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Blue Sphere Striving to Become Leader in U.S. Organics to Energy Sector
SOURCE: EquityBrief July 09, 2013 07:01 ET Blue Sphere Striving to Become Leader in U.S. Organics to Energy Sector LOS ANGELES, CA–(Marketwired – Jul 9, 2013) – Sometimes exciting developments come in small packages. That looks to be the case of Blue Sphere Corp. (OTCQB: BLSP ). Blue Sphere is positioning itself at the forefront of the developing organics to energy market in the United States. Blue Sphere currently is working on the implementation of two anaerobic digestion (organics to energy) projects scheduled to break ground in the second half of 2013. These two projects are slated to produce enough gas to power 8.4 MW of electricity generation capacity annually, with generation scheduled to begin in the second half of 2014. According to the EPA, there were over 202 anaerobic digestion facilities operating in the U.S. as of May 2013. In contrast Germany has over 4,000 of these plants in operation. The available market for this type of electricity production in the U. S. is enormous and Blue Sphere is now implementing its plans to develop, what it believes, are the best projects available. Anaerobic digestion power generation plants are facilities that generate electricity from organic material. Organic materials used to power these plants include food waste, animal manure, farm waste and certain municipal waste. Food waste is the second largest category of waste sent to landfills in the U.S. This is over 35 million tons of food waste equaling over 18% of the total landfill waste stream in the U.S. This food waste is a potential supply of power that can be developed into a viable alternative supply of electricity. The political environment in the U.S. is ripe for the growth of the organics to energy market. 31 states have passed laws mandating “renewable portfolio standards” requiring local utilities to purchase or generate a certain portion of their electricity from renewable sources. New York and California have implemented mandates that will require up to 30% of the power used in the states to be generated by renewable sources. Blue Sphere’s systems not only generate power, but they have the ability to reduce the amount of waste being added to landfills, turning it into useful products, specifically energy and fertilizer. Blue Sphere is developing and acquiring two anaerobic digestion plants in the advanced planning stages. Blue Sphere, acting as project manager, has brought on world-class partners to develop and build these power generation facilities. Biogas Nord, AG, out of Germany, specializes in designing and building organics to energy plants. Biogas Nord has built over 400 plants in Europe, Africa and the Middle East. Biogas has partnered with Blue Sphere to build the U.S. plants through Bino Sphere, a joint venture between the two companies with Blue Sphere owning 75% and Biogas Nord owning 25%. The U.S. plants will be individual companies that are owned equally by investment partners and Bino Sphere. Blue Sphere’s first project is located in Charlotte, North Carolina. The Charlotte facility will have 5.2 mega watts (Mw) of generating capacity when completed. The project has long-term agreements for organic feedstock supply, a Power Purchase Agreement (PPA) with Duke Energy, the largest power holding company in the United States, to buy the electricity generated by the facility and an agreement with McGill Environmental Systems to purchase the compost. Blue Sphere is currently putting in place the financing and expects to have the ground breaking in the third quarter 2013. Blue Sphere’s second project, located in Johnston, Rhode Island, is a 3.2 Mw bio-waste to energy facility. Once again, the preliminary organic feedstock supply agreements are in place, as is the PPA with National Grid, one of the largest investor owned energy companies in the world based in London, England and the compost off-take agreement with McGill Environmental Systems. Blue Sphere expects to break ground on this project by the end of this year. Both facilities will generate multiple streams of revenues. The largest revenue stream will come from selling the generated electricity to the PPA partners, Duke Energy and National Grid. The second revenue generator is the “Tipping Fee,” which is a fee for accepting the waste streams and operating what can the company refers to as an “endless landfill.” After the organic waste is processed and the gas produced from this process is turned into heat and energy, what is left is compost, which the company will sell to fertilizer companies as a product additive. This is the beauty of the organics to energy facilities; waste goes in and energy, in the form of electricity, and fertilizer come out and both outputs are sold. This is a true clean energy production process that can be replicated many times in cities, towns, farms and ranches around the country. When the projects are complete, Blue Sphere will own 37.5% of both facilities and will be entitled to that percentage of the cash flow, as well as a management fee for managing each facility. Blue Sphere will also be entitled to receive its project development costs back at the time of the funding close. Blue Sphere expects to start