BioCycle July 2011, Vol. 52, No. 7, p. 36
Two-part series examines a new breed of commercial project developers in the anaerobic digestion industry. This month’s article focuses on manure management. Part I
AS the anaerobic digestion industry matures, a new breed of commercial project developers is focusing on the agricultural and regional mixed organic waste substrate sectors. What sets these companies apart are experienced management teams using build-own-operate business models to develop larger scale projects that can successfully attract outside financing.
Part I of this article profiles four developers of farm-based digester projects. In these examples, power purchase agreements with utilities are the lion’s share of the revenues. Part of the location/site selection process certainly involves finding the best opportunities for maximizing the price for the power.
Another commonality is taking advantage of federal financing incentives, such as the U.S. Treasury Department’s Section 1603 funds and grants under the U.S. Department of Agriculture’s REAP program, while they are available. “It is nice to have some Federal incentives to prop up the technology but if that is not going to happen we are going to have to become more efficient and more effective,” says Leslie White, cofounder of The New Energy Company, one of the developers profiled in this article.
Typically farmers who want to install a digester must cobble together financing, obtain necessary permits, figure out interconnect options with the local utility and then contract with a third party to design and build the system. Once the digester is completed the farmer is responsible for operating the system.
Bob Joblin, partner at AgPower Group, LLC, thinks there is a better way: financing, building, owning and operating the system for the farmer. “We don’t require an investment from our host facility,” Joblin explains. “We require a long-term land lease, longer than our financing, and we have to be assured that the feedstock will be there for that term. We take it from there and go get financing. A partner puts in equity and we build and operate the system.”
Joblin, whose background includes real estate development, construction, energy and project finance, says he knows what lenders are looking for and adapts his projects to acceptable underwriting criteria. he says. “From what lenders have told me there is less risk.”
In Jerome, Idaho, AgPower is partnering with Camco Global, a developer of greenhouse gas emission reductions and clean energy projects, to construct an anaerobic digestion system on a 15,000-cow dairy. When completed in early 2012, the $24 million system will employ GHD modified plug flow digesters to generate biogas used to fuel generators with a combined capacity of 4.5 MW. The deal includes a 20-year power purchase agreement (PPA) with Idaho Power and multiyear contracts for the sale of the solids from the digestate. Renewable energy certificates (RECs) are available for this project through a California Energy Commission program called “Transferable Renewable Energy Credits.” Renewable energy sources in Idaho qualify for credits under this program.
AgPower partnered with Dean Foods, the largest processor and producer of dairy products in the U.S., on the company’s first digester project at the Big Sky Dairy near Gooding, Idaho. Dean Foods wanted to show the dairies they do business with that digesters work, are sustainable and can make money, Joblin explains.
The Big Sky project processes manure from the dairy’s 4,700 cows to generate up to 1.2 MW of electricity that is sold to Idaho Power. Digestate is separated, with the liquid returned to the dairy’s lagoons for land application; solids are shared with the dairy, which uses them for bedding. AgPower sells its share.
For now, the developer is not incorporating codigestion with off-farm substrates into its business model. “When we do the economics and design the project we are not dependent on any additional substrates,” explains Joblin. “We feel that would be too risky. We are concerned about projects that are dependent on tipping fees for substrates because there is a lot of energy in those substrates and the people who own them are getting smarter and smarter, especially with more digesters out there. I think tipping fees for those substrates are short lived.” He adds that AgPower permits its projects for receiving cattle manure “and so we are not going to get so much additional substrate that we change our category.”
Joblin sees controlling digester operations as critical to his model. When he started, he looked at existing digester installations and how they were operated. “We found that dairymen took care of their digesters the same way they ran their tractors and combines,” he says. “Some did preventive maintenance and some waited for the equipment to break down before taking action.” On all projects AgPower contracts with third party operators to run its systems. “We think third party operation is very, very important,” Joblin says. “Our lenders think so too.”
THE NEW ENERGY COMPANY
Just south of AgPower’s projects in Idaho, The New Energy Company (TNEC) is building digesters at Bettencourt Dairies’ Rock Creek Dairy near Filer. The $13.1 million New Energy One project will feed manure from 8,900 cows on three dairies into a central system composed of six, 1.026-million gallon UTS digesters. Over 1-mcf of biogas produced daily will drive gensets with installed capacity of 2.4 MW. Completion is slated for the fourth quarter of 2011.
