Economically Optimal Joint Strategy for Sustainable Bioenergy and Forest Sectors with CO2 Constraints

1. Economically Optimal Joint Strategy for Sustainable Bioenergy and Forest Sectors with CO2 Constraints – A Joint Project with E.ON Sweden Peter Lohmander  Professor Dr., SLU, Sweden  http://www.Lohmander.com Peter@Lohmander.com

2. Economically Optimal Joint Strategy for Sustainable Bioenergy and Forest Sectors with CO2 Constraints Ways of increasing the total profit of the forest and bioenergy sectors How to increase the forest harvest level and the capacity of the bioenergy sector in a sustainable way Determining the optimal dynamic time path of the forest resource and increasing the growth through new forest management methods Reducing CO2 in the atmosphere via CO2 separation and permanent storage in combination with increased forest harvesting and new plantations

3. Economically Optimal Joint Strategy for Sustainable Bioenergy and Forest Sectors with CO2 Constraints Economically optimal coordinated decisions in the forest, the forest products industry and energy industry. Optimal dynamic capacity investments. Optimal dynamic forest development.

4. Central components A General principles of investment planning. Economic returns in the stock market in dominating companies. Economic facts in forest and energy companies. Investment evaluation principles in a forest company. The initial physical state.

5. Central components B Energy in Sweden Bioenergy in Sweden Biomass flows in Sweden Distribution of the forest harvest with respect to forest industry, energi industry, stock level changes and others

6. Central components C Operations Research with Economic Optimization Raw material Perspective Total Perspective I Total Perspective II

7. Central components D New Observations General Conclusions Concrete Suggestions

8. Central components A General principles of investment planning. Economic returns in the stock market in dominating companies. Economic facts in forest and energy companies. Investment evaluation principles in a forest company. The initial physical state.

9. Economic returns in the stock market and comments on investment planning Source: Dagens Nyheter (The leading Swedish News Paper), Thursday 2008-01-03 The companies at the Stockholm Stock Exchange with a value of at least 100 billion SEK (approximately 10 billion Euro) are included in the study. P/e = Price per share divided by the expected profit per share. 1/(P/e) = Expected profit per share divided by the price per share. OBSERVATION: 1/(P/e) = ”Expected rate of return” on the money invested in the share.

14. Examples of requiered rates of return in a forest company:SCA 2006

15. Example of a method for investment evaluation Source: SCA 2006

16. Citation (Simplified and translated): ”SCA evaluates all strategic investments. Every investment must, with some margin, have a positive present value. If the present value is positive, the investment is ”creating a value”. SCA 2006

17. Citation (Simplified and translated): ”When SCA makes a present value calculation of a potential investment, the rate of interest used is determined by two things: The rate of return demanded by the SCA share holders and the long term bond rate. WACC, Weighted Average Cost of Capital, evaluated January 1, 2007, is 6,4 %.” SCA 2006

18. Typical investment evaluation methods and demanded rates of return The present value method. As the rate of interest, SCA uses the WACC. This is 6.4%. The present value should be positive, with some margin, using this rate of interest. SCA demands (2007) a rate of return on equity of 8.5%. The P/e of SCA (2008-01-03) was 12. this corresponds to an expected rate of return of 8.33% The mean of the P/e of the investigated largest 11 companies at the same point in time was 12.8 which corresponds to an expected rate of return of 7,8%. A typical rate of return is found in the interval 7% - 9%

19. Real calculation A typical rate of interest is found in the interval 7% - 9% Assuming that all prices increase with the inflation (2%) we may perform a real calculation with a rate of interest in the interval 5% - 7%.

20. The Initial Physical State The information from the Swedish Board of Forestry (Yearbook of Forest Statistics and Internet) clearly shows that the stock of wood in the Swedish forest has increased very much since 1920. This is true for pine, spruce and birch. Source: The Swedish Board of Forestry 2007-10-26: http://www.svo.se/episerver4/templates/SFileListing.aspx?id=16583

22. Source: www.svo.se 2008-01-02

24. Central components B Energy in Sweden Bioenergy in Sweden Biomass flows in Sweden Distribution of the forest harvest with respect to forest industry, energi industry, stock level changes and others

