State Claims Fund

The Long-Term Forest Residue Supply Contract Claims Fund (Claims Fund) is a proposed state- funded financial mechanism designed to de-risk long-term (10-year) forest residue supply agreements between suppliers and biomass facility operators. Modeled after California’s successful Prescribed Fire Claims Fund, the Claims Fund would compensate parties for specific non-performance issues and cost overruns that fall outside their direct control, circumstances that currently prevent suppliers and users from entering into the multi-year contracts that lenders and investors require before financing biomass facility expansions or new developments.

The Claims Fund addresses a critical market failure: while banks and investors demand decade-long supply contracts before committing capital to biomass projects, insurance companies do not offer coverage beyond one year. Without some form of coverage for the risk of cost increases or contract performance failures outside of their control, neither forest residue suppliers nor biomass operators can commit to the long-term agreements necessary to unlock project financing.

California faces converging crises that make forest residue removal urgent: escalating wildfire risks from fuel-choked forests, mounting emissions from those wildfires that undermine the state’s climate goals, and struggling rural forest economies. The state has set a target of treating one million forested acres annually, with newer goals calling for even more aggressive action—up to 2.3 million acres per year.

Meeting these objectives requires not just more removal of woody material from forests, but also robust end-user markets for that material. Biomass facilities that convert forest residues into energy, biochar, biofuels, composite materials, and other valuable products provide economic support for increased forest management. However, developing or expanding these facilities demands substantial capital investment, and lenders and investors cite the absence of long-term supply contracts as a primary barrier to financing.

The problem is circular: investors won’t fund projects without guaranteed supply, but suppliers won’t guarantee supply over 10 years when they face uncontrollable risks like labor cost increases, fuel price spikes, wildfire-induced supply disruptions, or restricted forest access. The Claims Fund breaks this deadlock by assuming the financial risk associated with these specific, objectively measurable circumstances.

No existing authority in California statute permits a state agency to establish and operate such a Claims Fund. Therefore, legislation is required to create the program, identify the program administrator and claims processor, define eligible participants and covered risks, and  appropriate funds to capitalize the Claims Fund.

The proposal recommends that the Governor’s Office of Business and Economic Development (GO-Biz) be assigned primary responsibility for implementing and overseeing the Claims Fund program, given its existing expertise with biomass users and forest residue suppliers. However, GO-Biz would contract with the California Earthquake Authority (CEA) to handle the day-to-day administration of claims processing and fund management.

This structure leverages complementary strengths: GO-Biz brings industry knowledge and policy expertise, while the CEA contributes proven experience administering a state insurance program. The CEA’s board, comprising the Governor, Insurance Commissioner, State Treasurer, and two legislative appointees, provides built-in oversight and accountability.

Beyond state agencies, the proposal envisions a collaborative role for local Joint Powers Authorities (JPAs)  already established in forested regions to  support forest residue supply chains. These JPAs possess valuable on-the-ground knowledge about local fuel costs, labor markets, forest access conditions, and supplier capabilities. They could assist with eligibility determinations, pre-qualification assessments, and claims review, either in an advisory capacity or through more formal delegated authority under statewide rules with Claims Fund oversight.

The Claims Fund would be capitalized through State General Fund appropriations rather than fees on suppliers or users, avoiding additional financial burdens on an already economically challenged industry.

Coverage would extend to both sides of supply contracts: suppliers could claim reimbursement when specific external factors drive costs above contracted prices, while biomass facilities could receive compensation when suppliers fail to deliver contracted volumes or when replacement supply requires paying higher prices. Cost-sharing mechanisms, such as covering 90% of eligible claims with parties retaining 10% of risk, would ensure both sides remain incentivized to manage controllable factors efficiently. The Claims Fund would cover four main external factors driving cost increases: labor costs, fuel costs, increased haul distances due to supply disruptions, and loss of forest access. It would not cover business risks within the parties’ control.