Liquid separated from the digestate will undergo a chemical/mechanical separation to remove phosphorus and then get applied as fertilizer to adjacent cropland. The solids will be split with the dairy, which will use them for bedding. TNEC will sell some of the material into the compost market.
Leslie White and Laura Knothe started Middleton, Idaho-based TNEC in 2008. White is a chemical engineer with 20 years of energy industry experience. Knothe has 17 years of engineering and construction management experience. While researching business opportunities in the anaerobic digestion industry, White and Knothe saw a need for a group to put together all the pieces of the development puzzle, such as the PPA and market incentives, which would help dairy operations obtain equity financing.
“Securing equity in an agricultural based system is often difficult,” says White. “The dairy owners are facing increasing environmental and regulatory pressures centered on their waste management systems, yet obtaining financing, securing off-take agreements, obtaining permits and selecting the best technology for a system that directly addresses their waste management issues is a distraction from their core business. We’ve put together a business model and a team that can produce a return to the investor and provide a service to the dairy that owners are unable to achieve on their own.”
TNEC developed detailed operating and capital cost models to help structure projects that are economically feasible and provide returns required by investors. “One of the biggest pieces of the puzzle is providing adequate returns to equity investors when the markets do not attach a monetary value to environmental and regulatory concerns impacting dairy farmers,” White says.
During the business start-up phase, White and Knothe spent considerable time touring digester facilities and talking with operators. “We saw that operations were a leading cause of failure,” White explains. Based on the findings, TNEC will control digester operations through an operating subsidiary of the company or negotiate operations and maintenance contracts with the technology provider.
Several other projects are currently under development: New Energy Two and New Energy Three have financing, the PPAs and permitting in place and the projects are in the technical design stage. New Energy Two will process manure from 4,100 cows in three, 1.1 million gallon UTS digesters to produce 1.1 MW of electricity. New Energy Three is composed of three, 1-million UTS digesters processing the manure from 10,000 cows to generate 1.3 MW of electricity. Both projects are utilizing MWM GmbH gensets. Codigestion of other substrates is expected to boost biogas production and increase power generation closer to 2 MW at each project, White says.
TNEC is developing New Energy Two and New Energy Three with Exergy Development Group, a multifaceted renewable energy company entrenched in solar, bioenergy, geothermal and hydro. “Exergy has grown to be one of the largest independent renewable energy companies in the United States and the company’s experience in the renewable energy industry is an asset to the development and placement of AD systems,” White says. “In an industry where the margins are tight, we have to be focused on increasing efficiencies.”
On a 64-acre farm in Mesquite, New Mexico, R-Qubed Energy of El Paso, Texas, is developing an anaerobic digestion complex to process manure from 40,000 dairy cows located on seven farms along a 6-mile corridor between Mesquite and Vado. Entec USA, a partnership between Reynolds, Inc. in Orleans, Indiana, and Austria-based Entec Biogas GmbH, is designing and will build the project.
The facility, owned and to be operated by R-Qubed, will help alleviate environmental and regulatory problems facing the dairies. “The farmers were in violation of the Clean Water Act for improperly handling and disposing of waste from their operations,” explains Keith Hughes, R-Qubed’s vice president of business development. “The EPA was ready to shut them down.”
When fully built-out, the plant will include four identical digestion systems (quads) composed of two digester tanks, two mixing tanks and two post digestion tanks. Manure from the dairies will be pumped or trucked to the site.
Liquid digestate from the process will be converted into a fertilizer. Solid digestate will be combined with raw manure and other organic materials in an on-site composting operation housed in fully enclosed buildings equipped with scrubber systems to purify the air, reduce odor and collect particulates. Unused liquid digestate will be processed in an on-site wastewater treatment plant to reduce nitrogen and total dissolved solids levels to meet discharge standards as specified by the New Mexico Water Quality Control Commission.
