The World’s Largest Open Access Agricultural & Applied Economics Digital Library This document is discoverable and free to researchers across the globe due to the work of AgEcon Search. Help ensure our sustainability. Give to AgE con Search AgEcon Search http://ageconsearch.umn.edu [email protected] Papers downloaded from AgEcon Search may be used for non-commercial purposes and personal study only. No other use, including posting to another Internet site, is permitted without permission from the copyright owner (not AgEcon Search), or as allowed under the provisions of Fair Use, U.S. Copyright Act, Title 17 U.S.C. THE FINANCIAL FEASIBILITY OF ANAEROBIC DIGESTION FOR ONTARIO’S LIVESTOCK INDUSTRIES By Shawn Mallon & Alfons Weersink WORKING PAPER 07/01 Department of Food, Agricultural and Resource Economics University of Guelph Guelph, Ontario N1G 2W1 October 2007 Mallon is a former M.Sc student and Weersink ([email protected]) is a professor in the Department of Food, Agricultural and Resource Economics at the University of Guelph. Weersink is the corresponding author. THE FINANCIAL FEASIBILITY OF ANAEROBIC DIGESTION FOR ONTARIO’S LIVESTOCK INDUSTRIES EXECUTIVE SUMMARY This report is an investigation of the financial feasibility of farm based anaerobic digestion investments under Ontario’s Standard Offer Contract electricity prices. Using Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) Agricultural Anaerobic Digestion Calculation Spreadsheet (AADCS) anaerobic digestion inputs, outputs, cost and revenues were estimated and used to conduct a financial analysis on the feasibility of four sized farm base anaerobic digestion investments. The results suggest investment in an anaerobic digestion system smaller than 300 kilo-watts is not financially feasible under the chosen base model assumptions and Ontario’s Standard Offer Contract. The efficiency of the anaerobic digestion systems, discussed in the report as electricity yield, was found to have the largest impact on the investments financial feasibility. Incorporating off-farm organic material improved financial feasibility by increasing biogas production and offering the potential for tipping fee revenue. ACKNOWLEDGEMENTS The authors are especially grateful for the support provided by Don Hilborn from the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA). Don’s Agricultural and Anaerobic Digestion Calculation Spreadsheet (AADCS) served as a base for the analysis and he also provided guidance through the research. Comments from Glenn Fox and Getu Hailu were also helpful . ii TABLE OF CONTENTS EXECUTIVE SUMMARY………………………………………………….....………..ii ACKNOWLEDGEMENTS………………………………………………..……………ii TABLE OF CONTENTS…………………………………………………..………...…iii TABLES …………………………………………..…………………………………...…v FIGURES……………...………………………..…………………………………...…viii CHAPTER 1: INTRODUCTION....................................................................................1 1.1 Background...............................................................................................................1 1.2 Economic Problem....................................................................................................3 1.3 Research Problem.....................................................................................................3 1.4 Purpose and Objectives.............................................................................................4 1.4.1 Purpose...............................................................................................................4 1.4.2 Objectives..........................................................................................................4 1.5 Chapter Outline.........................................................................................................4 CHAPTER 2: TECHNICAL REVIEW OF ANAEROBIC DIGESTION PROCESS6 2.1 Introduction...............................................................................................................6 2.2 The Anaerobic Digestion Process.............................................................................6 2.2.1 Odour Reduction................................................................................................6 2.3 Anaerobic Digestion Temperature and Retention Time...........................................7 2.4 The Anaerobic Digestion System.............................................................................7 2.4.1 Organic Material..............................................................................................10 2.4.2 Anaerobic Digester and Biogas Storage..........................................................10 2.4.3 Digestate Storage.............................................................................................14 2.4.4 Electricity and Heat Production.......................................................................14 2.4.5 Benefits of Anaerobic Digestion......................................................................17 2.5 Review of Anaerobic Digestion Feasibility Studies...............................................17 2.6 Chapter Summary...................................................................................................22 CHAPTER 3: ANAEROBIC DIGESTION BASE FEASIBILITY MODEL...........23 3.1 Introduction.............................................................................................................23 3.2 Agricultural Anaerobic Digestion Calculation