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BIOGAS PLANT INVESTMENT ANALYSIS, COST BENEFIT AND MAIN FACTORS

Article · January 2009

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Andres Menind Jüri Olt

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ENGINEERING FOR RURAL DEVELOPMENT Jelgava, 28.-29.05.2009.

BIOGAS PLANT INVESTMENT ANALYSIS, COST BENEFIT AND MAIN FACTORS

Andres Menind, Jüri Olt
Estonian University of Life Sciences, Institute of Technology
andres.menind@emu.ee, jyri.olt@emu.ee

Abstract. The establishment of a biogas station is possible only with a large investment and a good answer to
these main questions. 1. Would it be profitable? 2. What are the risks? 3. Is the current support for the
establishment of a biogas station sufficient? 4. What are the main factors, which the funding depends on? 5. Is
the current buying price for renewable energy sufficient to make the biogas station a profitable venture? These
are some of the questions which this work strives to answer through model calculations. Also the graphed
payback periods of the main factors and prices are included in the event where the used discount rate is 13 %. By
using the model calculation, the quick changing of the variable factors, and finding the most important
components, profitability is proved to be possible.

Keywords: investment analysis, remuneration, subsidiaries, sensitivity.

Introduction, materials and methods

All parameters and characterizing values are put into the corresponding mathematical model in
EXCEL which are related to the example with the current article (see Normak, etc.). The quantity of
liquid manure which is used in the model calculation corresponds to about 400 head milk cow
complex. Also an optimum quantity of silage in the calculations is applied, as additional substrate.
Obviously, there are also other biodegradable wastes (municipal, agricultural) attached to the process,
which are usually possible to use in all potential sites of the biogas plant. This helps to contribute
significantly to the waste management organizing. The investment into technology is based on one
particular offer of Host Engineering in Energy. The size of the investment between the different
equipment providers does not differ much by size, so the resulting impact on the study is not
significant. In this case the discount rate for benefit-cost analysis is 13, the investors holding 60.9 %
and it uses all the main potential resources of subsidy for livestock, for heat utilization as well as
support for established bio-gas plants, which is 4.7 million EEK (about 213 640 LAT). Total cost of
the project is 20 975 438 EEK, and investors participation of it is 12 775 438 EEK. The rate of the
share capital is 11 %. The excess part of the investment is planned to be covered with a bank loan
(49.9 %).
The elements of the model which enable the input of raw data and to make changes in it, have
been excluded from the article, and are reported in the last table: “a project cash flow”, which also
reflects all the essential elements of this project numerically over the lifetime of the project. Length of
the loan period is accounted for 10 years, and the investment lifetime has been calculated for 15 years.
It is important to note that the model calculations have been made by the price of silo being
300 EEK t-1. The subsequent graphs of sensitivity show the impact of the silo price as a significant
increaser of the payback period. In this example, the expected discounted payback time is planned for
5 to 6 years.
Prices going up are index-linked for both purchase and sales prices, and it is possible to change
the amount of the index variable, this enables to count automatically the analysis of price changes
(increase) year by year, and it reflects the projected annual growth in the input prices (substrates and
heat selling price). The selling tariff of electricity is taken to account as 1.25 EEK kWh-1, which is 10
cents higher than the fixed purchase price of electricity.

Results and discussion

1. Simple and discounted payback time dependence of silo price

On the following Figure 1 the payback time sensitivity to the price of silo is shown. It appears that
there is not much room for the silo price to rise, so the simple and discounted payback time is shifting
rapidly over the desired payback period.

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ENGINEERING FOR RURAL DEVELOPMENT Jelgava, 28.-29.05.2009.

Table 1
Cash flow from investing activities (MS EXCEL)

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ENGINEERING FOR RURAL DEVELOPMENT Jelgava, 28.-29.05.2009.

500

Silo price, EEK/t

400

300 Simple
200 Discounted

100

0
1 2 3 4 5 6 7 8 9 10
Time, year
Fig. 1. Simple and discounted payback time depending on the silo price
(electric sales tariff 1.25 EEK kWh-1)

2. Simple and discounted payback time dependence on various electric sales tariffs
On the following Figures 2-4 the silo price and electric sales tariff impact on the biogas plant, on
simple as well to discounted payback time at different prices of silo is shown. It appears that even
small changes in the silo price and electric sales tariff significantly inflect the payback period.
12

10 10
Time, year

8 8 Simple
6 6,5 6,5 6 Discounted
5,5 5 5,5
4 4,5 4,3 El sales tariff

2 1,5 1,6
1,15 1,25 1,35 1,4
0
Electric sales tariff, EEK/kWh
Fig. 2. Payback time dependence on electric sales tariff (on silo price 300 EEK t-1)
14

12 12
10
Tieme, year

8 Simple
7 7,5
6,5 Disconted
6 5,5 5,5
5 4,5 5 El sales tariff
4 4
2 1,5 1,6 1,7 1,8
1,25 1,4
0
Electric sales tariff, EEK/kWh
Fig. 3. Payback time dependence on electric sales tariff (on silo price 350 EEK t-1)

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ENGINEERING FOR RURAL DEVELOPMENT Jelgava, 28.-29.05.2009.