receiving revenue in 2014 from the operations of these projects. Blue Sphere’s management is in the planning stage of additional facilities. They believe they can replicate the process over and over in a similar fashion, with the same partners, contractors, financiers and processes. With this approach Blue Sphere can become a leader in the growing organics to energy market over the next several years. Blue Sphere went public through a reverse merger in 2010 to participate in the carbon credit trading markets and to develop clean energy projects globally. The management quickly realized that the carbon credit market would not develop as expected and management shifted focus to renewable energy and organics. Management did not do much marketing of the company or its stock while they were refocusing their company on the clean energy project business. Blue Sphere’s primary focus is now on developing organics to energy facilities in the U.S. with their partners, although they do have some clean energy interests in West Africa with partners, as well. Due to the nature of the changing business focus, investors have not focused on the potential value that Blue Sphere is generating for shareholders and investors. These first two projects will generate substantial revenue for Blue Sphere, possibly over $1.5 million/year with large operating margins. As Blue Sphere adds additional projects the cash flow will give management the potential for higher project ownership levels, and allow management to pursue larger facilities. With this type of revenue, and strong profitability, Blue Sphere will not have a market cap of only $2.7 million for long. If Blue Sphere can get both of these facilities up and running on schedule next year it is feasible that investors could see a significant increase in the valuation of the company. Using the assumption that these two facilities could generate $1.5 million/year for 20 years the net-present value of Blue Sphere’s revenue, upon completion of just these two facilities, could be over $10 to 15 million. We will have to wait to see actual projections to conduct proper valuation analysis, but the basis for a strong company and a good investment are in place. Currently, Blue Sphere trades at about $0.003/share and has approximately 800 million shares outstanding, but management is committed to adjusting the capital structure to make it more conducive to investing. An example of adjusting the capital structure would be if management conducted a 1 for 100 reverse split, the stock price would be $0.30/share with 7.7 million shares outstanding, a structure that would benefit all shareholders. The investor risks to Blue Sphere are mostly project related. These projects are not small undertakings. Issues could arise in the financing, permitting, construction, organic feedstock collection and operations of these organics to energy facilities, potentially delaying progress. Investors should be aware of these risks to protect themselves and their investments. Management has worked on these transactions for several years and has been meticulous about the details, but things can go wrong in any large construction project. From where the company stands now, if it is able to launch the two current projects, and announce the upcoming projects, it is easy to believe that Blue Sphere could quickly have a valuation of $10 to 15 million. This would equate approximately $0.015 to $0.02/share, which is an increase of around 400 to 700% from current levels. The milestones investors should expect in the near-term are the announcements of a strong financing partner for the Charlotte project, the delivery of the funding for the Charlotte project, the ground breaking for the Charlotte project all in the next 3 months. The next round of milestones would be the same ones, but for the Johnston project in the 4 th quarter 2013. Blue Sphere expects to generate value for its shareholders quickly between now and the end of the year. Investors would be smart to conduct due diligence into Blue Sphere quickly as the company expects it will reach the first set of these milestones by the end of the current quarter. Once Blue Sphere begins performing on these expectations investor interest will rise in this potential market leader, and it will be time for interested investors to take their initial investment positions in Blue Sphere. Continue reading
After Failed Attempt in April, Europe Approves Emissions Trading System
Ina Fassbender/Reuters Wind turbines and a coal power plant in Germany. Europe approved a measure aimed at raising carbon permit prices. By STANLEY REED Published: July 3, 2013 LONDON — The European Parliament approved on Wednesday a measure intended to revive sagging prices and confidence in the European Union’s emissions trading system, the centerpiece of Europe’s effort to cut greenhouse gases and a model for similar systems around the world. The vote had taken on symbolic importance because Parliament had rejected a similar proposal in April. That vote threatened the carbon trading system, which has been emulated globally as a way of using markets to curb greenhouse gases. The measure passed on Wednesday in Strasbourg, France, by a vote of 344 to 311 after intense lobbying by the European Commission and some national governments, including