Spreadsheet...................................23 3.2.1 AADCS Model Data Inputs.............................................................................24 3.2.2 AADCS Model Result Outputs........................................................................25 3.2.3 AADCS Model Estimated Costs......................................................................26 3.2.4 AADCS Model Estimated Revenues...............................................................27 3.2.5 AADCS Summary...........................................................................................28 iii 3.3 The Base Model......................................................................................................28 3.3.1 Base Model Assumptions................................................................................30 3.3.2 Base Model Financial Analysis.......................................................................32 3.3.3 Base Model Financial Feasibility Results........................................................33 3.4 Three Alternative Anaerobic Digestion Scenarios.................................................34 3.4.1 Scenario 1: Increase Generator Size and Electricity Output............................34 3.4.2 Scenario 2: Digest Livestock Manure with 25% Off-farm Organic Material.36 3.4.3 Scenario 3: Digest Livestock Manure with Energy Crop................................39 3.5 Chapter Summary...............................................................................................41 CHAPTER 4: BREAK-EVEN AND SENSITIVITY ANALYSIS.............................42 4.1 Introduction.............................................................................................................42 4.2 Base Model Results.................................................................................................42 4.2.1 Break-even Analysis........................................................................................43 4.2.2 Sensitivity Analysis.........................................................................................46 4.2.3 Change in Investment Period...........................................................................46 4.2.4 Change in Standard Offer Electricity Price.....................................................48 4.2.5 Standard Offer Electricity Price Inflation Policy.............................................48 4.3 Scenario 1: Increase Generator Size and Electricity Output...................................52 4.3.1 Break-even Analysis........................................................................................52 4.3.2 Sensitivity Analysis.........................................................................................55 4.3.3 Change in Investment Period...........................................................................55 4.3.4 Change in Standard Offer Electricity Price.....................................................58 4.4 Scenario 2: Digest Livestock Manure with 25% Off-farm Organic Material........58 4.4.1 Break-even Analysis........................................................................................58 4.4.2 Sensitivity Analysis.........................................................................................62 4.4.3 Change in Investment Period...........................................................................62 4.4.4 Change in Standard Offer Electricity Price.....................................................65 4.4.5 Impact of Off-farm Organic Material Tipping Fee..........................................65 4.5 Scenario 3: Digest Livestock Manure with Energy Crop.......................................65 4.5.1 Break-even Analysis........................................................................................69 4.5.2 Change in Standard Offer Electricity Price.....................................................71 4.6 Results Summary....................................................................................................71 CHAPTER 5: SUMMARY AND CONCLUSIONS....................................................74 5.1 Summary of Purpose and Objectives......................................................................74 5.2 Summary of Empirical Results...............................................................................74 5.3 Policy Contributions...............................................................................................75 5.4 Limitations and Recommendations for Future Research........................................76 REFERENCES................................................................................................................77 iv TABLES Table 2.1: Advantages and Disadvantages of Temperatures on Anaerobic Digestion Systems...............................................................................................................................8 Table 2.2: European examples of operating anaerobic digestion plants with technical and output data.........................................................................................................................18 Table 2.3: Summary of Literature Reviewed, Methods and Results................................19 Table 3.1: Base Model Assumptions and Financial Analysis...........................................29 Table 3.2: Base Model Livestock Animal Equivalents Required to Fuel each of the Four Sized Anaerobic Digestion Systems, Digesting only Livestock Manure.........................31 