Biomass supply contract pricing and environmental policy analysis: A simulation approach

Highlights: • The interaction between biofuel producers and farmers is modeled in agent-based simulation. • The dynamic pricing process of biomass supply contract is reflected. • A pricing strategy conserving farmers' benefits but providing 22% more profit for the producer is proposed. • The impact of important economic parameters on biomass contracting is analyzed. • The impact of environmental regulations is analyzed and managerial insights have been derived. This paper proposes an agent-based simulation model to study the biomass supply contract pricing and policy making in the biofuel industry. In the proposed model, the agents include farmers and a biofuel producer. Farmers' decision-making is assumed to be profit driven, which is formulated as a mixed-integer optimization model, and the biofuel producer's pricing decision is represented with a linear equation with an objective to maximize profits. A case study based on Iowa has been developed to analyze the interactions between the stakeholders and assist determination of the optimal pricing equation for the biofuel producer. Simulation results show that under such a pricing strategy, the biofuel producer can achieve higher profitability than using a fixed price. The impact of government environmental regulations on farmers' decision-making and biomass supply has also been analyzed, and managerial insights have been derived.