waste as key biobased resource
How can the Dutch and EU governments mitigate the risks of biobased investments, most importantly for the support of demonstrations plants?
Which possibilities are there for developing biobased markets within Europe and the Netherlands? How to stimulate consumer uptake of biobased products?