The Financial Feasibility of US and Indian Biogas-projects

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The Financial Feasibility

of US and Indian Biogas-projects

A Monte Carlo simulation for studying the involvement of different variables in the

business model of a Biogas plant

Plans based on average assumptions will be wrong on average.

University of Groningen

Faculty of Economics and Business

MSc Business Administration (specialization Finance) Mai 2011 Maurice (M.) Markerink Haydnlaan 13 9722 CB Groningen Maurice.markerink@gmail.com Student number: 1273086

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2 M. Markerink University of Groningen

ABSTRACT ______________________________________________________________________________________ 3 PREFACE ________________________________________________________________________________________ 3 INTRODUCTION _________________________________________________________________________________ 5 1. RESEARCH DESIGN __________________________________________________________________________ 6

1.1. RESEARCH OBJECTIVE AND PROBLEM DEFINITION ___________________________________________________ 6 1.2. RESEARCH QUESTION ________________________________________________________________________ 6 1.3. SUB QUESTIONS ____________________________________________________________________________ 6 1.4. BOUNDARY CONDITIONS _____________________________________________________________________ 6 1.5. DATA ____________________________________________________________________________________ 6 1.6. SCIENTIFIC RELEVANCE ______________________________________________________________________ 7

2. BIOGAS – PREFATORY REMARKS ____________________________________________________________ 8

2.1. BIOGAS __________________________________________________________________________________ 8 2.2. NATURAL GAS ____________________________________________________________________________ 10

3. GLOBAL DEVELOPMENTS __________________________________________________________________ 11

3.1. MAJOR ENERGY DEVELOPMENTS SINCE WEO2006 _________________________________________________ 11 3.2. ENERGY INVESTMENTS AND FINANCING MECHANISMS _______________________________________________ 13 3.3. COPENHAGEN AND GOVERNMENT POLICIES _______________________________________________________ 14

4. EUROPEAN BIOGAS MARKET. ______________________________________________________________ 16

4.1. GERMANY _______________________________________________________________________________ 18 4.2. ITALY __________________________________________________________________________________ 19 4.3. UK ____________________________________________________________________________________ 19 4.4. FRANCE _________________________________________________________________________________ 20 4.5. THE NETHERLANDS ________________________________________________________________________ 20 4.6. DENMARK _______________________________________________________________________________ 22 4.7. OUTSIDE EUROPE __________________________________________________________________________ 26

5. BIOGAS MARKET IN THE USA AND INDIA. ___________________________________________________ 28

5.1. USA ___________________________________________________________________________________ 28 5.2. INDIA ___________________________________________________________________________________ 33

6. CONTEXT SPECIFIC VARIABLES ____________________________________________________________ 43

6.1. CONTEXT SPECIFIC VARIABLES IN THE NETHERLANDS _______________________________________________ 45

7. METHODOLOGY ___________________________________________________________________________ 52

7.1. UNCERTAINTY ____________________________________________________________________________ 52 7.2. MONTE CARLO SIMULATION _________________________________________________________________ 53

8. DATA ______________________________________________________________________________________ 60

8.1. USA ___________________________________________________________________________________ 60 8.2. INDIA ___________________________________________________________________________________ 70

9. SIMULATION AND RESULTS ________________________________________________________________ 74

9.1. RISK MEASUREMENTS_______________________________________________________________________ 74 9.2. USA ___________________________________________________________________________________ 75 9.3. INDIA ___________________________________________________________________________________ 86 9.4. COMPARISON US VS INDIAN BUSINESS CASE ______________________________________________________ 91

10. CONCLUSION ____________________________________________________________________________ 96

10.1. MAIN DIFFERENCES US AND INDIAN BUSINESS CASE. _____________________________________________ 96 10.2. USMARKET ___________________________________________________________________________ 97 10.3. INDIAN MARKET ________________________________________________________________________ 98 10.4. LIMITATIONS OF THIS RESEARCH AND SUGGESTIONS FOR FURTHER RESEARCH ___________________________ 99