Table 3.3: Scenario 1 Assumptions and Financial Analysis1...........................................35 Table 3.4: Scenario 2 Assumptions and Financial Analysis1...........................................37 Table 3.5: Number of Livestock required when a combination of Livestock Manure and 25% Off-farm Organic Material is Digested for each of the Four Sized Anaerobic Digestion Systems.............................................................................................................38 Table 3.6: Scenario 3 Assumptions and Financial Analysis1...........................................40 Table 4.1: Base Model Estimation of Annual Net Revenue After Tax and Financial Measures for each of the Four Sized Anaerobic Digestion Systems................................44 Table 4.2: Base Model Break-even Analysis Values and Estimated Percentage Change in Electricity Price, Annual Cost, Capital Cost and Electricity Yield for each of the Four Sized Anaerobic Digestion Systems.................................................................................45 Table 4.3: Base Model Sensitivity Analysis Percentage Change in Net Present Value Resulting for a 1% Increase in Electricity Price, Annual Cost, Capital Cost and Electricity Yield Values for each of the Four Sized Anaerobic Digestion Systems..........................47 Table 4.4: Impact on the Base Models Estimated Net Present Values1 and Internal Rates of Return when the Assumed 10 Year Investment Period is Increased to 15 and 20 Years for each of the Four Sized Anaerobic Digestion Systems................................................49 Table 4.5: Base Model Non-peak1 and Peak2 Standard Offer Electricity Prices Required for 10%, 15% and 20% Internal Rate of Return on Investment for each of the Four Sized Anaerobic Digestion Systems...........................................................................................50 v Table 4.6: Impact on Base Model Estimated Net Present Values1 and Internal Rates of Return from the Standard Offer Electricity Price Inflation Policy for each of the Four Sized Anaerobic Digestion Systems.................................................................................51 Table 4.7: Scenario 11 Estimation of Annual Net Revenue After Tax and Financial Measures for each of the Four Sized Anaerobic Digestion Systems................................53 Table 4.8: Scenario 1 Break-even Analysis Values and Estimated Percentage Change in Electricity Price, Annual Cost, Capital Cost and Electricity Yield for each of the Four Sized Anaerobic Digestion Systems.................................................................................54 Table 4.9: Scenario 1 Sensitivity Analysis Percentage Change in Net Present Value Resulting for a 1% Increase in Electricity Price, Annual Cost, Capital Cost and Electricity Yield Values for each of the Four Sized Anaerobic Digestion Systems..........................56 Table 4.10: Impact on Scenario 1 Estimated Net Present Values1 and Internal Rates of Return when the Assumed 10 Year Investment Period is Increased to 15 and 20 Years for each of the Four Sized Anaerobic Digestion Systems......................................................57 Table 4.11: Scenario 1 Non-peak1 and Peak2 Standard Offer Electricity Prices Required for 10%, 15% and 20% Internal Rate of Return on Investment for each of the Four Sized Anaerobic Digestion Systems...........................................................................................59 Table 4.12: Scenario 21 Estimation of Annual Net Revenue After Tax and Financial Measures for each of the Four Sized Anaerobic Digestion Systems................................60 Table 4.13: Scenario 2 Break-even Analysis Values and Estimated Percentage Change in Electricity Price, Annual Cost, Capital Cost and Electricity Yield for each of the Four Sized Anaerobic Digestion Systems.................................................................................61 Table 4.14: Scenario 2 Sensitivity Analysis Percentage Change in Net Present Value Resulting for a 1% Increase in Electricity Price, Annual Cost, Capital Cost and Electricity Yield Values for each of the Four Sized Anaerobic Digestion Systems..........................63 Table 4.15: Impact on Scenario 2 Estimated Net Present Values1 and Internal Rates of Return when the Assumed 10 Year Investment Period is Increased to 15 and 20 Years for each of the Four Sized Anaerobic Digestion Systems......................................................64 Table 4.16: Scenario 2 Non-peak1 and Peak2 Standard Offer Electricity Prices Required for 10%, 15% and 20% Internal Rate of Return on Investment for each of the Four Sized Anaerobic Digestion Systems...........................................................................................66 Table 4.17: Scenario 2 Impact on Annual Net Revenue After Tax1 and Estimated Net Present Values2 Paying $10 and $20 per Metric Tonne for Off-farm Organic Material and being Paid $10 and $20 per Metric Tonne for Off-farm Organic Material for each of the Four Sized Anaerobic Digestion Systems...................................................................67 vi Table 4.18: Scenario 31 Estimation of Annual Net Revenue After Tax and Financial Measures for each of the Four Sized Anaerobic Digestion Systems................................68 Table 4.19: Scenario 3 Break-even Analysis Values and Estimated Percentage Change in Electricity Price, Annual