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Financial sustainability for a lignocellulosic biorefinery under carbon constraints and price downside risk

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  • Cheng, Lingfeng
  • Anderson, C. Lindsay

Abstract

The development of an environmentally sustainable and financially viable replacement for fossil fuels continues to elude industry investors even though the benefits of replacing them is undisputed. Biofuels are among the promising replacements for fossil fuels. However, the development and production process for bio-based fuels creates uncertainty for industry investors. In order to increase process profitability, financial tools can be implemented with current technology. This paper proposes the use of forward contracts to mitigate risk, and it also considers the impact of carbon tax constraints and price uncertainty. Specifically, a stochastic optimization approach is implemented to develop strategies, which increases the net present value (NPV) of a production facility through determination of an optimal production schedule, as well as the creation of a portfolio of forward contracts to reduce product price risk. Results of numerical case studies show that if the policymaker is risk averse, production is higher in the early planning period rather than the later period. This paper also investigates the ability to maintain inventory in order to create additional financial benefit.

Suggested Citation

  • Cheng, Lingfeng & Anderson, C. Lindsay, 2016. "Financial sustainability for a lignocellulosic biorefinery under carbon constraints and price downside risk," Applied Energy, Elsevier, vol. 177(C), pages 98-107.
    • Handle: RePEc:eee:appene:v:177:y:2016:i:c:p:98-107
    DOI: 10.1016/j.apenergy.2016.05.089
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    References listed on IDEAS

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    Cited by:

    1. Mutran, Victoria M. & Ribeiro, Celma O. & Nascimento, Claudio A.O. & Chachuat, Benoît, 2020. "Risk-conscious optimization model to support bioenergy investments in the Brazilian sugarcane industry," Applied Energy, Elsevier, vol. 258(C).
    2. Cheng, Lingfeng & Anderson, C.L., 2017. "Too conservative to hedge: How much does a corn ethanol facility lose?," International Journal of Production Economics, Elsevier, vol. 193(C), pages 654-662.
    3. Chen, Zi-yue & Nie, Pu-yan, 2016. "Effects of carbon tax on social welfare: A case study of China," Applied Energy, Elsevier, vol. 183(C), pages 1607-1615.
    4. Walsh, Michael J. & Gerber Van Doren, Léda & Shete, Nilam & Prakash, Akshay & Salim, Usama, 2018. "Financial tradeoffs of energy and food uses of algal biomass under stochastic conditions," Applied Energy, Elsevier, vol. 210(C), pages 591-603.

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