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Biomass Thermal Financing
1
Biomass Thermal Finance Options, Steps, and Resources for Biomass Project
DevelopmentThis Webinar is brought to you by:
Biomass Thermal Energy Council (BTEC)
With the generous support of the U.S. Forest Service
Wood Education Resource Center
2 PM ET, June 29, 2011
“The work upon which this publication is based was funded in whole or in part through a grant awarded by the Wood Education and Resource Center, Northeastern Area State and Private Forestry, U.S. Forest Service. This institution is an equal
opportunity provider.”
Biomass Thermal Financing
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Joseph Seymour - Moderator
Program Coordinator - Policy and Government Affairs, Biomass Thermal Energy Council (BTEC)
I. Introduction - Seymour
Biomass Thermal Financing
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Quick NotesTwo Audio Options: Streaming Audio and Dial-In.1. Streaming Audio/Computer Speakers (Default)
2. Dial-In: Use the Audio Panel (right side of screen) to see dial-in instructions. Call-in separately from your telephone.
Ask questions using the Questions Panel on the right side of your screen.
The recording of the webinar and the slides will be available after the event. Registrants will be notified by email.
I. Quick Notes - Seymour
Biomass Thermal Financing
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Speakers
Greg Montgomery,Managing Partner, Abundant Power
Fred Reagan, Facilities Director, Merrimack Valley School District
Dan Kuipers, Managing Partner, Sustainable Energy Financing, LLC
Joseph Seymour, Program Coordinator - Policy and Government Affairs, BTEC
Moderator
I. Event Introduction - Seymour
Biomass Thermal Financing
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Presentation OutlineI. Introduction – Joe SeymourII. Biomass Project Financing– Greg
MontgomeryIII. School Case Study – Fred ReaganIV. Environmental Commodities – Dan
KuipersV. Q & A, Next Events – Joe Seymour
[Full presentation will be available online, www.biomassthermal.org/resource/webinars.asp]
I. Event Introduction - Seymour
Biomass Thermal Financing
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About BTEC – Mission & CompositionThe Biomass Thermal Energy Council (BTEC) is a nonprofit association dedicated to advancing the use of biomass for heatand other thermal energy applications.
BTEC engages in research, education, and public advocacy for thefast growing biomass thermal energy industry.
Formed in January 2009 by eight companies, BTEC currently has 85+ members from 34 U.S. states, Canada, and Austria
Includes landowners, handling equipment manufacturers, fuel refiners, appliance manufacturers, project developers, investment companies, nonprofits, universities, associations, and others
I. Introducing BTEC - Seymour
Biomass Thermal Financing
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BTEC Membership
I. Introducing BTEC - Seymour
Abundant Power Froling Energy Public Policy VirginiaACT Bioenergy Fröling GmbH Rainforest AllianceAlliance for Green Heat Fuel Pellet Technologies Ray Albrecht/The Fulton CompaniesAlternative Energy Solutions International, Inc. FutureMetrics Renewable Energy ResourcesAmerican Agriculture Movement Gavilon Group Resource Professionals GroupAmerican Wood Fibers Green Clean Heat Sandri CompaniesAPEX Indeck Ladysmith Santa Energy CorporationBear Mountain Forest Products Innovative Natural Resource Solutions Sewall CompanyBeaver Wood Energy International Renewable Energy Technology Institute Skanden EnergyBiomass Combustion Systems International WoodFuels State of Montana Department of Natural Resources and Conservation
Biomass Commodities Corporation Jesse E. Lyman Pellets State University of New YorkBiomass Energy Resource Center Krieg DeVault Tarm BiomassBiomass Energy Works Lignetics of Virginia Twin Ports TestingBionera Resources Inc. Maine Energy Systems Vapor Locomotive CompanyBiowood Energy Maine Pellet Fuels Association VecoplanChip Energy Marth Vermont Wood PelletClean Power Development Missouri Corn Growers Association ViessmannComact Equipment Montana Community Development Corporation West Oregon Wood ProductsConfluence Energy National Network of Forest Practitioners Western Ag EnterprisesContinental Biomass Industries New England Wood Pellet Westervelt Renewable EnergyControl Labs Northeast Mill Services Wilson Engineering ServicesCorinth Wood Pellet Oregon Forest Industries Council Wisconsin Energy Conservation CorporationCousineau Forest Products PA Pellets WoodFuels Virginia LLCDejno's Pellet Technology USA WoodmasterEcostrat Pelletco WoodPellets.comEnviva LP Plum Creek Zilkha Biomass EnergyErnst Biomass Pratt & Whitney Power Systems ‐ TurbodenForest Energy Corporation Proe Power Systems
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Project made possible by the USDA FS WERCBTEC awarded a grant from the USDA Forest Service’s Wood Education and Resource Center (WERC) in June 2010 to advance education and outreach on biomass thermal energy
The Center's mission is to work with the forest products industry toward sustainable forest products production for the eastern hardwood forest region.