Cost, Capital Cost and Electricity Yield for each of the Four Sized Anaerobic Digestion Systems.................................................................................70 Table 4.20: Scenario 3 Non-peak1 and Peak2 Standard Offer Electricity Prices Required for 10%, 15% and 20% Internal Rate of Return on Investment for each of the Four Sized Anaerobic Digestion Systems...........................................................................................72 vii FIGURES Figure 1.1 Number of Anaerobic Digesters Currently Operating in Four European Countries.............................................................................................................................2 Figure 2.1: Flow Diagram of a Basic Anaerobic Digestion System...................................9 Figure 2.2: Anaerobic digestion design, membrane covered liquid manure lagoon........12 Figure 2.3: Organic material being augured into an anaerobic digester...........................15 Figure 2.4: Generator operating on anaerobic digestion produced biogas.......................16 APPENDICES Appendix 1.1: Corn Silage Output Section of the AADCS..............................................80 Appendix 1.2: Livestock Manure Energy Production Conversion Values for AADCS...81 Appendix 1.3: Livestock Manure Output Section of the AADCS....................................82 Appendix 1.4: Off-farm Material Output Section of the AADCS....................................83 Appendix 1.5: Digestion Size Calculation Section of the AADCS..................................85 Appendix 1.6: Cost Break-down for Bohni Plant Models used in AADCS.....................86 Appendix 1.7: Capital Cost of Digester without Peak Power Option Section of the AADCS.............................................................................................................................87 Appendix 1.8: Capital Cost of Digester with Peak Power Option Section of the AADCS ...........................................................................................................................................88 Appendix 1.9: Corn Silage Production Cost Section of the AADCS...............................90 Appendix 1.10: Cost of Transporting Organic Material to Digester Section of the AADCS.............................................................................................................................91 Appendix 1.11: Operation and Maintenance Cost of Digester Section of the AADCS...92 viii CHAPTER 1 INTRODUCTION 1.1 Background Anaerobic digestion can be used in agricultural, municipal and industrial systems to treat organic materials. Anaerobic digestion is a naturally occurring process where anaerobic bacteria breakdown organic material, in the absence of oxygen to produce biogas. Biogas consists of approximately 60% methane, 30-40% carbon dioxide, and trace elements of gaseous water, hydrogen sulfide, and ammonia (Leggett et al., 2006). This biogas can then be harvested and used as fuel to produce electricity and heat. Biogas can be produced from a large variety of bio-waste materials including all types of livestock waste, energy crops such as corn silage, and off-farm organic waste materials such as cooking oil and grease. Debruyn and Hilborn (2004) state, the anaerobic digestion process reduces odours and greenhouse gases emitted from agricultural operations, by harvesting these gases and converting them into a renewable energy source. Hilborn (2006) states, harmful pathogens present in agricultural waste can be reduced up to 99% depending on the operating temperature of the anaerobic digester and the by-product from the digestion process makes an environmentally friendly soil conditioner. Anaerobic digestion allows the incorporation of off-farm source organics with on-farm source organics and has the potential to produce a constant and renewable energy source while improving farm revenues. Anaerobic digestion is not a new process. Europe, considered to be the World leader in anaerobic digestion technology and biogas production, currently has over two thousand anaerobic digestion plants operating on individual farms Preusser (2006). To date, Germany is the largest producer of biogas in Europe, see Figure 1.1. According to Preusser (2006) German farmers invested over three billion CDN in 2005 on anaerobic digestion systems. These farm level anaerobic digestion investments were made possible with two key German policies: (1) guaranteed electricity price for twenty years and (2) guaranteed access to the electricity grid. In Europe these feed in tariff electricity prices range between 11-16 cents per kWh with a bonus of between 2-8 per kWh cents if energy crops are digested (Preusser, 2006). Following German renewable electricity policy, Dalton McGuinty the Premier of Ontario announced the introduction of Ontario's Standard Offer Program. Under this program the Ontario government has set a fixed price of 11 cents per kWh up to 8000 hours per year for non-peak electricity production and a 3.5 cent per kWh bonus or 14.5 cents per kWh up to 2000 hours per year for electricity produced during peak hours, for renewable energy projects such as anaerobic digestion (Ontario Power Authority, 2007). It is important to mention this guaranteed price is considerably higher than conventionally produced electricity which currently ranges between 5 and 6 cents per kWh (Ontario Energy Board, 2007). For Ontario agriculture producer’s one major 1