Chapter 5
Wood Pellets Business Model in Indonesia
May 2022
This chapter should be cited as
ERIA Study team (2022), ‘Wood Pellets Business Model in Indonesia’, in ERIA (eds.), Forecast
of Biomass Demand Potential in Indonesia: Seeking a Business Model for Wood Pellets. ERIA
Research Project Report FY2022 No. 01, Jakarta: ERIA, pp.46-56.
Chapter 5
Wood Pellets Business Model in Indonesia
Referring to session 2.1, the amount of biomass especially wood chips or pellets will be
estimated as 4.6 million tonnes to 34.8 million tonnes in 2040, for biomass co-firing coal
power generation due to biomass mixing rate. In order to secure this remarkable volume
of biomass, the supply chain must be maintained through applying some business model.
Thus, in this chapter, appropriate business models are examined.
1. Types of biomass supply chain business model
The biomass supply chain consists of following segments:
- Cutting raw woods at a forest site and transporting to a fabrication factory
- Fabricating wood chips and pellets
- Transporting wood chips/pellets to coal plant sites
The biomass business model has the following three types of organization:
- Pure private company (pure business basis)
- Private company with government support such as subsidies and feed-in tariff (FIT)
- Public company such as a national company
The best way for Indonesia is the pure private company because it can produce wood
chips/pellets affordably, allowing it to compete with coal. However, if private companies
cannot produce the chips/pellets at affordable prices, second- and third-generation
options are considered. But the third option will fully depend on national budget, so that
it is almost impossible. As a result, the second option is suggested in this report. The
biomass supply chain will be implemented on business basis; however, in order to secure
this business, Indonesia may provide financial incentives or formulate appropriate FIT
system. In addition, Indonesia regulates lower biomass mixing ratio such as 5%–10%, so
that the power generation cost could not increase highly.
Another point on the business model of biomass supply chain is the function of the private
company, i.e.:
- One company covers all the segments
- One company covers each segment
The first option can minimise the total cost of the biomass supply chain, and the
enterprise should be large. On the other hand, the second option can expect an economic
rationale in each segment, but it should be a group of small enterprises. Therefore, the
business configuration is vulnerable. Thus, the report recommends the first option.
2. Economic study of the wood pellets business model
This section assesses the economics of the wood pellet supply chain business model based
on several assumptions:
46
(1) Business configuration
A company engages the whole wood pellets supply chain, which comprises cutting
raw woods, fabrication from raw woods to wood pellets and transportation of
woods pellets from the fabrication site to coal power plants. In other words, this
company consists of following departments:
a. Maintain woods including reforestation and cutting raw woods
b. Fabricate wood pellets based on the raw woods cut
c. Transportation of the wood pellets
(2) Basic assumption of the business model
a. Coal Power Plant
- Capacity: 500 MW
- Capacity factor: 80%
= Generation amount: 3,504 GWh (500,000 kW x 24 x 365 x 80%) / year
- 40% for thermal efficiency and 10% for biomass mixing ratio
= Coal consumption: 3,504 GWh * 0.086 /40% = 753.36 ktoe (1toe = 107kcal)
/ year
= Wood pellets consumption: 753.36 * 10% = 75 ktoe /year
= Wood pellets consumption: 148.809 (75 / 5040 (kcal/kg)*10,000) ktoe
/year = 150 ktoe /year and 407.696 = 408 tonne /day
b. Definition of biomass supply chain business model
- Cutting raw woods by chainsaws
- Fabrication from raw woods to pellets under assumed yield at 90%
- Transportation: 100 km of distance between the fabrication site to a coal
power plant
c. Others
- Shared capital ratio: 30%
- Interest rate of long-term borrowed money: 5%
- Repayment years: 10 years after 3 years taxi holiday
- Interest rate of short-term borrowed money: 7%
- Interest rate of earning: 3%
- Depreciation period: 10 years for all the equipment
(3) Cost assumptions
a. Cutting raw woods
- Yield of fabrication factory: 90%
= Cutting woods amount: 408 / 0.9 = 453 tonnes /day
- Raw woods price: $35 / ton
- Cutting equipment (chainsaw): $3,000 / unit
= $3,000 x 70 units =$210,000