Previous webinars available at: www.biomassthermal.org/resource.
All questions and attendee feedback will help form future activities.
Remember to answer the survey at the webinar’s conclusion!
I. Sponsoring Entity - Seymour
Biomass Thermal Financing
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Greg MontgomeryManaging Partner, Abundant Power
Biomass Project Financing
II. Project Financing - Montgomery
Biomass Project Financing
Topics for Discussion• Project Financing Overview• Capital and Funding Sources for Projects• Biomass Project Case Study
Greg Montgomery
Managing Partner
Abundant Power Group
(704) 271‐9889
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Development Cycle and Timeline
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Early Stage
Development
Late Stage
Development
Construction
Operations
What is Project Financing?
• Technique for financing capital‐intensive projects that are either difficult to support on
a Developer’s corporate balance sheet or are more attractive when financed separately.
• “Sponsor”
( the Developer ) creates subsidiary “Project Company”
(Special Purpose
Entity ) to hold the project’s assets, including all contractual rights and obligations.
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• Equity in SPE comes from Sponsor and outside parties.
• Debt is provided to SPE based on the viability of the project• Distribute all risks from SPE to project parties best able to
mitigate particular risk via long‐term, enforceable contracts.
• The combination of contracts, credit‐worthiness of
counterparties, etc. provide sufficient credit to make the
transaction bankable on a stand alone basis.
• Recourse is limited to the Project Company’s assets and not to
Sponsor.
Project
Company(SPE)
Sponsor(Developer)
Parties to the Transaction
Project
EPC
Offtaker
/ Utility
Debt FinancingEquity Financing Developer
Feedstock Supply
Operator
Ownership
EquityDebt
Interest Rate
Return
OwnershipAggregates
Project
FuelPower
Construction Operations and
Maintenance personnel
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Tax Equity
Tax Benefits
Essential Components of Project Finance
Project Sponsor/Developer• Reputation• Track record• Financial strength and skill set• Depth of the development team
Project Technology/ Resource• Technical feasibility• Manufacturer reputation, warranties, creditworthiness• Resource quality for renewable energy projects
Project Economics• Realistic debt assumptions• Attractive equity returns (pre‐tax, after‐tax, unlevered, levered)• Upfront cash and leverage is what every developer is after• Project pro forma and downside sensitivities
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Essential Components (con’t)
Legal Plan• Special purpose entity (SPE) for the project• All the contracts are with the SPE with proper assignment rights• Get good legal help early• Common problems with the early contracts e.g. Form of land leasesConstruction Plan• EPC wrap with reputable, well capitalized, creditworthy contractor• Performance liquidated damages (LDs)• Schedule delay LDsRisk Mitigation• Allocate risks to the party who best can bear them• Have clear contractual obligations and monitor the milestones• Develop the project in phases when you can• Prove out the resource• Minimize cash outflows upfront
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Essential Components (con’t)
Operation and Maintenance• Third party operator or an affiliate of the sponsor• Arms length transaction if the contractor is the affiliate of the sponsor• Track record and reputation• Warranties from the manufacturer and availability guarantees from the
operatorPower Marketing• Power purchase Agreement is a key document – see below• Credit of the power off‐take• Long‐term contractFinancial Package• Project Pro forma• Marketing plan for the power• Transmission plan• Procurement/ construction Plan• Summary contractual
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Efficient Allocation of Risk and Rewards
RisksCounterparties Risk
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Key commercial contracts set forth “basic”
business deal—benefits and
obligations and allocation/transference of risk.
Financeable contracts require this “basic”
deal, but also set forth required
responses to hypothetical uncertainties.
In that regard Project Finance structures are pre‐arranged work‐outs.
