Washington State dairy digester

March 14, 2012 | General

Financial Feasibility Of Digester Development

With by-product revenue streams — combined with loans — digesters are approaching financial viability, at least for larger projects..

Nora Lake-Brown and David Paul Rosen
BioCycle March 2012, Vol. 53, No. 3, p. 52

Six dairy-related digesters developed between 2006 and 2011 are operating in Washington State, with two others in construction and at least one more under consideration. The operating digesters (and the two in construction) utilize manure from 1,000 to 5,300 cows each, with half of the projects using manure from more than one dairy. The rated capacity of these digesters ranges from 400 kW to 1.2 MW.
In addition to private loan financing, these projects have used a range of subsidized loan and grant sources, including the State Energy Program (SEP), the USDA Rural Energy for America Program (REAP), the U.S. Department of Energy, U.S Department of Treasury grants in lieu of the 30 percent Investment Tax Credit, and USDA loan guarantees. With FY2012 funding for the REAP program cut to $25.4 million, down from $70 million in FY2011, and most of the other sources no longer available, competition for available subsidies will be even greater. For long-term viability and growth of the industry, it will be imperative for digester development to move toward a market-based model.
Under Washington State law, certain anaerobic digesters are allowed to operate without a solid waste permit, provided specified conditions are met. Digesters located on or near dairies that codigest organic wastes with manure may qualify for this permit exemption, as long as the digester uses at least 51 percent livestock manure and no more than 30 percent preconsumer organic waste. On-farm wastes may comprise the other 20 percent.

Study Parameters And Assumptions

An analysis of two prototypical dairy digester projects, sized to use manure from 2,000 cows and 750 cows, respectively, was conducted to test the financial feasibility of manure-based digester development and operation utilizing economic data and assumptions derived from the operating facilities in Washington State. The analysis modeled the payback period required for a private loan equal to 80 percent of development cost, and the rate of return on an equity investment for the remaining 20 percent. The analysis was performed using an interest rate of 8.0 percent, as well as for a second alternative assuming tax-exempt bond financing at a 5.0 percent interest rate. For the 2,000-cow prototype, total development costs are estimated at $2,000/cow for a dairy using a scrape disposal process for manure, and 20 percent higher ($2,400/cow) for a dairy using a flush disposal process for manure. For the 750-cow prototype, development costs are estimated at $4,000/cow and $4,800/cow for scrape and flush dairies, respectively.
In Washington, the three investor-owned utilities (IOUs) — Pacific Power, Avista Corporation and Puget Sound Energy — are required to set and publish tariffs for their purchase of renewable energy at its avoided cost. All but one of the digesters developed in Washington State are located in Puget Sound’s service area, with the other facility served by Pacific Power. For contracts executed in 2010, Puget Sound Energy paid $0.08467 per kWh for power produced in 2010, while Pacific Power paid $0.06542.
Electricity output from manure alone was estimated at 0.25 kW/cow for dairies that use a scrape disposal process for their manure. Adding 10 percent food waste is estimated to increase electrical production by 25 percent. Adding 20 percent food waste is estimated to increase electrical production by 50 percent compared to manure alone. These increases are half of that shown in a long-term analysis of a Washington State dairy digester case study by Frear et al (“Evaluation of Codigestion At A Commercial Dairy Anaerobic Digester,” Clean: Soil, Air, Water, 2011), but are considered to represent fair but conservative values reflecting future organic waste distribution and energy content of the wastes available. A dairy that uses a flush disposal process for manure is estimated to produce 20 percent less electricity (flush dairies use a large volume of water, which dilutes the manure concentration). Present flush dairy systems require various levels of manure concentration for suitable energy balance, with lower concentrations causing a corresponding loss of some of the energy value in the manure.
The financial feasibility analysis examined 13 scenarios assuming various percentages of manure and preconsumer food waste feedstocks, electricity prices from the Puget Sound and Pacific Power IOUs, and a range of alternative revenue sources for digester by-products including fiber sales, tipping fees, increased Renewable Energy Credit (REC) prices, carbon credits, and the production tax credit. The RECs are purchased from renewable energy producers at a price per kWh of electricity produced negotiated between the buyer and seller of the REC. The Bonneville Environmental Foundation estimates that a renewable energy system that begins operations in 2012 can sell its RECs at a rate of $0.012 per kWh in the project’s first year in service, increasing by $0.001 per kWh per year until it reaches a negotiated, predetermined cap.
Washington State law (RCW 19.285.040) allows RECs purchased from distributed generation facilities, including anaerobic digesters, with a rated capacity of 5 MW or less, to count at double the facilities’ output for the utility company purchasing the RECs. Therefore, one would expect that anaerobic digester owners should be able to sell RECs associated with their facilities at double the market REC price. However, the Washington State digester operators interviewed as part of this study sell their RECs, along with their produced electricity, to the local utility provider. They report receiving rates in the $0.01 per kWh range for their RECs. Therefore, the analysis initially assumes that the digester prototypes sell RECs at a rate of $0.01 per kWh in their first year of operation, increasing by $0.001 annually. The sensitivity of the financial feasibility of the prototype to a doubling of the REC price was also tested.
Substantial research has been and is occurring in Washington State regarding potential use of fiber produced as a by-product to a digester operation. Currently, most of the existing dairies that own or contribute manure to digesters use the fiber as bedding for their dairy cows, or sell it as bedding to neighboring farmers. The financial benefit from the avoided bedding cost to the farmer (and/or sale of the fiber) was calculated assuming production of 10 cubic yards of fiber per cow per year, with 50 percent of that fiber used as bedding (or sold) at an avoided cost (or price) of $9/cubic yard.
Research is also being done on nutrient extraction from digester effluent, which may be sold as fertilizer in liquid or pelletized form. Currently, most dairies that own or contribute manure to digesters use the liquid effluent on their own fields. Since the use of fertilizer by-products from the digester may only replace the use of manure itself, the benefit is difficult to quantify. The analysis did not assume any sales revenue or avoided cost from fertilizer, although this may prove a viable revenue stream in the future.
Some Washington digesters have benefited from tipping fees paid for the preconsumer food waste used as a feedstock. However, competition for preconsumer food waste has increased as more digesters have come on line, reducing the availability of, and price paid for, tipping fees. The feasibility of the prototype is analyzed with and without tipping fees. Tipping fee revenue, when included, is estimated at $12/ton of food waste used in the digester each year.
The carbon credit market is in flux and has yet to be stabilized. The baseline financial analysis assumes no revenue from carbon credits, while the sensitivity analysis examines the effect of carbon credit sales assuming 3.5 tons of carbon credits per cow, and a carbon credit price per ton of $8.00.
The American Recovery and Reinvestment Act (ARRA) of 2009 authorized facilities eligible for either the investment tax credit or the production tax credit to receive a grant instead of the tax credit. To be eligible for the grant, digester systems had to have begun construction prior to December 31, 2011, and be placed in service by December 31, 2014. Biodigesters remain eligible for the production tax credit. The tax credit equals $0.022 per kWh for open-loop biomass systems, such as dairy and waste biodigesters, and is taken over the first 10 years of operation.
Operating costs for the digester prototypes are estimated at $0.028/kWh based on research and interviews. This includes maintenance on equipment in the engine room at $.007/kWh, maintenance on the separator at $0.007/kWh, a long-term maintenance agreement for major problems at $0.008/kWh, and sinking fund at $0.006/kWh. It also includes daily monitoring costs and insurance costs estimated at a flat $20,000/year, escalated over time.
Electricity rates are escalated at 2.10 percent annually, based on the average annual increase in the payment schedules for the three IOUs. Other revenues (from fiber, tipping fees and carbon credits) are escalated at 2 percent annually. Operating costs are escalated at 4 percent annually.