those of France, Denmark and Finland. It also gained stronger backing from liberal and socialist groups. Among those opposed were the governments of Poland and the Czech Republic, which were wary of the plan’s impact on their energy-intensive industries. A large moderate group, the European People’s Party , was divided, leading many of its members to abstain. “This was to some extent a symbolic vote indicating support more broadly for Europe’s carbon policies,” said Stig Schjolset, an analyst at Reuters Point Carbon, a market research firm based in Oslo. A negative vote would have meant “that European policy makers did not want to fix the carbon market and use it as a key tool to combat climate change,” he said. Richard Seeber, an Austrian and spokesman on the environment for the European People’s Party, voted in favor of Wednesday’s legislation after voting ‘no’ in April. He said he was persuaded by an amendment ensuring that the intervention in the market was “a one-off” and by a requirement that an assessment be made about “carbon leakage,” the extent to which businesses would leave the European Union to avoid the higher permit price. “It is essential to keep the E.T.S. as the main market-based instrument to fight against climate change,” said Mr. Seeber, referring to the emissions trading system. The market for carbon credits reacted positively, rising to about 4.70 euros, or $6.13, per ton, a 9 percent increase for the day, on heavy volume. The approved proposal will try to shore up prices for permits to emit greenhouse gases by delaying the auctioning of some of these allowances in the coming years through what is called backloading. Carbon permits are licenses for companies to release greenhouse gases. The idea behind the European cap-and-trade system is to tighten the amount of permits available each year so as to make polluting more costly, forcing companies to switch to greener technologies. But Europe’s prolonged economic downturn and generous allocations of allowances have created a glut of permits that cut the price to as low as about 2.75 euros a ton after the negative April vote. In a sense, the system is working by providing relief at a time of economic stress. But analysts say that a price of 30 euros a ton or higher is needed to persuade companies to switch to cleaner fuels like natural gas, the main alternative to coal for generating electric power. Coal use in Europe boomed last year. Analysts caution that the number of allowances that will be held off the market, about 900 million, is estimated to be only about half of the surplus of permits that would otherwise have built up by 2020, so it will not by itself shift the carbon market from bear to bull mode. “I think the backloading itself will have limited impact on prices because the market remains significantly oversupplied,” said Roland Vetter, head of research at CF Partners, a carbon trading firm based in London. In addition, there are still negotiations with Europe’s national governments and other hurdles to clear before the changes are put into effect, perhaps in the early part of next year. “This is a marathon, not a sprint, so today is not the end of the story,” said Miles Austin, the executive director of the Climate Markets and Investment Association, an industry group based in London. Business groups, some of which had lobbied against the measure, were critical of what they described as interference in a market system. “Even a one-off intervention undermines the principles of the emissions trading system and will make it more difficult for businesses to produce cost-effectively in the E.U.,” Arnaldo Abruzzini, secretary general of Eurochambres, which represents European chambers of commerce, said in a statement. But the world’s pioneering carbon market has a pulse again. Among supporters of carbon trading there is now hope that Europe will in a couple of years adopt structural changes that would lead to permanently higher prices. Connie Hedegaard, the European Union’s commissioner for climate action, said the purpose of the backloading measure was to “stop the bleeding with the drop in the carbon price while we were discussing more challenging issues.” The simplest overall change that would raise the price would be to “reduce the cap,” or permanently reduce the number of allowances available, said Robert N. Stavins, director of the Harvard Environmental Economics Program. But such a move “is very difficult to do at a time like this,” he said. With Europe mired in recession, politicians do not want to saddle Europe-based companies with even higher costs, especially considering that their American competitors are benefiting from lower energy prices thanks to the discoveries of shale gas. Also, the United States seems to have more or less permanently rejected a cap-and-trade system after the House of Representatives passed one in 2009 that later failed in the Senate. For some businesses, that left the European system looking like yet another burdensome and costly regulatory initiative. “Europe thought it would take the lead and the U.S. would follow,” Mr. Stavins said. Instead, the United States rejected cap and trade and that is affecting the cost of carbon-intensive services in Europe, he said. Mr. Stavins said that countries like Australia, Japan and China were all experimenting to various degrees with systems like the one Europe adopted. A version of this article appeared in print on July 4, 2013, on page B3 of the New York edition with the headline: After Failed Attempt in April, Europe Approves Emissions Trading System. Continue reading