Power Purchase Agreements
• Construction milestones
• Delay damages
• Guaranteed commercial
operation date
• Certainty of delivery at agreed quantity
Utility’s Objectives Project’s Objectives
• Force majeure relief on
liability
• Stable cash flow
• No damages if milestone
other than COD is missed
• Caps on delay damages
• Avoid posting of security
• Escalating price over term
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Debt & Equity
Different markets for different capital needs
• Equity sources:• Strategic Equity: Utilities, companies with operation capabilities• Private Equity: Increasing demand for renewable projects• Institutional Investors: Rarely provide equity funding• Family Offices/High Net Worth Investors: Mission oriented with appetite for risk• Tax Equity: Corporations and banks with tax liability; an important source of capital
for renewable energy projects
• Debt sources:• Bank Markets: Most common in the project finance space. Generally floating (Libor)
interest rate based deals (can be swapped). Term is usually less
than 10 years.• Capital Markets (i.e. bond markets): Attractive long term financing option. Generally
fixed rate issuance and natural financiers are institutional investors like insurance
companies. Benefits are maximized leverage over a long term that
increases the
equity returns. Limited/no refinancing risk and interest rate risks. Downside is limited
flexibility vs. Bank debt
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Equity Returns and Ownership
• Typically in project financing , the Equity Investor will invest
all of the equity into the
SPE required for the project.
• For this investment, the Equity Investor initially receives significant majority
ownership (80‐95%) with the Sponsor/Developer retaining the rest as a “promote”
for
conceiving and developing the project through point of investment.
• Sponsor/Developer can also invest alongside outside equity investor in project.• Sponsor/Developer will earn a negotiated development fee at closing of the
project financing for reimbursement of costs associated with development as
well as premium for risk.
• Based on a “waterfall”
structure, the Equity Investor’s ownership will decrease over
time as certain hurdle rates are achieved. The following is an example:
• Initial ownership may be 95/5 to Equity Investor and Sponsor based on Equity
Investor providing all of the equity required for the project.
• Once the Equity Investor achieves a IRR of 18%, then ownership will alter to
75/25 to Equity Investor and Sponsor.
• Upon the Equity Investor achieving an IRR of 25%, the ownership will revert to
60/40 for the life of the project.
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Project Lifecycle & Equity Returns
Project R
eturns
Early Stage
Development
Late Stage
Development
Construction
Phase Operations
Project Stages
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Required equity returns to the outside Equity
Investor are dependent on the stage of the
investment and the project risks.
25‐35%
18‐25%
12‐18%8‐12%
Establishing Debt Capacity
Size project debt to:
Maximize leverage• Cover project costs and expenses• Start‐up costs• Working capitalProvide acceptable risk/reward to lenders• Contract structure• Technology risk• Counterparty riskAmortize debt over acceptable time period• Fully amortizing, Partial amortization, Bullet
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Construction Debt
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• Construction debt for a project is typically lined up after finalizing the
permanent financing and the signing of the EPC agreement with construction
ready to commence.• Typically an interest only loan repayable at completion of construction and
commissioning of plant which triggers permanent financing.• The construction lender will fund draws based on a construction schedule
prepared by the EPC contractor and certified by the project representative. • If the Equity Investor has not already invested into the project, then the
construction lender may require a commitment by the Equity Investor to
fund in the event of issues with timing or completion of the Project to
decrease the construction lender’s exposure.• Construction lender may also be the project’s permanent debt lender
through a “mini‐perm”
feature converting the outstanding construction line
into term debt at completion of construction and commissioning of plant. • Otherwise, construction line repaid out of proceeds of permanent
financing.
Sources of Cash, Tax, and Other Incentives
Project Revenue•Energy sales (power, thermal)•REC sales•Environmental intangiblesFederal Incentives•Production Tax Credits ("PTC").
2.2¢/kWh (wind, geothermal, closed‐loop biomass);
1.1¢/kWh for other s; applies to first 10 years of operation.•Investment Tax Credit ("ITC“): 30% (wind, solar, biomass, others); 10%
(geothermal, micro turbine).•Treasury Grant (expiring 12/31/10). Accelerated Tax Depreciation•MACRS ‐5 yrs•Bonus depreciationState Incentives•Tax credits and grants•Sales and property tax abatement/rebates/exemptions•Other incentives (e.g. S‐RECs)
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Environmental Intangibles
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• Monetization of Environmental Intangibles (“EIs”) associated with a project
are an important revenue source for project cash flows.• Types of EIs
available include:• Renewable energy credits (RECs): general v. carve out (solar, thermal,
swine, poultry)• Carbon credits (becoming less of a factor without supporting policy)• “White Tag”
credits for energy efficiency• Added project cost to design plan for Eis
and increased operating cost to
measure, verify and register.• Monetize through off‐take agreements with credit worthy buyers
• Long‐term v. short‐term• Fixed price with escalator v. indices or open market
• Emerging secondary markets for these credits• Will not be given firm value for financing beyond term of contracted off‐take
Biomass: Sector Dynamics
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• Return profile: 17% - 20%+
• Project Cost: $5 - $200 million
• Abundance of developers and projects• Attractive risk/return profile and project
size• Produce baseload power• Proven and reliable technology• Utilities/Munis are comfortable with
resource and providing PPAs• No tax equity required
Strengths
• Under scrutiny of several environmental groups for not being ‘renewable’ (e.g. State of Massachusetts)
• Long construction period• Out years of long-term wood supply
contracts are unclear
Weaknesses
Valleys of Death – New Technologies
27Source: New Energy Finance.