16
15
14
12
Simple
Time, year

10 10
Disconted
8 8
7 El sales tariff
6 6,5
5,5 5 5,5 5
4 4,5 4
2 1,25 1,35 1,5 1,6 1,7 1,8
0
Electric sales tariff, EEK/kWh
Fig. 4. Payback time dependence on electric sales tariff (on silo price 400 EEK t-1)

3. Profitability and Policy

The baseline calculation of this project has been done with a discount rate of 13 %. In this case,
the payback time is approximately 8 years. Simple payback time is being 5.5 years. Using the 13 %
discount rate, the internal rate of return (IRR) is 14 %, so it is also close to the limit on the
discounting, which means that the project is still cost-effective. The discount rate of 13 % is a result of
the relatively large risk of investment in this area. Based on the project baseline data, current prices,
and available financial support, it is not possible for the project to achieve the needed discounted
payback time by the 5th to 6th year of operation. Since in the model calculation we use the subsidy for
the development of livestock manure management and as well for heat transfer, which is not always
possible, hence the real payoff may be much longer. This would require higher subsidies to the
establishment of the biogas plant or we need to presume to increase the electricity tariff. Table 1 on
NPV (Net Present Value) graph is shown as NPV dependence on a discounted rate of return.
The government politics are also skeptical of the bio-energy industry. Consequently, as a result of
such skepticism the bio energy sector is out of attention. The government has show its initiative and
desire to increase the share of renewable energies in national energy production, but it may be
implemented in other ways, such as wind power supporting.
The analysis carried out by “Ernst & Young Baltic AS” found that the most critical risks, which
pose a threat to the bio-energy field in Estonia are related to the raw materials, land low exploitation,
and governmental policy and behavior in developing this industry
(http://www.bioenergybaltic.ee/?id=1307 summary).

Conclusion
1. When the manufacturing methods of biogas are competently selected there are additional benefit
factors to saving nature and costs of testing and other means. To reap additional benefits, as
energy yield, these methods need to be applied at the standard recycling and utilisation processes.
2. From the result estimations, according to the current example, the 13 % discounted price payoff
period is 8 years. This is a period, which is not attractive to the investor, and it would make
getting bank loans difficult if not questionable.
3. Also, here we have used for the price of silo (300 EEK t-1), which is close to the cost price and is
not sufficient without the support of the energy-crop growing fund and may not be even enough
with that to evoke the interest in silo production.
4. When investigating the changes of investment analysis about electricity sale tariffs also during a
small rise (0.25 EEK kWh-1) we see major changes in shortening the payoff period (- 2.5 years),
which would make the project feasible. At the same time the rising price of silo (+50 EEK t-1)
would cause a noticeably longer recoupment period on investment. It is also certain that the
biogas production facility grant of 4.7 m EEK per one described functioning factory is
exceptionally modest and accrues from the whole relatively small biogas station only 22.4 %.

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5. Currently the sale of renewable energy is also calculated for the consumer separately and
therefore there is no problem to calculate it with any justified price. Consequently, profitability is
therefore dependent on politics and on the changes in the law of energy marketing.
6. The effectiveness to use the fund depends on the enforcement of the Estonia’s agrarian
development plan 2007-2013 bio-energy production investment aid measure 1.4.3. When the
objective is to support as many projects as possible the obstacle can become the curtailing of these
projects for economic reasons, and the fund may become unused, or its means will not be used for
establishing biogas factories. Similarly, if to support establishing a smaller number of biogas-
factories in a range that would be sufficient to attain an optimal investment payoff period these
factories would fulfil their objective answering the environmental and energy problems.
7. Biogas factories would be possible and profitable in Estonia after few small changes in the
legislation, support schemes, and in the politics of energy-economy. The minimal sufficient price
for electricity in this situation would be 1.5 EEK kWh-1.

References
1. Normak, A., Kaasik, A., Menind, A., Jõgi, E., Oper, L. 2007 Biogaasi tootmisvõimaluste
eeluuring Vinni piirkonnas lõppraport, EMU, 23 lk.
2. Mansberg, M.(tõlkija), Normak, A., Volmer, E., Orupõld, K., Kaasik, A., Kask, Ü. (toimetaja).
2008. Biogaasi tootmine ja kasutamine, Käsiraamat. Eesti Põllumeeste Keskliit, 158 lk.
3. Ernst & Young Baltic AS, 2008. Bioenergia tururegulatsioonid Eestis. Tallinn 2008, 182 lk.
Kättesaadav:
http://www.bioenergybaltic.ee/bw_client_files/bioenergybaltic/public/img/File/EYMESRaport_K
oondraport.pdf.
4. Olt, J., Lepa, J., Jõgi, E., Menind, A. 2007. Biogaasi tootmistehnoloogiad. Taastuvate
energiaallikate uurimine ja kasutamine. Kaheksanda ja üheksanda konverentsi kogumik. Tartu,
2007, 128 lk.

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