- Number of labourers: 140 persons
b. Fabrication from raw woods to chips
47
- Fabricate 408 tonnes of pellets per day from 453 tonnes of raw woods
- Equipment: $1 million (21 tonnes of pellets production per day) and 20 units
- Number of labourers: 100 persons
- Electricity consumption per wood pellet: 0.1375 kWh / kg
- Electricity price: $0.07 /kWh
c. Transportation
- Number of trucks: $70,000 per truck (10-tonne capacity) and 15 trucks
- Number of drivers: 15 trucks x 2 = 20 persons
- Fuel economy of 10-tonne truck: 5 km/litre
= Diesel consumption: 100km /5 km/litre x 2 (return) x 15 trucks =600 litre
/day
- Diesel oil price: $0.050 /litre
(4) Forecasted income statement of A company
a. Annual revenue
- Price of wood pellets: $100 / tonne
* Annual revenue: 150 (148.809) ktoe / year x $100/tonne = $ 15,000/ year
b. Operation cost
- Cutting raw woods
* Raw wood cost: 165 ktoe x $35 /tonne = $5,775 /year
* Labour cost: 70 team x 2 persons / team x $1,500 /person month x
12months = $2,520,000 /year
*Total operation cost: $5,775 + $2,520 = $8,295,000 / year
- Fabrication
* Electricity cost: 150 ktoe x 0.1375 kWh/kg x 0.07 $/kWh x 1000 =
$1,443.75 / year
* Labour cost: 20 machines x 5 persons /machine x $1,500 /person month x
12 months / 1,000 = $1,800,000 /year
* Total operation cost: $324,375,000/ year
- Transportation
* Diesel oil cost: 600 litre/day x $0.5 / litre x 365 = $ 10,950,000 /year
* Labour cost: 15 trucks x 2 persons /truck x $1,500 /person month x 12 =
$ 540,000 / year
* Total operation cost: $649,000 /year
48
c. Depreciation
- Cutting raw woods
* Chainsaw: $3,000 /unit x 70 units / 1,000 / 10 years = $21,000 / year
- Fabrication
* Wood pellets producer: $1 million /unit x 20 units x 1,000 / 10 years =
$2,000,000 /year
- Transportation
= 10-tonne truck: $70,000 / unit x 15 units / 1,000 / 10 years = $105,000 /year
d. Income statement
This business will start in 2024 and the forecasted income statement of A
company is show below from 2024 to 2040 (refer to Table 5.1).
Table 5.1. Forecasted Income Statement of A company ($1,000)
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Revenue of wood pellets 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Operation costs 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188
Cutting raw woods 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295
Fabrication 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244
Transportation 650 650 650 650 650 650 650 650 650 650 650 650 650 650 650 650
Depreciation 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 0 0 0 0 0 0
Cutting raw woods 21 21 21 21 21 21 21 21 21 21
Fabrication 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Transportation 105 105 105 105 105 105 105 105 105 105
Profit after Ope. & Dep. 686 686 686 686 686 686 686 686 686 686 2,812 2,812 2,812 2,812 2,812 2,812
Interrest payment 744 744 744 744 670 595 521 446 372 298 223 149 74 0 0 0
Long-term 744 744 744 744 670 595 521 446 372 298 223 149 74 0 0 0
Short-term
Interest received 0 62 126 191 213 236 262 289 319 350 384 397 412 429 492 556
Profit before tax -58 4 68 133 229 327 427 529 632 738 2,972 3,060 3,149 3,241 3,304 3,368
Income tax 1 24 46 80 114 149 185 221 258 1,040 1,071 1,102 1,134 1,156 1,179
Profit after tax -58 2 44 86 149 212 277 344 411 480 1,932 1,989 2,047 2,106 2,147 2,189
Source: Author.
Based on the income statement shown above, the following key findings are
extracted:
i. A company will show a negative profit at the first year (2025) but after that
will show a positive profit continuously until 2040.
ii. The department of cutting raw woods will mark highest cost share of a
company at 60%, followed by the fabrication department at 35%, and the
transportation department at 5% (refer to Figure 5.1).
49
iii. Looking at cost items, the cost of raw woods procurement will be highest
share at 42%, followed by labour cost at 35%, electricity cost of the
fabrication department at 10% (refer to figure 5-2). For this analysis, $35 per
tonne is assumed for raw wood costs and this assumption will be crucial to
maintain the economics of this business model.
iv. This business model will be operating cost-oriented not capital cost-oriented
(refer to figure 5.1); thus, management of raw wood cost, labour cost, and
electricity cost is essential. Few variations of capital cost will not affect this
business seriously.
v. Assumed selling price of wood pellet is $100 per tonne and appropriate.