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Abstract

With renewable energy becoming worldwide more important from both an emission reduction perspective as well an energy security perspective, more research is being done on the feasibility of different types of renewables. Were previous studies mainly focused on small scale biogas plants, within developing countries, this research is focused at the financial feasibility of large scale biogas plant in the US and Indian market. These two countries have been chosen in order to determine the feasibility in a developed and less-developed country. For determining the financial feasibility a Monte Carlo simulation has been performed to determine the Net Present Value (NPV) under varying circumstances. Country specific data has been collected through internet and empirical data has been received from EnviTec Biogas AG and EnviTec Biogas India Limited. For each country, specific variables have been analyzed and distribution curves have been estimated. Based on the distribution curves a Monte Carlo simulation has been performed.

The results shows that most Indian scenarios show a positive NPV whereas only the “inside the fence” scenarios in the US show a positive expected NPV. Secondly the Indian scenarios outperform their US counterpart scenarios. Remarkable is the fact that the Indian projects, under circumstances, would be feasible without CER revenues.

Reasons why the Indian scenarios perform better are: lower investment costs per MW as of cheaper labor, a stressed Indian energy market caused by large power deficits and therefore electricity prices are increasing, abundance of local biomass available and a high demand for a good organic fertilizer. Especially the Indian Business model shows its strengths in the decentralized regions, which gives it enormous opportunities to copy-paste in other decentralized regions within India. The feasibility of the US model however, is limited to site-locations close to industries with high energy demands.

Key words: Monte Carlo Simulation, Net Present Value, Biogas, Anaerobic Digestion, India, USA

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Preface

As I did an internship at a Biogas company in Germany (EnviTec Biogas AG) I had the possibility to do market research on the American and Indian market. While in Europe most countries have

subsidies for renewable energy production, mostly an incentive per kWh or tax deduction on total investments, the investments in Biogas plants are economically feasible. Compared with the US and India this differs, which makes it interesting to look at the feasibility of plants in such countries and which context specific variables play an important role in this feasibility.

The objective of this research is to measure the feasibility trough an economic model. This economic model should take into account different context specific variables which determine the feasibility of a biogas plant.

Therefore the main problem statement is as follows:

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Introduction

The global economy is set to grow four-fold between now and 2050 and growth could approach ten-fold in developing countries like China and India (IEA (2008a)). On the one hand this means huge improvements in people‟s standards of living, but on the other hand involves a significant increase in energy usage. The world energy outlook of 2007 (IEA (2007)), reports that the trends in energy demand, imports, coal usage and greenhouse gas emissions to 2030 are even worse than projected in 2006. In order to secure our energy supply and reduce our greenhouse gas emissions, investments in alternatives are essential. Renewable energy sources are one of these alternatives. If we look at the different renewable energy (RE) technology sectors we can divide them in the following sectors: Wind, Hydro (water), Solar, Biofuels, Biomass and Waste. This thesis will be focused on the Biomass and Waste sector especially on large scale biogas facilities.

Biogas is produced by fermentation of a mixture that includes crop waste, liquid waste streams and maize, often in combination with manure. Nowadays, biogas is mainly used to produce electricity and heat through a so called CHP-unit1. But there is a more sustainable and more efficient option:

upgrading the biogas and returning it to the gas grid. Biogas that has been upgraded to natural gas quality is called „green gas‟.

In Europe in 2009 about 25 TWh2 is produced out of Biogas of which almost 11 TWh is produced by agricultural plants in Germany (EurObserv‟ER (2010)). In 2009 Germany had almost 5000

agricultural biogas plants operational, with an installed electrical capacity of 1893 MW3. The total electricity production contributed to 2% of the total German electricity consumption (Fachverband Biogas (2010)).

Whereas in Europe, most countries have regulated feed in tariffs, which incentivises every produced kilowatt-hour, this differs in countries outside Europe.

As these incentives in Europe, at this moment, are essential for making a project feasible, it is

interesting and certainly a must to have a look at the variables which are influencing the feasibility of the investment especially in countries outside Europe.

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1. Research Design

1.1. Research objective and problem definition

The objective of this thesis is to study the feasibility of the investment in large scale biogas plants in the USA and India. This research will be focused at the different context specific variables which are influencing the feasibility. Trough an economic model, which takes into account different variables, the NPV should be calculated under varying circumstances.