European Biomass Demand Continues to Grow Domestic Markets Face Uncertainty
Legislation and funding uncertainty loom over the domestic market while a boom in the European market soaks up North American supply. What is the future for both markets when it comes to wood pellets and biomass for energy? By DeAnna Stephens Baker Date Posted: 7/1/2013 Wood-based energy markets have seen significant growth over the past decade – a trend which is expected to continue, driven by renewable energy policy in the U.S. and abroad. However, unless some significant changes are made in Washington, foreign policies, which are currently larger market drivers than domestic policy, will continue to hold the place of the major cause of demand for U.S. woody biomass. The North American wood pellet export industry has grown exponentially in a relatively short period of time with the export value increasing from an estimated $40 million in 2004 to almost $400 million in 2012, according to the Wood Resource Quarterly (WRQ). Most of these exports have gone to Europe where aggressive renewable energy policies in many countries are fueling the demand, pushing pellet prices close to, or at, record-high levels in all the major markets in the first quarter of 2013. European Policies and Demand Last yeat saw a record volume of 3.2 million tons of pellets exported from North America to Europe, according to the North American Wood Fiber Review. Much of this has been due to the European Union’s 20-20-20 targets of reducing greenhouse gas (GHG) emissions by 20%, increasing consumption of energy from renewable sources to 20%, and improving energy efficiency by 20% by 2020. “One of the cheapest ways to go about meeting these targets was to take existing coal capacity and either co-fire with wood pellets or convert it to burn wood pellets,” said Seth Walker, an associate bioenergy economist at RISI. However, the incentive to burn wood pellets has decreased over the past year in Europe due to a glut in carbon credits. This glut was caused by the emissions trading scheme that was set up in Europe prior to the recession. When overall energy usage dropped during the recession, the use of carbon credits did as well, creating an oversupply of credits. “Within the past year or so, the carbon market absolutely tanked,” said Walker. “So right now the price of carbon is extremely low throughout Europe…and there isn’t a ton of incentive for most power companies to burn wood pellets right now.” This does not mean that the demand from Europe is dropping off; but it may be shifting to the United Kingdom where analysts expect that the majority of future development will be centered. In July 2012 the UK released new rules for its renewables obligation certificates (ROC) which are issued to power generators for producing renewable energy, with different categories of generation receiving a different number of ROCs per megawatt hours generated. The 2012 rules are favorable to dedicated biomass power generation, awarding two ROCs for dedicated biomass electricity generation with combined heat and power and 1.5 ROCs for dedicated biomass electricity generation, but only 0.5 ROC for co-firing. Several UK power plants have already been converted from coal to biomass and more are in the process of doing so, including Drax Power Station, the largest coal-fired power station in the country. Drax plans to transform itself into a predominantly biomass-fueled generator, initially converting three of its six generating units to run on biomass. The first unit came online in April and the next unit is scheduled for conversion next year. About 70% of U.S. pellet exports are already going to the UK and with almost all of the biomass used by large-scale power plants being imported due to a limited supply of domestic raw material, demand is expected to rise. “Each of those facilities is a huge source of demand,” said Walker. “Drax would use about 7.5 billion tons of pellets, which is more than double the entire consumption for one U.S. power plant.” Demand has already started to ramp up and is expected to increase quickly in the next five years, likely over one million tons annually. Many of the new biomass facilities that have been announced in western Europe will be coming online by 2016, after which demand will probably start leveling out. “The question is what will be the level of attrition among those projects, given how the carbon trade pans out,” said William Perritt, executive editor of RISI’s Wood Biomass Market Report. Unlike many European countries, the United States does not have a national renewable energy standard (RES). Congress has considered a RES in the past, but never gotten real traction on one. Many industry analysts expect that the United States will eventually pass a federal RES, but that it will not happen within the next few years due to the current political landscape. Farm Bill At present, the inclusion of funding for the Biomass Crop Assistance Program (BCAP) in the farm bill is one of the