Figure 5.1. Operating Cost Structure by the Three Departments of A Company
Cutting raw woods Fabrication Transportation
Source: Author.
Figure 5.2. Operating Cost Structure by the Cost Items of a Company
Raw woods Electricity Diesel oil Labour Depreciation Interest payment
Source: Author.
50
Figure 5.3. Overall Cost Structure of a Company
Operating Cost Capital Cost
Source: Author.
(5) Forecasted cash balance statement of a company
a. Capital cost
- Cutting raw woods: price of chainsaw $3,000 /unit and 70 units
* $3,000 x 70 units = $210,000
- Fabrication: price of fabrication facility $1 million /unit and 20 units
* $1 million x 20 = $20,000,000
- Transportation: price of truck $70,000 /unit and 15 units
= $70,000 x 15 = $1,050,000
- Total capital cost
=$210 + $20,000 + $1,050 = $21,260,000
b. Finance of capital cost
- Share of shared capital: 30%
= $21,260 x 30% = $6,378,000
- Share of borrowed money (long-term): 70%
= $21,260 x 70% = $14,882,000
c. Condition of borrowed money (long-term)
- Repayment period: 10 years with straight line method and 5% interest rate
- Repayment holiday; first 3 years
d. Cash balance statement
This business will start in 2024 and the forecasted cash balance statement of A
company is shown below from 2024 to 2040 (refer to Table 5.2).
51
Table 5.2. Forecasted Cash Balance Tables of a Company
($1,000)
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Cash in Total 21,260 2,068 2,128 2,170 2,212 2,275 2,338 2,403 2,470 2,537 2,606 1,932 1,989 2,047 2,106 2,147 2,189
Profit after tax -58 2 44 86 149 212 277 344 411 480 1,932 1,989 2,047 2,106 2,147 2,189
Depreciation 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 0 0 0 0 0 0
Equity 6,378
Long-term borrowed money 14,882
Short-term borrowed money
Cash out Total 21,260 0 0 0 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 0 0 0
Repayment (long-term) 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488
Repayment (short-term)
Capital costs 21,260
Cutting raw woods 210
Fabrication 20,000
Transportation 1,050
Cash Balance 0 2,068 2,128 2,170 724 786 850 915 981 1,049 1,118 444 501 559 2,106 2,147 2,189
Accimulated cash balance 0 2,068 4,196 6,366 7,090 7,876 8,727 9,642 10,623 11,672 12,790 13,233 13,734 14,293 16,399 18,547 20,736
Source: Author.
Based on the cash balance statement mentioned above, the following key findings are
extracted:
i. A company will never face a money shortage until 2040.
ii. In terms of share of capital cost, the fabrication department shows its largest at
94%, followed by transportation department at 5%. Thus, a wood pellets
production facility becomes key regarding capital cost (refer to Figure 5.3).
iii. Total cash gain in 2025–40 will be $21,194,000 and it is almost same amount of
total capital cost, $21,260,000.
Figure 5.3. Capital Cost Structure of the Three Departments
Cutting raw woods Fabrication Transportation
Source: Author.
52
(6) Internal rate of return of A company
Next, the Internal Rate of Return (IRR) of A company is analysed. There are two
types of IRR; one is Return on Investment, which is called Internal Rate of Return
on Investment (IRROI) and other is Return on Equity, which is called Internal Rate
of Return on Equity (IRROE). Definitions of both cash flows are:
- IRROI: cash flow = - total capital cost + profit after tax + depreciation
- IRROE: cash flow = - equity + profit after tax + depreciation – repayment (long
term)
IRROI is meant to calculate rate of return on total investment. In other words, it
shows real project economics. On the other hand, IRROE is meant to calculate just
the economics of equity; in other words, shared capital or economics of
shareholder.
Accumulated cash flows for Return on Investment and Return on Equity are shown
in Figure 5.5.
Figure 5.5. Accumulated Cash Flows for Return on Investment
and Return on Equity
20,000
15,000
10,000
5,000
0
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
-5,000
-10,000
-15,000
-20,000
-25,000
IRROI IRROE
IRROI = Internal Rate of Return on Investment; IRROE = Internal Rate of Return on Equity.
Source: Author.
