Modelling investments in short rotation coppice under uncertainty: A value chain perspective

Short rotation coppice (SRC) for biomass production seems to be an interesting form of land use both from an ecological and economic perspective. However, farmers still behave reluctant in cultivating SRC. Recent investigations show that the high (partially irreversible) investment costs and the uncertainty of the future returns, in the literature jointly known as the real options approach, are main reasons for this reluctance. For complexity reasons, these studies do not, amongst others, consider interactions between different stages of the value chain of woody biomass, which, however, are existent in reality and can affect SRC cultivation decisions. Examples for this are the maximum capacities of biomass heating stations (BHSs), which could represent de facto production restrictions for the surrounding farmers, or possible incentive measures implemented by BHSs to increase farmers' willingness to cultivate SRC. This paper develops an agent-based real options model, which considers these interactions and comprises all stages of the value chain of woody biomass, from farmers who cultivate SRC, over the BHS which converts the wood chips into heat, to end consumers to whom the heat is delivered. Within this framework, the model analyzes farmers' optimal SRC cultivation decisions and the respective effects of potential incentive measures to the farmers implemented by the BHS to increase its utilization. Under a given stimulation of the total quantity of wood chips supplied by the farmers, investment subsidies are advantageous to price floors because they lead to a stronger increase in the profitability of the BHS.