27. Source: Swedish Energy Agency: "Energy in Sweden, Facts and Figures 2005"

29. Source: Swedish Energy Agency: "Energy in Sweden, Facts and Figures 2005"

30. http://www.svo.se/episerver4/dokument/sks/Statistik/dokumenten/Produktion/Tradbransle/ProjTradbr/Biomassaflöden%20i%20svensk%20skogsnäring%202004-2(förf%20P-O%20Nilsson,%20prof%20emer).pdf

34. Central components C Operations Research with Economic Optimization Raw material Perspective Total Perspective I Total Perspective II

35. Operations Research Raw Material Perspective Total Perspective I Total Perspective II

36. Raw Material Perspective

38. The Raw Material Perspective and Optimization You may instantly calculate the economically optimal decisions, from a raw material perspective, using software available from the Internet: http://www.lohmander.com/program/Faust_Slut/InFaust3.html http://www.lohmander.com/program/Stump02/InStump022.html

45. Observations From a pure ”raw material perspective”, you may show that a very large part of the Swedish forest should be instantly harvested, even if the real rate of interest is not higher than 3%. If the real rate of interest exceeds 3%, you should if possible harvest even more. If the growth rate of the next forest generation increases, you should also harvest the present forest earlier.

47. Total perspective I

54. Derivations and parameters (I)

59. Observations Even if we do not accept to decrease the stock level below the very high level of today, we should strongly increase harvesting during a considerable time interval. In this first derivation, the improved growth rate in new plantations has not been considered.

61. Observations If we are prepared to adjust the stock level to the stock level of the year 1985, (approximately 2 500 Mm3sk), we should increase harvesting very much during a long time period. Then, the total economic value strongly improves. In this derivation, the improved growth rate in new plantations has not been considered.

64. Total perspective II

65. Appendix 2: Derivations of exlicit functions for the stock levels at different points in time under the influence of changing harvest levels and production in dynamically introduced new plantations. This approach represents “Total Perspective II”.

68. How rapidly will new forests grow? Example: Pine: Director of silviculture Dr. Per Persson, SCA says: Pinus contorta on average grows 40% faster than Scots pine. Source: Jägmästarnas förenings höstexkursion, Skogsakademikern, Årgång 21, Nr 4, 2007

69. How rapidly will new forests grow? Example: Spruce: Dr. Bo Karlsson, Skogforsk:

70. How rapidly will new forests grow? Example: Intensive plantations: - Treat forestry seriously! Start with intensive forest management! These are the words of Fredrik Klang, district manager at Sveaskog, Västra Götaland.He says that a production increase of 20 procent is easy to obtain if you really want to. With fertilization, the production could even increase by 150%. - Perhaps we can use 2-5% of the land for more intensive production. If 10% of the forest land is used for intensive production (that is the size of the area today set aside for environmental purposes), this would improve the national forest production by 15%.

72. Derivations and parameters (II)

81. Observations In this derivation, a growth improvement of 19% in future forest generations has been assumed. (126/106 -1 = 19%). The maximum potential future growth, 40% or much more with intensive management, has not at all been utilized or assumed. Still, we should strongly increase harvesting during a long period. For instance, we may harvest 136 Miljon m3sk per year during 20 years. This period starts in five years. 25 years from now, we will have 2.6 billion cubic metres in the forest (which is the same as the stock level in 1985). Harvesting increases by 58%!!! The total economic value strongly improves. Industrial capacity of different kinds that utilize forest raw material should be very much expanded. The employment improves for a long time.

82. Central components D New Observations General Conclusions Concrete Suggestions

83. New observations The forest policy and regulations are not optimally chosen with respect to the economy of Sweden, employment and the environment. If we want to get the best possible forest sector and energy policy, coordinated activities of a new kind are necessary.

84. Eon investsts billions in Sverige 2008-01-02 | 07:41 The new director of E.ON Nordic, Håkan Buskhe, informs about large investments in Sweden during the next years. Between 2007 and 2013, the investment plans represent almost 50 billion SEK (=5 billion Euro) (Dagens Industri).

