BioCycle April 2010, Vol. 51, No. 4, p. 45
The Ontario Power Authority introduced a renewable energy feed-in tariff in 2009, which on paper should create incentives for digester biogas. So far, that beneficial effect is elusive, say project operators and developers.
EVERY day at the Grober farm near Cambridge, Ontario, 2,700 bull calves, destined to become tender veal, deposit 45 metric tons of watery manure on grating that carpets their airy, concrete barn. For years, the waste was spread on fields. Recently, the Grober Group, which owns the farm, hired PlanET Biogas Solutions to install a 2,000 m3 digester and its related equipment and controls. Biogas produced by the $2.2 million system will run a 500 kW electric generator.
This is the kind of operation the Ontario government had in mind when, in 2009, it introduced North America’s first feed-in tariff, or FIT, program. As part of the effort to eliminate coal-fired power and combat smog and climate change, the program – similar to several in Europe – pays premium rates, guaranteed for 20 years, for electricity produced from renewable sources such as wind, solar and biogas.
FIT appears likely to spark a boom in renewable energy. Already, applications are in for about 8,000 megawatts worth of generating capacity. Most is for wind farms, but solar projects, too, are expected to sprout across the province, thanks to tariffs up to 20 times above the current market price.
But the future of anaerobic digester biogas is far less certain. Just 10 projects are underway or in advanced planning in Ontario and proponents say only a handful more, representing a tiny fraction of the province’s total potential, will be added unless the FIT program is substantially altered.
“It has been a debacle,” says Ross Blaine, director of innovation at the Grober Group. Adds Jennifer Green, whose family operates a 230-head dairy farm near Kingston, Ontario, and has installed a digester and 500-kW generator: “There’s not going to be an onrush of biogas systems. The (Power Authority) missed their opportunity to make a surge in biogas.”
While the level of frustration and anger varies among those developing biogas projects, they all make the same basic points, which reflect a fundamental difference between them and the Ontario Power Authority (OPA), the provincial agency that manages the FIT program. In brief, they believe OPA doesn’t recognize the industry’s unique economics or the environmental and rural development benefits it offers. It has set the tariffs too low, they say, and is imposing contract conditions that one project developer describes as outrageous. As a result, most of a small but dependable supply of renewable energy will remain untapped.
The OPA has more modest ambitions for biogas, saying it must balance support for the industry against the need to contain costs for Ontario’s taxpayers and electricity consumers. It has no specific production targets but says it wants to guard against producers making what it considers windfall profits, and its financing calculations don’t take into account the environmental benefits that the industry argues are so important. “They (OPA) would say, ‘we don’t care about the environmental issues, we care about the electricity,’” says Nicole Foss, Executive Director of the Agricultural Energy Producers Association of Ontario (AEPAO). “We say it’s in the public interest to have manure disposed of.”
The regulators “lump anaerobic digesters in with the other (renewable energy sources) but they’re totally different operations,” says Laurie Stanton who, with his wife Sandy and four children runs a 2,000-head dairy herd near London, Ontario (See “Ontario Dairy Digester Grows With The Flow,” May 2009). The Stantons have installed a biogas system with the potential to generate 1.3 MW of electricity but are “limping along” at about 300 kW, mainly to provide electricity for on-farm use, until issues with the FIT and grid connections are resolved.
FIT PROGRAM OVERVIEW
It is estimated that Ontario livestock operations produce about 12 million metric tons of manure annually. To make biogas projects financially viable, manure needs to be combined with fats, oils, grease and food waste, which have a much higher energy content. Typically, these feedstocks comprise 20 percent of a digester system’s inputs but produce 80 percent of its energy, says Douglas Carruthers with Organic Resource Management Inc. (ORMI), a Toronto-area company that collects wastes from about 6,000 food industry establishments.
Ontario’s potential generation from digester biogas is estimated in the hundreds of megawatts. That’s a negligible amount in a province where total capacity – dominated by nuclear and hydro – is more than 27,000 MW and demand regularly exceeds 20,000 MW. “It’s a tiny fraction of what we consume, but it’s a renewable number that’s not there today,” says Carruthers.
Unlike wind and solar, which are at the mercy of natural elements, biogas projects can generate power either uninterrupted or on demand. These benefits were anticipated last year when the Ontario Legislature passed the Green Energy and Economy Act, which laid the groundwork for the FIT program.
But OPA, focused on the economics of electricity generation, developed a system intended to assure all renewable energy producers an 11 percent annual rate of return on their investments. To create what it considered a level playing field, it produced a complex table of tariffs and contract provisions.