The $25-million pilot phase of the project, expected to break ground in September, will construct the first digester quad with a capacity to convert manure from 11,000 cows into 2.5 MW of electricity. The pilot will include composting, liquid fertilizer and wastewater treatment operations.
R-Qubed negotiated long-term contracts with the dairies for the manure. Farmers receive a percentage of the gross sales of the electricity, the RECs, the liquid fertilizer and the compost. Much of the power produced by the pilot facility will be used to heat the digesters and power the process. Excess power, estimated at 0.5 to 1 MW, will be sold to Public Service Co. of New Mexico under a 15-year PPA.
Biogas produced by future phases of the project will be cleaned and upgraded for injection into natural gas pipelines. This will be more cost-effective, and allows R-Qubed to avoid legal, permitting and regulatory costs incurred when third-party producers put over 1 MW of power on the grid, Hughes explains. “We have a lot more sales opportunity once we go to the pipeline.”
Successful marketing of the backend materials, such as compost, is critical to project economics. “We’ve figured out how to make money off of every bit of the buffalo,” he adds. Contracts for the ‘backend’ materials are expected to be completed by the end of July.
The project raised $6 million in private equity and will take advantage of the Treasury Department’s 1603 program, which provides grants for 30 percent of eligible project investments in lieu of tax credits. “Final financing goes to bank in late July, early August,” Hughes says.
Anaerobic digestion technology is not new to Minneapolis-based Cargill, an international producer and marketer of food, agricultural, financial and industrial products and services. The company has used digesters for decades and currently operates 14 systems in the U.S., primarily at its meat processing operations where the biogas replaces 20 percent of the natural gas used at the plants. About five years ago, the company went looking for greenhouse gas reduction projects in the U.S. As part of that search, Cargill sought opportunities to build small renewable power plants while gaining institutional knowledge in the environmental attributes market.
“Cargill has a strong presence in commodity trading and environmental attributes, whether that is carbon credits or renewable energy credits,” explains Craig Maetzold, general manager of biofactory facilities at Cargill. “Environmental attributes were a new commodity that entered the market a couple of years ago and we were investing in opportunities around them from a trading standpoint.”
Between 2007 and 2010, Cargill built three anaerobic digestion systems on farms in southern Idaho. The company financed, owns and operates the facilities, located on land leased from the host dairies. Installing digesters on dairy farms allowed the company to become a small renewable electrical generation, Maetzold says. The projects also allowed Cargill to enhance customer relationships within its agricultural and food supply chains and differentiate itself from a customer standpoint. The three host dairies selected for the project have historical relationships with Cargill’s animal nutrition business.
Cargill spent between $8 million and $12 million to build each system, all located in Idaho. The first digester, installed at the Bettencourt Dairy’s Dry Creek Dairy in Hansen, processes manure from 10,000 cows in GHD digesters with a total capacity of 4.7-million gallons. The facility produces 700-scfm of biogas and can generate up to 2.25 MW of electricity.
The other two systems employ low rate modified plug flow reactors developed by Cargill. At Bettencourt Dairy’s B6 Farm in Jerome, a 5.4-million gallon digester system converts manure from 6,000 cows into 515-scfm of biogas to drive gensets with generating capacity of 2.28 MW. This facility was designed with excess generation capacity allowing for codigesting other wastes in the future. The third project is at Kettle Butte Dairy in Roberts, a 5,500 cow facility near Idaho Falls. A 3.9-million gallon digester system produces 490-scfm of biogas that is used to fuel generators with an installed capacity of 1.7 MW.
The digester fibers produced by the systems are shared with the farms. Approximately half are used by the dairies as bedding; the remainder available for Cargill to market as a soil amendment product. Cargill does not have any additional projects in the pipeline. “We are focusing on optimizing the operation of these three projects while we continue to monitor and build knowledge around the market and investigate opportunities as they may show themselves,” Maetzold says. One of the challenges is the commercial return, he adds “We want to make sure our capital is utilized so that we get an attractive return.”
Diane Greer is a Contributing Editor to BioCycle. Part II of this series, appearing next month, will profile three developers of regional mixed substrate projects.
July 18, 2011 | General
Digester Developers In The Agricultural Sector
BioCycle July 2011, Vol. 52, No. 7, p. 36