Based on these cash flows, IRROI and IRROE are calculated using IRR function
equipped in MS-Excel. The results are:
- IRROI: 7%
- IRROE: 22%
53
The economics of this wood pellets business model looks good and the return to
shareholders also seems to be much better because the dividend ratio will be
higher than 10%. If following important parameters could be secured, the following
business model could be approved:
- Price of wood pellets: $100 per tonne
- Cost of raw woods: $35 per tonne
- Cost of electricity: $0.07 per kWh
- Capital costs of fabrication: $1 million per unit
(7) Case study
We assume the first 3 years for a repayment grace period, but we analyse the
economics if we cannot apply this grace period. This is a basic concept of the case
study.
The income statement of the case study is shown at Table 5.3. One of important
implications extracted from the income statement is a decrease of total interest
payment compared to Table 5.1. Because repayment of the borrowed money (long
term) will start from the first year, the outstanding borrowed money in 2025–35 is
lower than Table 5.1. Thus, after-tax profit of the case study is improved.
Table 5.3. Income Statement of the Case Study
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Revenue of wood pellets 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Operation costs 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188 12,188
Cutting raw woods 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295 8,295
Fabrication 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244 3,244
Transportation 650 650 650 650 650 650 650 650 650 650 650 650 650 650 650 650
Depreciation 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 0 0 0 0 0 0
Cutting raw woods 21 21 21 21 21 21 21 21 21 21
Fabrication 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Transportation 105 105 105 105 105 105 105 105 105 105
Profit after Ope. & Dep. 686 686 686 686 686 686 686 686 686 686 2,812 2,812 2,812 2,812 2,812 2,812
Interrest payment 744 670 595 521 446 372 298 223 149 74 -0 0 0 0 0 0
Long-term 744 670 595 521 446 372 298 223 149 74 -0 0 0 0 0 0
Short-term
Interest received 0 17 37 59 82 108 135 164 196 229 265 325 386 448 512 577
Profit before tax -58 33 128 224 322 421 523 627 733 840 3,076 3,136 3,198 3,260 3,324 3,388
Income tax 12 45 78 113 147 183 219 256 294 1,077 1,098 1,119 1,141 1,163 1,186
Profit after tax -58 22 83 145 209 274 340 407 476 546 2,000 2,039 2,078 2,119 2,160 2,202
Source: Author.
54
Next, we check the cash balance statement of the case study. Table 5.4 indicates that
the cash balance in the first 3 years becomes worse; in other words, lower than Table
5.2 due to the starting repayment from the first year (2025). Fortunately, money
shortage does not occur until 2040.
Table 5.4. Cash Balance Statement of the Case Study
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Cash in Total 21,260 2,068 2,148 2,209 2,271 2,335 2,400 2,466 2,533 2,602 2,672 2,000 2,039 2,078 2,119 2,160 2,202
Profit after tax -58 22 83 145 209 274 340 407 476 546 2,000 2,039 2,078 2,119 2,160 2,202
Depreciation 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 2,126 0 0 0 0 0 0
Equity 6,378
Long-term borrowed money 14,882
Short-term borrowed money
Cash out Total 21,260 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 0 0 0 0 0 0
Repayment (long-term) 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488
Repayment (short-term)
Capital costs 21,260
Cutting raw woods 210
Fabrication 20,000
Transportation 1,050
Cash Balance 0 579 660 721 783 847 912 978 1,045 1,114 1,184 2,000 2,039 2,078 2,119 2,160 2,202
Accimulated cash balance 0 579 1,239 1,960 2,743 3,590 4,501 5,479 6,525 7,639 8,823 10,822 12,861 14,940 17,059 19,219 21,421
Source: Author.
Next, we analyse IRROI and IRROE based on both cash flows shown at Figure 5-6. The
calculated results are:
- IRROI: 7%
- IRROE: 14%
Repayment of the borrowed money never affects the cash flow of IRROI, so that IRROI is
the same as the base case. But the repayment does affect the cash flow of IRROE (refer
to the formula mentioned before); as a result, IRROE becomes worse from 23% to 15%.
However, 15% is still higher than 10% of a normal dividend ratio. As a conclusion, the
grace period does not impact this wood pellets business model seriously. Again, the
following parameters are key:
- Price of wood pellets: $100 per tonne
- Cost of raw woods: $35 per tonne
- Cost of electricity: $0.07 per kWh
- Capital costs of fabrication: $1 million per unit
55
Figure 5.5. Cash Flow of IRROI and IRROE of the Case Study
(1000 US$)
20,000
15,000
10,000
5,000
0
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
-5,000
-10,000
-15,000
-20,000
-25,000
IRROI IRROE
IRROI = Internal Rate of Return on Investment; IRROE = Internal Rate of Return on Equity. Source:
Author.
56