Crossing to Commercialization:• DOE Loan Guarantee Program• Advanced Research Projects Agency‐Energy (ARPA‐E)• Decentralized state funding
Biomass: Sample Project
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Wood Fueled
Project Size 60 MW
Cost $200 million
Description Power plant built to burn regional wood waste
Revenues • 75% power sales• 25% REC credits (sold with power under long‐term PPA)
Cash Flow per Project $30 million per year EBITDA
Equity Payback Approximately 3 years
Capital Structure • Debt –
50%• Tax Grant –
30%• Equity – 20%
Key Issues • Pass through of fuel cost• Adequacy and quality of wood• Construction cost assurance
Exit Strategy • Sale of interest to financial or strategic investor subsequent to plant establishing
solid operating record
• Sale as part of a portfolio of projects developed by sponsor
Biomass Thermal Financing
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Fred Reagan
Facilities Director, Merrimack Valley School District
Commercial Biomass Heating Case Study: Merrimack Valley School District
III. School Application – Reagan
Biomass Thermal Financing
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Identifying Project Scope and Available Options
Heat days (182) and heating requirement for facilitiesTypically we use 2.80 tons per day = 26,880,000 btu’s.Comparatively, that’s = 170 gals fuel = 23,460,000 btu’s
O Obvious fuel savings with BTU conversion10 / 11 wood chips @ $50/ton = Oil @ $ .82 per gal
Based on 511 tons chips = $25,550 > 31,059 gals #2 oil @ $ 2.35 = $72,989Realized Savings for 10/11 = $ 47,439
Chose to pursue a system with the following features:Wood Chip, 5.0MMBtu, MessersmithDesigned as a stand alone facility with1 stack (use of existing MS boilers as back up)
Designed for two existing buildings with future expansion capacity (have added SAU office and bus garage)Use of underground PEX piping – to Bus Garage and SAU Office
III. School Application – Reagan
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Financial Considerations and PaybackOverall System Costs for Equipment Purchase and Installation
Annual fuel – $ 25,550 chips vs. $ 72,958 # 2 oilOverall system –conventional oil/gas $ 925,650 vs. chip 1.5 mil
Fuels Savings Average Savings yearly = $ 53,806
Projected Payback – We have achieved payback. Based on difference in conventional system vs. bio mass system.
DEGREE DAYS NET WEIGHT (lbs) NET TONS EQUIVALENT OIL (gal, no. 2)
2008-2009 6190 1,091,630 546 33,174.64
2009-2010 5472 1,083,500 542 32,927.57
2010-2011 6219 1,021,608 511 31,046.67
Total tons Total equivalent oil
1,599 97,148.88
III. School Application – Reagan
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OTotal cost wood chip heat plant cost of $1,500,000 (conventional fuel oil system priced at $925,650).
O Needed to obtain an additional $574,350
OMVSD received 55% building aid towards total of the Capitol Project ($315,893).
ODistrict tax payers responsible for remaining $258,457.O The total capital project was priced at just over $ 20,000,000.
OBond was approved by the taxpayers with 74% approval.O Proactive planning on the school board’s part due to the
creation of a community task force, taxpayer’s questions were answered well in advance of the district’s annual meeting.
State and Community Funding
III. School Application – Reagan
Biomass Thermal Financing
Facility Pictures
III. School Application – Reagan
Biomass Thermal Financing
Lessons Learned1. Operational qualities of
biomass system vs. other fuel sources
10 mins per day. 20 minutes once per week.