biggest legislative issues that the biomass industry is watching. The farm bill is a bundle of legislation that Congress usually passes every five years to set national agriculture, nutrition, conservation and forestry policy. The last farm bill expired in December and a partial extension of several programs was passed as part of the fiscal cliff deal after the House failed to bring a five-year bill to the floor. The Senate passed its version of the farm bill in early June, and as of press time the House had scheduled floor debate on its version. However, the two versions have significant funding differences. The Senate’s $955 billion bill calls for over $1 billion in mandatory funding of renewable and clean energy programs over 10 years, including $38 million annually to BCAP for five years as well as $26 million in annual mandatory funding and $30 million in annual discretionary funding for biomass research and development. In contrast, the House version eliminates mandatory funding and reauthorizes programs at reduced discretionary funding levels. It completely eliminates BCAP’s collection, harvest, storage, and transportation (CHST) payments – a move the agriculture committee said was done to prioritize funding for the establishment of dedicated energy crops. Many in the biomass industry prefer the Senate version due to the mandatory BCAP funding. However, other industry groups, such as the American Forest & Paper Association (AF&PA), oppose mandated funding, preferring the discretionary funding of the House bill. “AF&PA believes that the free market should determine the highest and best use of biomass,” said Donna Harman, president and chief executive officer. Reconciling these differences could cause a delay in final passage of a farm bill. However, with the temporary program extensions set to expire in September, there is a lot of pressure for Congress to pass a five year farm bill, and it is expected to be completed by the end of summer. The leaders from the Senate agricultural committee may be in a good position when it comes to negotiating a compromise of the two versions, due to the passage of their version with a filibuster proof majority. Tax Parity Members of the biomass industry are also continuing to lobby for the biomass sector to receive tax parity with other types of renewable energy. In 2009, under the American Recovery and Reinvestment Act, wood-fired biomass power plants were given only half the production tax credit that other renewable energy sources received and for only five years – half the time period that the other sources were given. According to the Biomass Thermal Energy Council (BTEC), there are currently about 80 different energy-related tax provisions in federal law. “Unfortunately, none of these incentives extends to high efficiency biomass thermal energy, despite the fact that biomass thermal energy fulfills all the same public policy objectives as other renewable energy sources, and despite the fact that the Internal Revenue Code recognizes other thermal technologies such as solar and geothermal,” said Joseph Seymor, executive director of BTEC in a letter to the Energy Tax Reform Working Group. “The end result is an unlevel energy landscape that promotes certain technologies over others, both limiting consumers’ energy choices and their ability to utilize local fuels from landowners and farmers.” Not only does this disparity in tax incentives put biomass at a competitive disadvantage compared to other types of renewable energy, but it can also discourage development in an industry that already has tight profit margins. The effort has received some attention recently from both President Obama’s budget proposal and a piece of Senate legislation. In his proposed 2014 fiscal year budget, President Obama included a permanent extension of the production tax credit for renewable energy sources. The credit is currently scheduled to expire at the end of the year. If a permanent extension is passed, it could go a long way toward helping new biomass facilities secure needed investments for construction by providing the stability and continuity that would help attract private investment. The Biomass Thermal Utilization Act of 2013 would amend the federal tax code to incentivize biomass energy, as it already does for several other forms of renewable energy. Currently, a number of renewable energy technologies qualify for investment tax credits for capital costs incurred in residential and commercial installations. This legislation seeks to achieve equal treatment between those renewable systems and thermal biomass systems. One provision of the bill would include high-efficiency biomass heating technology in the 30% residential renewable energy investment tax credit. The second provision is a tiered tax credit for 15% or 30% of the installed cost of biomass-fueled heating systems for commercial or industrial applications. Because biomass thermal technologies have comparatively high up front capital costs, these investment credits can help overcome the investment hurdle and help build the market. Tailoring Rule A close eye is also being kept on the Environmental Protection Agency’s (EPA) progress on the decision of whether or not to require GHG permits for biomass-fired sources under the Clean Air Act’s Prevention of