All of the FIT payments represent a premium over current market rates. During the past couple of years, Ontario’s wholesale price for electricity – one of the lowest in the industrialized world – has usually bounced around between three and four cents per kWh. Residential consumers now pay 5.8 cents for each of the first 1,000 kWh in a month, and 6.7 cents for the rest. The province is introducing time-of-use rates that will range from 4.4 to 9.3 cents.
The FIT rates range from 10.3 cents/kWh for electricity from large landfill gas projects up to 80.2 cents for small-scale solar photovoltaic installations, such as those on home rooftops. On-shore wind projects will receive 13.5 cents/kWh; those built offshore in one of the Great Lakes will get 19 cents.
The tariffs for biogas are toward the bottom of the FIT scale. Projects with a capacity of less than 100 kW will be paid 19.5 cents/kWh. Between 100 and 250 kilowatts, they’ll get 18.5 cents. From that level up to 500 kW, the rate drops to 16 cents. Above 500 kW, it falls to 14.7 cents. At 10 MW, it’s down to 10.4 cents.
Beyond these contract prices, the OPA says, are adjustments that should boost biogas incomes. Producers are to get 90 percent of the tariff for electricity generated during off-peak times, and 135 percent when demand is high. Those rates are formulated so that a biogas generator running 24 hours a day, seven days a week, would be paid the posted FIT tariff. Producers will do better than the posted rate if they shut their system during some off-peak times but keep it going during the peak hours.
On top of that, the rate calculations assume biogas systems will operate only 75 percent of the time even though, OPA says, they might be able to hit 90 or 95 percent – a difference that could add $100,000 a year to their annual revenue.
As with most of the renewable sources covered by the FIT program, the OPA contract also includes a 20 percent inflation adjustment over the 20-year life of the deal. (The lone exception is solar, which gets no adjustment.) On the other hand, whatever tariff is assigned to a project is paid for its entire production. Operators of a 200-kW biogas generator, for example, won’t get 19.5 cents for the first portion of the electricity they generate and 18.5 for the rest. Instead, they’ll get the lower rate for everything.
500 KW “SWEETSPOT”
Projects with capacity of 500 kW or less face easier rules for getting connected to the provincial electricity grid – a crucial factor since grid capacity is turning into a major impediment to expansion of renewable energy. One result of these tariffs and rules is that most proponents are building systems with a capacity of 500 kW. That is the “sweet spot,” considering potential revenues and ease of grid connection, offering the best return on investment, Carruthers says. The Grober and Green systems will operate at 499 kilowatts, to ensure they don’t creep up into the next, and lower-rate, tariff band.
Fepro Farm in Cobden, Ontario is following this strategy as well. “Our generator will produce more than 500 kW but we stopped there since, with the lower price (for larger systems), it wouldn’t make sense,” says Paul Klaesi, a biogas pioneer (see “Small Dairy Pioneers Anaerobic Digestion,” September 2007). “We talked about that with (the Power Authority), but they wouldn’t change. They didn’t understand biogas then. Maybe they still don’t.”
Still, taking all this into account, industry members say the current rules won’t generate the 11 percent return suggested by OPA, and even if they did, it’s barely enough for them and too low to encourage new projects. A typical 500-kW installation – including storage and conveying equipment for manure, a heater to pasteurize off-farm food wastes, digester, motor, generator, connections to the grid and myriad other bits and pieces – costs $2 million to $2.5 million.
CHALLENGES TO PROJECT ECONOMICS
The existing projects received grants of up to $400,000 from Ontario’s Ministry of Agriculture, Food and Rural Affairs. That money is no longer available and without it, few if any additional digesters are expected to be built. The payback – which various operators say ranges from 7 to 12 years – would be too slow for them and, especially, their bankers, to accept. The grants were “just enough to make some systems work,” says Foss of AEPAO. “Without them, I’d be surprised if any more systems were financially viable.”
Blaine says his project would be fine with two to four cents more per kilowatt-hour. Others say the tariff should be similar to Europe’s, above 25 cents. All argue the inflation factor should be raised from 20 to at least 45 percent, because biogas producers face ongoing capital and maintenance costs that wind and solar projects don’t.
OPA has set the biogas tariff at “let’s see what happens at this price” rather than, as in Europe, “let’s set a price that will stimulate the industry,” says Carruthers. The solar tariff is intended to boost that source of renewable energy; why not biogas, he asks.
