Biomass for bioenergy: Optimal collection mechanisms and pricing when feedstock supply does not equal availability

Abstract

The supply chain connecting biofuel processing firms and suppliers of biomass is evolving, and processors face a choice in the collection and pricing strategies they will employ to procure biomass. One option is to pay a single price for biomass collected field-side (processor collection). Another is to pay a single price for biomass at the plant gate (supplier delivery). The literature in this area is relatively young, but there is a sense that the evolution of contracting and pricing structures will dictate the industry's success, and ultimately the costs of producing biofuels from dedicated and non-dedicated energy crops. We examine the collection and pricing choices for a cost-minimizing cellulosic biofuel processor, who initially has monopsony power in feedstock procurement in their collection area. We derive optimal prices, total expenditures on feedstocks, and the collection areas required to meet a processor's fixed input needs. We show that while societal welfare is greatest under supplier delivery; however, the processor will be indifferent between supplier delivery and processor collection unless they areconcerned about entry of a competing processor. When this is the case, the processor can use the processor-collection mechanism as an effective deterrent to entry. Numerical simulation based on corn stover for biomass is used to illustrate optimal pricing and the extent of biomass collection areas for different procurement and pricing strategies. We use these findings to calculate the rates at which collection costs increase for a monopsonistic stover processor constrained to a defined procurement area, as might emerge as the industry moves toward commercialization. The derived marginal cost curve for a monopsonistic processor of stover is compared with the marginal cost curve across alternative feedstocks.