Significant Discharge (PSD) Tailoring rule. Currently, EPA has no standards for the regulation of GHG emissions from biomass-to-electricity facilities. However, that could change when EPA makes the decision that it deferred in 2011 for up to three years to provide time to study the science and policy of regulating biomass emissions and determine whether a Clean Air Act permit is required. A decision is expected soon and the outcome of the decision could have a significant impact on the biomass industry. “The prudent course for EPA to take, and one with real potential for climate change mitigation, is to pursue amendments to the Tailoring Rule that incorporate the carbon benefits of forest bioenergy in the broadest and simplest terms,” said Dave Tenney, president and chief executive officer of the National Alliance of Forest Owners (NAFO). Wood-based energy has had a difficult time being accepted as a renewable energy option in the United States largely due to the aggressive campaigns that have been mounted against it by many environmental and competing industry groups. “There’s a dilemma in people’s minds about using wood-based energy,” said Dr. Burton English, professor of agricultural economics at the University of Tennessee. “The demand for energy is so large that we could do this wrong and hurt the environment and people are afraid of that. So we’ve been spending a great deal of effort to make sure that the systems we plan for are indeed sustainable. And that’s the key: bioenergy is bearing a cross that other fuels don’t have on them.” That burden is made worse by policies and regulations that create uncertainty for the entire biomass supply chain. And until that uncertainty is dealt with, it will continue to inhibit the growth of domestic demand. “We’ve seen what happens in the last three or four years when uncertainty is there,” said English. “We have uncertainty in policy; we have uncertainty in fuel prices; we have uncertainty in the whole area of energy and we need some policies that reduce that uncertainty.” Wood Pellet Logistics Expand The rising and expected demand from Europe for wood pellets is driving developments in infrastructure and logistics – especially in the Southeast United States where a number of new pellet plants and port facilities are currently in various building and planning stages. “Investment in pellet mills and port infrastructure is in the tens to hundreds of millions of dollars,” said Pete Madden, vice president of renewable energy and supply chain at Plum Creek. According to Madden, states are actively trying to attract that investment capital with a variety of incentives for companies that locate their mills in their states, along with investments in the port infrastructure. “There currently are only a handful of U.S. ports that are capable of handling wood pellets,” said Madden. “These ports require pellet storage and handling facilities that are capable of keeping the pellets dry with fire protection and dust abatement systems. This infrastructure will take time to develop along with the added complexity of keeping the ports properly dredged (if necessary).” Some of the most recently announced pellet-related port projects include: • the Port of Wilmington’s agreement with Enviva for a $35 million wood-pellet storage and shipping facility; • a potential agreement between International WoodFuels and the Port of Morehead City for a project costing up to $15 million to build pellet storage domes and update an existing rail unloading station; • the $28 million to $30 million facility ($10 million is being funded by the state of Mississippi) being built at the Port of Pascagoula that will include a system, storage silos and a ship loader for receiving and shipping wood pellets; • a plan by Drax Biomass plans to build a port-side storage and loading facility, capable of accommodating delivery of pellets by rail and truck, at the Port of Greater Baton Rouge, with the capacity to store approximately 80,000 metric tons of biomass pellets. The planned biomass production facilities in the region are even more numerous. Some of the most notable ones include the facilities planned by European countries. German Pellets is planning a 500,000 metric ton pellet manufacturing plant in Woodville, Tx. and a 1 million metric ton plant in Urania, La. Drax Biomass also has plans for two pellet manufacturing facilities – one each in Gloster, Miss. and Morehouse Parish, La. Full operations at both are expected to start next year with a combined capacity to produce 900,000 metric tons of biomass pellets. Even with the planned port facilities, the planned pellet capacity is growing faster than the port capacity, which could make port infrastructure an even larger problem for pellet exporters in the near term. But with new facilities being announced often, the logistical efficiency of the industry could increase. “Without additional port capacity (some of which is planned) pellet capacity announcements in the south could outstrip port capacity development, exacerbating the problem,” said Madden. “The industrial pellet industry is still emerging and one could expect as other projects come online the costs of supplying pellets in the global marketplace should trend lower as supply chain efficiencies increase.” Continue reading