The tariff issues top the list of what Carruthers calls the FIT program’s “flat tires,” flaws that make it a bumpy ride and could bring it to a complete stop. Others arise from provisions in the 20-year contract that operators must sign with OPA.
Most of these provisions revolve around what are called “environmental attributes.” These are, essentially, grants and other payments awarded by governments for promoting energy efficiency and reducing greenhouse gas emissions. The Green Energy Act stipulates that such benefits belong to the OPA. Thus, it demands half of any grants that projects receive through the Canadian government’s Eco-Energy program. (Producers may retain the other half to cover costs associated with applying for the grant.) It also wants any credits that might become available under a cap-and-trade system for cutting carbon emissions, as well as additional amounts that might be paid for destruction of methane.
As well, OPA is said to want 80 percent of the profits from “future related products” derived from the digestate or other residues of the biogas process. Not all operators plan to get involved in such ventures, but for those that do – including the Grober Farm and the Stantons – it’s a crucial component, both financially and to maximize the environmental benefit.
Exactly what “future related products” means isn’t clear, and OPA didn’t respond to several requests for a definition. But the rule is a major irritation. Germany offers additional cash for developing these products, says Garry Fortune, who is managing the Stanton project. That’s a major reason, he explains, why Germany has 4,000 anaerobic digesters, able to generate 1,400 MW of electricity.
The 80 percent rule is “punitive,” adds Fortune. “Other jurisdictions say, ‘if you bring in new technology we’ll give you an incentive.’ That develops a green economy. … It’s outrageous for them to say, ‘we’re going to claw back the financial incentives.’”
And there is another impediment: In Ontario, in addition to the stated rates for electricity, consumers pay additional charges, per kWh, for transmission, reducing the debt of the provincial electricity system, and covering costs of regulatory agencies. Those extras double the final bill.
The FIT program replaces a simpler tariff scheme known as the Renewable Energy Standard Offer Program. RESOP offered lower rates but had a major advantage for biogas producers: It exempted them from those extra charges on any electricity they used to run their operations. Under FIT, they must pay the fees.
“Biogas has a lot of moving parts. It’s extremely complicated … there’s a lot of parasitic (electricity) load,” Foss says. Having to pay the full retail price for that energy is, “a significant difference. It’s enough that it will hurt. Since the tariffs are marginal anyway, it really doesn’t help.”
In addition, the higher price for electricity generated during times of peak demand isn’t as great a benefit as it might appear since most systems are designed to burn methane at about the same rate the digesters produce it. To shut down for anything beyond normal maintenance would mean building facilities to safely store the gas. In addition, frequent stopping and restarting would reduce the life of the generator motor – a $100,000 item.
Grid connections are a major constraint on the entire FIT program, with the 8,000 MW megawatts worth of applications competing for just 2,500 MW of transmission capacity. The province has approved a $3 billion plan to upgrade and expand the network of wires and towers, but it’s years from completion. Meanwhile, project operators must line up to await access. Every six months, OPA reviews the projects in the queue and assesses whether there’s an economic case for bringing them on line. If it decides to proceed, there’s a further delay while this work is completed.
Small biogas systems are considered “capacity exempt,” meaning that once their technology is approved and a contract is signed, they can bypass the queue. But here, too, there are complications that will be a further impediment to new projects. Those with a capacity of up to 500 kW are exempt, but only if they can connect to a 15-kilovolt line. If the only available line is smaller than that – as is the case in most of rural Ontario – the maximum project capacity is 250 kW. “It’s hard to make a go of it at 250 kW,” says Foss.
“BEGINNING OF THE DISCUSSION”
The OPA says it received support from the farm industry, including the Ontario Federation of Agriculture (OFA), before finalizing the FIT rules. And OFA is sympathetic for the need to contain costs, stating: “From the OPA point of view, the price is not meant to be high enough that every farm with manure can put in a digester and get whatever that price might need to be. That would be great for farmers but not for consumers.”
The OPA says the FIT program, including its tariffs, is to be reviewed every two years. “I don’t think the launch of this program ends the discussion,” says spokesperson Ben Chin. “It’s just the beginning of the discussion. … The window is now opened and it doesn’t ever close.”
But Laurie Stanton says the tariffs must be raised now for the industry to succeed: “If we squeeze the price at the outset we’ll never establish the infrastructure we need.”
Peter Gorrie is a free-lance writer based in Toronto, Ontario, specializing in energy and environment issues.