Sensitivity Analysis Results

The findings of the financial sensitivity analysis are summarized in Table 1, for the 2,000-cow digester. The table shows the payback period for the loan and the internal rate of return (IRR) on equity over a 20-year projection period. With a target of a 7-year loan repayment and 15 percent or higher IRR indicating financial feasibility, highlights of the findings for the 2000-cow digester are as follows:
• With tipping fees, the prototype approaches feasibility at the Puget Sound Energy electricity purchase rate ($0.8826/kWh in year 1), assuming 10 percent waste feedstock (Scenario 2).
• Assuming 20 percent preconsumer waste feedstock, the prototype is feasible even at the lower Pacific Power electricity rate ($0.06542/kWh in year 1) (Scenario 7).
• Use of the production tax credit increases feasibility, however, most digester developers interviewed during the course of the study said that its use is impractical.
• A flush dairy, as opposed to a scrape dairy, with its assumed higher development costs and lower electricity production, is feasible with 10 percent preconsumer food waste feedstock, the higher Puget Sound electricity price, the production tax credit and a lower interest rate. (Scenario 13)
Because of the assumed higher development costs, the 750-cow digester is unfeasible under the scenarios tested. The results of the feasibility analysis provide guidance to digester development and point to the need for additional sources of equity (or “patient loan capital” that can be paid back over a longer period of time than the first mortgage), with the prospect of reasonable returns being paid on these funds, to spur digester development without grant funding.
Nora Lake-Brown and David Rosen are Principles of David Paul Rosen & Associates (DRA), a financial and development advisory firm (www.DRAConsultants.com). DRA was retained by the Washington State Housing Finance Commission to analyze the feasibility of digester development in Washington State.

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