85. General observations The harvest level in Sweden is absolutely not too high! Sweden would, in every way, benefit if the harvest level strongly increased during a long time period. We do not need the expensive roundwood import from Russia. We should not shut down the pulp mills. The unemployment in the Gävle region is quite unneccesary. The forest industry and the energy industry utilizing raw material from the forest should be strongly expanded. Sources: Lohmander, P., Ekonomiskt rationell utveckling för skogs- och energisektorn i Sverige, Nordisk Papper och Massa, Nr 3, 40-41, 2008, http://www.Lohmander.com/ERD2008/ERD2008.pdf Lohmander, P., Lägg inte ned Svensk skogsindustri på grund av virkesbrist, Krönika, Nordisk Papper och Massa 8/2007http://www.Lohmander.com/kronika_NPM07.pdf

86. Suggestions for the future We need a special commission with this task: ”Create a coordinated development plan for the forest-, energy- and car- industry sectors in Sweden that is rational with respect to total economics, employment and the environment.” The comission should report directly to the government, once a year, 2009 – 2011, and have a budget of 50 MSEK (5 M EURO). Organization: Peter Lohmander (Chair), The Forest Sector, The Energy Sector, The Car Industry and the Department of the Environment.

87. Reflections 080520 The author has discussed the contents of this presentation with different persons on different occations. Typical comments, answers and conclusions are found on the following pages.

88. Comment #1: It seems as if the analysis does not take environmental consideration into account. Is this correct?

89. Answer #1: The analysis really takes environmental considerations inco account. The derivations are based on the fact that the stock level right now is approximately 3 billion m3sk, which is correct according to Figure 1. Figure 1. has been obtained from the Swedish Board of Forestry and is based on the National Swedish Forest Survey results. Mountain forests and forest land protected because of environmental purposes etc. have been excluded from the analysis.

90. Comment #2: The forest has a value as a carbon sink. This value does not seem to be included in the analysis.

91. Answer #2: If we invest in CO2 separation and storage technology (CSS) in the energy industry, it is even more important to rapidly harvest the old forest stands! Then, if we increase the area that is replanted with more rapidly growing trees, we will absorb more CO2 from the atmosphere, separate it and store it permanently.

94. Examples CSS investments exist and costs have been derived.(Compare Statiol, Vattenfall, E.ON-Siemens) In this document, IPCC gives information about these methods and costs: http://arch.rivm.nl/env/int/ipcc/pages_media/SRCCS-final/SRCCS_SummaryforPolicymakers.pdf

95. Another way to store the carbon (more or less) permanently is to harvest the timber trees and to build permanent constructions such as timber houses.

96. Comment #3: Has the correct relationship between MWh och m3sk been used in the analysis?

97. Answer #3: A large number of circumstances determine the relation betwen MWh and m3sk. Here, you find some tables that may be used in different situations:

100. If we, for instance, have 1 m3sk of spruce, this corresponds to 0.95 m3fpb. (The table does however not give exact information concerning the effect of the bark percentage.) 1 m3f of spruce gives 2.0 – 2.1 MWh according to the table. The conclusion is that 1 m3sk of spruce should represent 2 MWh. This was the assumption made in the derivations. The energy content of the roots has not been included in the analysis. Hence, if also the roots are utilized, the potential energy production increases even further. Other tree species would give more energy per m3sk. Hence, since the forests in Sweden do not only include spruce, the energy potential is partly underestimated by the analysis.

101. Comment #4: Do we know anything about the profitability of producing biofuels from forest raw material?

102. Answer #4: Citation: ”The largest raw material potential is found among the biofuels that can be produced from lignin cellulose (different tree- and grass species).” … ”The biofuels that, except for sugar ethanol, will reach low production costs in the long run are ethanol from cellulose and those that can be produced via gasification of biomass, such as methanol, FTD and DME (all of these approximately 5-7 SEK per liter gasoline equivalent.” ( = 0.5 – 0.7 EURO per liter) (The production costs include distribution to the gas stations, excluding taxes ) Source: Maria Grahn, Doktorand, Fysisk Resursteori, Chalmers http://fy.chalmers.se/~np97magr/other/Infotext_Riksdagen_050317.pdf

103. My warmest ”Thanks” to E.ON Sweden for economic support to the project ”Economic forest production with consideration of the forest- and energy- industries”! Peter Lohmander  Professor of Forest Management and Economic Optimization, Swedish University of Agricultural Sciences  http://www.Lohmander.com Peter@Lohmander.com