Login to Czarnikow Advisory platform User name * Password * Remember me Forgotten your username or password? English English Español Português 简体中文 Sugar Ethanol Advisory Corporate Finance News About Czarnikow Contact Analysis Live Search Sections Sugar & the Energy Matrix: Why Ethanol is Not Enough Share via Tweet Print this page Published 17 June 2014 The fall in global sugar prices has meant that today sugar cane has greater value as an energy feedstock than as a food. The function of price has been to ensure that the market finds a way to place surplus sugar. And it appears to be doing this in terms of placing surplus cane to ethanol. With the global sugar economy potentially facing a longer period of surplus, the convergence with the energy market is needed. However, for those in the industry seeking to sustain revenues through the downturn in the business cycle, earnings from ethanol are not enough. Energy from electrical power is now becoming an important source of income for sugar mills from Brazil to India and Australia. However, it is in Brazil that the economic impact of this is now becoming more pronounced. Demand for Energy is Rising “Capturing the income potential from cane biomass is important to ensure the future efficiency of the sector and sustain income through the downturn in the business cycle.” Toby Cohen, Head of Analysis According to the IEA projected energy growth in OECD countries, where electricity markets are well established and consumption patterns are mature, is slower than in non-OECD. Brazil has the largest electricity market in South America. Its installed capacity is comparable to that of the United Kingdom, which is similar in terms of current GDP Brazil’s state-run Energy Research Corporation expects growth in energy demand to run at approximately 4.5% over the next decade. While this is above the current growth rate in GDP it may prove conservative with fuel demand rising at 7%. Clean Energy Brazil is a global leader in clean energy. Hydroelectric power meets the majority of Brazil’s electricity demand. However, the dependence on hydropower makes Brazil vulnerable to power shortages in drought years. High electrical energy prices are good for Brazil’s sugar and ethanol sector as it is a net exporter of energy. Today electrical energy from cane bagasse meets around 7% of Brazil’s needs. Investment in Clean Energy Since 2007, 14 sugar and ethanol groups have structured joint ventures with financial and industrial partners to capture value from biomass through co-generation. Under these new structures a total of 1,000 mega watt hours (MWh) of installed capacity has been negotiated. The return from co-generation provides greater stability than the return from a conventional milling investment. This can bring significant value to a mill seeking to deleverage as the mill can also sell off the energy asset at a higher multiple than the underlying business enabling fresh capital to be introduced either to reduce debt, as well as overall cost of capital, or for re-investment. This is a growth area within Brazil today and Czarnikow is the lead advisor operating in this space having been engaged in transactions governing 380 MWh of installed capacity. During the 2013/14 season the sector exported 15.067 Giga Watt hours of electricity. We therefore estimate the total value of electrical energy sales at BRL 4bn. This crop, for an individual mill with high pressure boilers and generating an energy surplus of 70KW/tc, we can estimate that electrical energy sales add around 20% to revenues from sugar and ethanol. “The energy business has become the best returning part of the cane milling industry. Realising the value from this through partnership with strategic investors from outside the sector is the sensible choice for a mill to make. Mills can then either seek fresh equity to de-leverage, reduce overall cost of capital, or for reinvestment – for example in cane to increase supply volumes to match industrial capacity, diluting fixed costs.” Luis Felipe Trindade, Co-Head of Corporate Finance The Potential for Growth Today all of Brazil’s sugar mills use bagasse to generate steam and electrical energy for internal use. However, just 170 plants have the capacity to export electricity. Of these 170 plants there is a wide variance in volume reflecting efficiency gaps in technology and management. The shift from manual to mechanical harvesting has impacted agricultural efficiencies. However, the shift to green harvesting has also given the sector the opportunity to commercialise the cane straw as biomass. In addition, technology is enabling greater electrical energy generation per tonne of cane. The opportunity consequently exists to increase production from 22KWh/tc, which some of the least efficient assets are achieving, to138KWh/tc representing the best in class today. This means that sugar cane sector has the potential to treble the volume of electricity generated. Conclusion Low global sugar prices continue to stress the financial health of the sugar industry and the outlook for earnings remains difficult. For sugar mills seeking to sustain revenues through the downturn in the business cycle, earnings from sugar and ethanol are not enough on their own and there is a need to capture additional income streams from energy. Cane is an excellent source of biomass as well as sucrose. The future will be determined by those able to broaden their revenues at this stage in the business cycle. Want more information? If you are interested in receiving more in-depth information on the sugar and ethanol markets, subscribe to our Market Advisory services. 6 days 7 hours ago Czarnikow @Czarnikow More career opportunities at Czarnikow - find out more here: https://t.co/yjb0GYf784 Reply Retweet Favorite 3 weeks 15 hours ago Czarnikow @Czarnikow Fantastic career opportunity with the Czarnikow Advisory team - find the details here: https://t.co/yjb0GYf784 Reply Retweet Favorite 1 month 3 days ago Czarnikow @Czarnikow Find out about the new Czarnikow Analysis Video Platform here: https://t.co/vlziiZrfEI Reply Retweet Favorite Follow @twitterapi December 2015 2015/16: Brazil Fuels the Deficit November 2015 Bonsucro and THRIVE to work together to promote sustainable sugar supply chains September 2015 India in 2015/16: Record Production Expected? June 2015 2015/16 – In Deficit? May 2015 Bhubesi Pride Foundation April 2015 Centre South Brazil 2015/16 Crush: A Record Season? March 2015 A Final Look at the 2014/15 Season: Strong Production December 2014 Balancing the Surplus: A Second Look at the 2014/15 Cycle July 2014 Over the Edge? A First Look at the 2014/15 Season June 2014 Sugar & the Energy Matrix: Why Ethanol is Not Enough May 2014 The Inconvenient Truth about Sugar Consumption (it’s not what you think) April 2014 2013/14 in Surplus: A Fourth Look at the Global Balance December 2013 Surplus Sustained: A Third Look at the 2013/14 Balance Back on its Feet: A Return to Consumption Growth October 2013 Why A Depressed Price Is Just Not Fair Value A Changing Outlook Confirmed September 2013 A Tighter Sugar Market: Re-thinking the 13/14 Balance Sheet Sugarcane production and water risks; a longer term view June 2013 Still in Surplus? A First Look at the 2013-14 Season May 2013 Sugar and the Commodity Supercycle March 2013 Consumption statistics, the production surplus and the market February 2013 Sugar in 2013: Any Change in the Outlook? January 2013 A Look Back at 2012 November 2012 A renewed emphasis on ethanol for Brazil? October 2012 Sugar Prices at 20¢/lb - What Happens Now? August 2012 A Second Look at the 2012/2013 Surplus July 2012 Running Low On Gas: The Competition For Ethanol Feedstocks June 2012 Delays in Brazil: better cane but short term pain May 2012 A second year In surplus: an early look at the 2012/2013 balance sheet April 2012 Back to surplus, and a return to normality? Stalling growth In bio-ethanol demand March 2012 A benign year for Indian sugar February 2012 The 2011/12 sugar surplus arrives Czarnikow Home About Czarnikow Contact us Careers at Czarnikow Corporate responsibility Google+ Our services Sugar Ethanol Advisory Subscriptions About this website Sitemap Our privacy policy Accessibility Cookies Webiste terms of use Best execution policy Follow us on In the United Kingdom, this website is a financial promotion and has been approved solely for the purposes of Section 21 of the Financial Services Markets Act 2000 by C. Czarnikow Sugar Futures Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority. 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