Study: biofuel drives financial stability

More organisations are turning to biofuels to save money but the switch requires careful financial steering. By Kaushal Bhatt, financial controller, Parasol Logistics.

Rapeseed: a source of biofuel

In 2005 Parasol Logistics, a small company with a fleet of vans and trucks, was expanding rapidly. But the dramatic rises in fuel prices were making it difficult to manage cash flow efficiently. As prices reached record levels by the end of that year, we started looking at alternative fuel options. That’s when we first came across biodiesel as an effective and economical solution to our problem.

What is a biofuel?

In simple terms, biofuel is produced from dry organic matter or combustible oils produced by plants. The most common types of biofuels are biodiesel and bioethanol.

Parasol decided to start production of its own biodiesel. I was involved from the start, as manager and financial controller of the project. Before investing, however, we undertook extensive research into biodiesel.

Difference between biodiesel and bioethanol

Biodiesel is an ester (similar to vinegar) that can be made from several types of oils such as soybean, rapeseed, and vegetable or animal fats. Through a process called trans-esterification, organically derived oils are combined with alcohol (ethanol or methanol) and chemically altered to form fatty esters such as ethyl or methyl ester. The biomass-derived ethyl or methyl esters can be blended with conventional diesel fuel or used as a neat fuel.

Bioethanol is made using a process similar to brewing beer. Starch crops are converted into sugars, the sugars are fermented into ethanol, and the ethanol is distilled into its final form. Ethanol made from cellulosic biomass materials instead of traditional feedstocks (starch crops) is called bioethanol.

Financial perspective

My task was to look at the project from a management accountant and project manager’s perspective. The first step was to produce a detailed cash flow plan and calculate relevant costs and revenues. A profit and loss account and trial balance sheet were then drawn up to present an overall financial picture.

One of the key elements of my work was to compare the project performance with its objectives. Financial ratios were used throughout the project. The most useful was NPV (net present value), ideal for analysing a relatively new, high-risk product. NPV is the difference between the present value of cash inflows (cost savings in this project) and the present value of cash outflows. IRR (internal rate of return) ratio analysis was also used but was limited by its use of a single discounting rate for every investment. With biodiesel this was difficult to measure because of the length of time involved in the project cash inflows. We also used ROCE (return on capital employed) ratio analysis in working out profitability prospects over a given period.

Great care must be taken with ratio analysis to distinguish different project costs and allocate them appropriately. Once the project started, all the financial data and ratios were reviewed regularly to detect any deviations. At the same time, I had done an appraisal process for the entire project which helped it stay on course.

Alongside all this there were compliance issues to address including:

• obtaining a fuel producer licence from Customs and Excise
• health and safety requirements for the site installation and maintenance
• waste disposal management
• training
• quality control and stock control system
• supplier sourcing and
• effective storage and distribution of biodiesel.

Stability from self-sufficiency

With efficient project management, we were able to complete the project within two months and the company now runs a successful biodiesel production site. After the initial layout on plant, machinery and set-up costs, Parasol Logistics is steadily reaching self sufficiency. The significant savings in fuel costs have been a major factor in the company’s financial stability. The company has started importing soya bean oil from Brazil to produce better quality and even more cost-effective biodiesel.

There are many positive factors in the use of alternative fuels such as biodiesel. It is fully biodegradable, non-toxic and made from renewable energy sources. Greater use of biodiesel will help revive agriculture and boost rural economies by creating employment. Many local councils, companies and government organisations have started using it. London’s Southwark Council runs its fleet of diesel vans on a blend of biodiesel and diesel, as does Berwick-upon-Tweed Council in Northumberland. Green Gold Biodiesel in Manchester is the first dedicated biodiesel garage in the UK. It is run by Manchester Biodiesel Cooperative, a social enterprise working to help reduce fossil fuel use and generate awareness of climate change.

However there are issues relating to the production and use of biodiesel as its technology is still in development. Some concerns are being raised about the regular availability of materials and about the real profitability of biodiesel. Some critics argue that it is actually more expensive to produce than normal diesel. I believe these issues can be resolved with the use of new technology and by applying effective cost measures.

Government attention

One of the major factors in increasing the use of biodiesel is the government’s policy for the provision of sustainable transport fuels for the future. Although the government currently provides a fuel duty rebate of 20 pence per litre, it is not enough to make biofuel production fully cost effective. EU Directive 2003/30/EU has set a target of 5.75 per cent biofuel usage by the end of 2010. Given the UK’s high rate of fuel tax, encouraging greater use of biofuels needs urgent attention from the government.

Links

Renewable transport fuel obligation feasibility report from Department for Transport
Allied biodiesel industry (UK)
Journey to forever
Biodiesels - health and safety, where to buy and more background
EU strategy for biofuels
Company specialising in installation of biofuel production plants

Biodiesel expo on 18 October 2006 at Newark Showground, Nottinghamshire.

See ‘Accountants save water and tax as droughts worsen’ in August Insight.

Have you been involved in an interesting corporate sustainability project? If so we want to know – please email tim.cooper@cimaglobal.com.

October 2006