The economic efficiency of forest energy wood chip production in regional use – A case study

SAFAŘIK DALIBOR, BADAL TOMAS: The economic effi ciency of forest energy wood chip production in regional use – A case study. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 2013, LXI, No. 5, pp. 1391–1398 This regional project case study deals with the limiting factors of economic effi ciency in the production of forest energy wood chips. The evaluation of production effi ciency made use of data obtained from the Lesy města Brna, a.s. (Forest of the City of Brno, Corp.), which were subjected to two static methods of investment evaluation: an analysis of the tipping point and determination of the limit of variable costs and a dynamic modifi ed tipping point analysis using cash fl ow (i.e. cash break even analysis). The results have confi rmed an established hypothesis, namely that the decisive factor in the profi tability of the production of forest energy wood chips hinges on the costs incurred in the gathering of raw material and the distribution of the produced chips. The results include a further limiting factor: transportation costs to the fi nal consumption location. The output of the study is a recommendation that the concentration of residual forest materials not exceed a distance of 250 m from the place of production to the point of disintegration and that the transport distance of energy chips not exceed 50 km from the place of disintegration to the fi nal consumption point. These limiting values help quantify the full internal costs per cost unit, full internal cost profi tability, total revenue profi tability and annual profi tability expressed in terms of fi xed assets depreciation without factoring in fi nancial aid. energy wood chips, economic effi ciency, profi tability, tipping point, variable costs On 8 November 2012, the Government of the Czech Republic negotiated an update to the State Energy Concept (SEC) and – prior to fi nal approval – requested an assessment of its impact on the environment. Key aspects of SEC include diversifi cation and strategic fl exibility. SEC is designed to make use of all available energy sources, while respecting their specifi c conditions. In the case of renewable energy sources (RES), this refers primarily to their use in a range accessible within the conditions of the Czech Republic, i.e. with respect to the decentralised production of electricity and heat as well as in view of growing regional demand. The strategic document also takes into account the limited fi nancial support available for RES (MIT, 2012). Forest energy wood chips (FEWC), which constitute the output of the processing of energy dendromass, may be considered dominant in the RES context. However, its rational use at regional level is prevented by the currently ineffi cient system of fi nancial aid for the use of energy wood chips for electricity production, which was instrumental in the initial stage of development of the utilization of this type of RES, but which does not respect the principles of economic effi ciency of FEWC production, thereby distorting the market environment. One of the basic indicators in assessing the economic effi ciency is economization, i.e. a ratio indicating cost savings on comparable production volumes. The case study presented in this study aims to point out the limiting economic effi ciency factors encountered in the production of FEWC in regional conditions as well as focusing on their quantifi cation. The main limiting economic 1392 Dalibor Safařik, Tomas Badal effi ciency factors include the following: the concentrating distance of logging residues (LR) prior to the process of disintegration (chipping) and the transport distance involved in the distribution of produced wood chips to the point of fi nal consumption. For study purposes, a working hypothesis was formulated: The decisive economic effi ciency factor of FEWC production is the cost of gathering the raw material and transporting the manufactured chips. The study could have relied on a number of already published results, but fi ndings listed by various authors o en diff er both in terms of direct production costs and in terms of internal FEWC production costs; e.g. Havlickova et al. (2010) lists the value of direct production costs at 195 CZK. m−3, Chytrý (2007) indicates the value of internal production costs (including overhead) at 212 CZK. prm−1 (138 CZK.m−3). The value of internal FEWC production cost has recently also been infl uenced by the price of the raw material, i.e., LR, which – according to calls for tenders carried out by the Lesy Ceske republiky, s. p. (Forests of the Czech Republic, S. E – LCR) in October 2011 – ranges from 15.68 to 46 CZK.m−3 of harvested wood substance on stump, i.e. 6.27–18.40 CZK.prms−1. The cardinal question, however, is the amount of internal production cost price as limited by the distance between the point of LR concentration, point of LR disintegration and point of fi nal FEWC consumption. In this case, the maximum economically viable distance of 60 km remains an undisputed standard for the transportation of processed FEWC – see e.g. Kara (2006) and Chytrý (2007). The experience acquired by the Osterreichische Budesforste AG (Austrian Federal Forests) regarding the production and sales of forest energy wood chips to the Wien Simmering power station indicates that economically viable road transport must be limited to a maximum distance of 60 km. However, chips are also transported to more distant destinations. In the 60 to 100 km range, large-volume road transport or rail may be used, while the 100–200 km range calls exclusively for river transport Fink (2004). MATERIAL AND METHODS Economic effi ciency may be evaluated using a variety of methods which can be divided into two groups: static and dynamic. In order to provide the most meaningful results – production effi ciency indicators – and a subsequent summary of the fi ndings obtained, it is essential to always accurately describe and formulate the point of departure. A signifi cant problem encountered by many researchers during the process of the evaluation of the economic effi ciency of forest energy wood chip production in the Czech Republic is the lack of publicly available data relevant to production costs and revenue. The evaluation of economic effi ciency of FEWC production and the assessment of limiting production factors focused on data covering the period from 2004 to 2008 in the Lesy města Brna, a. s. (Forests of the City of Brno, Corp., municipal forest enterprise, LMB). This approach was utilized for the following reasons: • mixed forest stand composition of the LMB is similar to the mixed forests encountered throughout the Czech Republic (see Tab. I), • FEWC produced from LR by the LMB was supplied as a homogeneous mixture in a ratio of mixed coniferous and deciduous forest material corresponding to LMB forest composition, • production of forest energy wood chips at the LMB was launched in 2004, i.e. in the year when the Czech Republic was admitted to the European Union as full member and was thus subject to international obligations arising from Directive No. 77/2001/EC, • data obtained from the LMB for the period from 2004 to 2008 represents a coherent set of economic information regarding the individual stages of LR production in regional conditions, from LR production to concentration, chipping and implementation. During the selected reference period (2004 to 2008), FEWC have been produced by the LMB by processing LR in the forests of the statutory city of Brno as supplied primarily by TEZA, a. s., a company controlled by the statutory city of Brno (as is the case with LMB). LMB was the sole and exclusive supplier of forest energy wood chips sold to supply heat to the Bystrc I. and II. housing estates in an annual volume of 22,000–25,000 prms (8,800– 10,000 m3) as required by the current heating season. The technological production process included the following steps: • preparation of materials, • concentration, which includes the sub-operations of bundling, moving hauling road – roadside “HR-RS”, moving stump – roadside “S-RS” and trolley carting, • production by chipping,