2. Expansion of system to other buildings.
Have added SAU office and bus garage
3. Support from community
Decision after surveying other boiler sites in VT
III. School Application – Reagan
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Contact Information
Fred ReaganFacilities Manager, Merrimack Valley School DistrictP: 603-753-6422Email:[email protected]
Neil BarryPlant Manager, Merrimack Valley School DistrictP: 603-753-6422Email: [email protected]
III. School Application – Reagan
Biomass Thermal Financing
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Dan Kuipers
Managing Partner, Sustainable Energy Financing LLC
What Does Carbon Mean for Your Bottom Line: Assessing the Economic Impact of Carbon In Biomass Projects
IV. Environmental Commodities - Kuipers
Dan Kuipers, GHG-IQFounder/Managing Partner
Sustainable Energy Financing, LLC
June 29, 2011
Assessing the Economic Impact of CarbonIn Biomass Projects
• SEF Background• Carbon Credits/Renewable Energy Credits • Current State of Affairs• Carbon Consideration• Sample Analysis
• Economic Development Firm Specializing in Biomass Related Renewable Energy Projects• Wood Product/Processing Industry, Greenhouses,
Agricultural Producers, Food Processors, Building Material Industry, Manufacturing Industry, Wood Pellet Manufacturers
• Carbon Credits, Grants, Tax Credits, Renewable Energy Credits
• Carbon Assessments/GHG Inventory Quantification• Millions of Dollars in Successful Incentive Work
RENEWABLE ENERGY CREDITS
• 1 MWh
of electricity =
1 REC
• Represents the Environmental
Attributes Associated with the Generation of Electricity
• Voluntary/Compliance
CARBON CREDITS
• 1 mtCO2e = 1 Carbon Credit
• PAVER• Permanent• Additional• Verifiable• Enforceable• Real
• Robust Documentation• PDD
• Voluntary/Compliance
• Lack of National Policy• Regional Programs Do Offer Some Guidance and Hope
• RGGI• WCI• California
• Thermal Projects Remain Largely Un-incented
• Projects Should Undergo Comprehensive Analysis to Determine Value of Carbon and Other Applicable Incentives
• Methodology• Tonnage• Voluntary/Compliance• Other Incentives
• Numerous Voluntary Standards• VCS• CAR• ACR
• Each standard has own set of program rules and types of eligible
projects
• Each standard uses different methodologies and approaches for quantifying emission reductions
• Each standard has pros and cons• Associated Costs• Ease of Use• Market Value• Liquidity
• Renewable Energy –
Displacement of Fossil Fuels• Thermal Production• Combustion• Gasification• CHP
• AFOLU –
Agriculture Forestry and Other Land Use• Forestry
• Utilization of Waste Materials –
C&D, Pallets, Chips/Hog Fuel• Pellets Can be Difficult
• Life Cycle Analysis• Vertical Integration
• Planning and Analysis Project Developer/SEF• Prior Consideration• Methodology Review• Tonnage Estimates
• Project Design -
SEF
• Validation –
3rd
Party• Long Term Importance of Project Validation/Registration
• Verification –
3rd
Party• Brokerage –
SEF/RFP/Other
• 24 MWth
Biomass Fuel Switch • Replacing Natural Gas with Waste Wood Chips• Annual Thermal Demand 250,000 MMBTU • $1.75 Million/year in fuel cost using Natural Gas• $500,000/year in fuel cost using Biomass
• Simple Payback without Incentives –
7 years
• Simple Payback with Incentives –
6 years• Eligible for USDA REAP (25% of Project Cost) -
$500,000• Carbon Credits (VER’s) Sold Through 2015 -
$4.00/ton• $52,000/year• Over 10 years = $520,000@$4.00/ton
• Can’t See the Future• What If Scenarios
Questions?
Dan KuipersManaging Partner
Sustainable Energy Financing, [email protected]
www.SEF-LLC.com
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Q & A
VI. Discussion - Seymour
Ask questions using the Questions Panel on the right side of your screen.
All questions and comments will be recorded and incorporated in the webinar summary report.
Also, please take a few moments to answer the survey questions.
Biomass Thermal Financing
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Other Resourcesbiomassthermal.org/resources
Podcasts
Interviews with key industry leaders (8+, also on iTunes Podcasts)
Factsheets (posted soon)Presentation (posted soon)
VI. Other Resources - Seymour
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Upcoming Events
Wood Heat Symposium, Alliance for Green Heat
July 13, DChttp://www.forgreenheat.org/
DOE Biomass ProgramJuly 26-27, DChttp://www1.eere.energy.gov/biomass/biomass_2011.html
VI. Upcoming Events - Seymour
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More Information
This Webinar will be available by Thursday, June 30.
Sign up to receive BTEC news at on our website.
Join BTEC for: -- Frequent and timely regulatory, policy and market intelligence updates
-- Business Development opportunities and networking with other biomass leaders
-- Visibility as a supporter of the market’s growth
-- Discounts to nearly all major biomass industry events in the U.S.
For more info or to join, go to: www.biomassthermal.org/membership
VI. More Information - Seymour
Biomass Thermal Financing
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Thank you!
BTEC Board of Directors
If you want to learn more about the biomass thermal industry, BTEC, or membership, visit
www.biomassthermal.org
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