Managing Weather- and Market-Related Financial Risk in Algae Production for Biofuel and Co-products

Abstract:

Large scale algae production has gained interest as a promising biofuel and co-product feedstock (e.g., nutraceuticals, animal feed, bulk chemicals), largely as a result of the high yield per acre, ability to recycle production inputs, and non-competitive nature of algae production with food producing land. Previous techno-economic analyses show potential for algal biofuels to reach cost-competitive levels if a series of technological improvements are achieved, yet these studies are mostly based on average values. This work involves modeling the influence of unexpected weather deviations on the financial performance of a hypothetical algal biorefinery by combining stochastic weather generation, biophysical growth modelling, stochastic market price generation, and techno-economic analysis. Results show coefficient of variation values of 8-15% in seasonal revenues for an algae producer, which represents weather- and market-related financial risks. A novel index-based insurance instrument, similar to those used in agriculture and electric utilities, that considers both weather and market conditions is then developed, and its effectiveness in reducing unpredictable revenue streams for an algae producer is explored. Results indicate that index insurance tools can effectively reduce variability in revenues to a higher extent than and at a lower cost than cash reserves alone. This assessment of index insurance financial tools for algae producers is particularly timely given the passage of the 2018 Farm Bill by US Congress, in which the USDA declared algae to be a “crop” that can be covered by federal crop insurance programs.