1.2. Research question

Is the investment in large scale biogas plants, in the USA and India, financially feasible under the different context specific variables?

1.3. Sub questions

In order to further structure the research the following sub questions have been formulated:

1. What are the developments in the World Energy Outlook since 2006? 2. What is the current status for large scale biogas plants in Europe?

3. What is the current status for large scale biogas plants in the USA and India?

4. Which variables are affecting the feasibility of the investment in the USA and India?

1.4. Boundary conditions

Boundary conditions with respect to the research include:

- The research is primarily focused on large scale biogas plants (≥1 MW).

- This thesis focuses on the feasibility of investments in biogas plants in the USA and India.

Boundary conditions with respect to the process:

- The research study will have to comply with general rules and prescriptions for scientific research and thesis writing as is set by the University of Groningen.

1.5. Data

In this thesis the following sources will be used:

- Literature: studies about biogas developments, regulatory frameworks and investment analysis for renewable energy sources.

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1.6. Scientific Relevance

It would be interesting to see which context specific variables in different countries, especially developed and less developed countries, are influencing the feasibility of the investment most.

Combining these variables in one model can give both parties, buyer and seller, a better perspective of the benefits or disadvantages of investing in biogas. Next to this, as said above, energy demand is becoming larger in a country like India and less dependency becomes more important also in the USA. If we look at India we see that biogas has a long history in this country mainly in rural areas. In order to supply families in rural areas with their own cooking fuel small, families have built their own small biogas plant next to their homes.

Especially the fact that this research is looking at the feasibility of investment decisions on a single project for large scale biogas plants, running on more than only manure as a feedstock, in different countries makes it interesting but certainly new. Most research done till now is based on small scale biogas plants (Rubab and Kandpal (1995)); Singh and Sooch (2004); Purohit (2007)) whereas we already see that in for example the Netherlands there is a scale-effect for digesters (Kort (2005)) which might also be the case in other countries. A reason why large scale digestions has not been studied more in depth, is because only after 2000 large scale digester became economically viable, especially in Europe, due to higher energy prices and incentives like feed in tariffs. This stimulated the

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2. Biogas – Prefatory Remarks

2.1. Biogas

Biogas is a methane (CH4) rich gas which originates from the anaerobic (oxygen free) digestion of organic matters. A biogas plant is a facility in which the biogas is produced. There is a wide range of organic materials which can be used to produce the biogas; among these is manure, energy crops like maize silage, and organic industrial wastes like fats or food waste also called OFMSW5. Depending on the product characteristics, every type of product can be converted in a certain amount of biogas. With the composition of these input materials it is possible to determine the specific total biogas production and to see if the combination of products can be used together.

The manure and other organic materials are mixed together and dosed into the digester, where the biogas is produced. This digester is a concrete tank which is continuously heated at about 37°C; this is called a mesophilic process in which the bacteria convert the organic materials into biogas. The volume of the digester can be varying between 2500m3 and 4500m3. Due to the fact that the mix, which is dosed into the digester, has to be stirred the maximum volume of the digester is limited. The total biogas production per hour and with this the electrical output of the biogas plant is depending on the volume of the digester and the input materials used.

This biogas can be used in a CHP (combined heat and power) station or upgraded to natural gas quality. On average the biogas contains 55% methane (CH4) and 45% carbon dioxide (CO2) and possible some nitrogen (N2), hydrogen (H2), hydrogen sulphide (H2S) and Oxygen (O2).

The CHP station produces electricity and heat. The electricity will be fed into the grid and the heat can be sold to a district heating system or used for local farm heating or other purposes.

In order to upgrade the gas to natural gas quality, the methane content has to be upgraded and the CO2 has to be removed. Hereby it is possible to upgrade the biogas to a gas with a methane content of 97% and inject it into the grid.

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Figure 1

Working principle of a biogas plant

This figure gives an overview on the production process of energy out of biogas. From the different feedstock, to the preparation, the digestion, and finally the production of energy in the form of electricity or natural gas.

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2.2. Natural gas

The WEO 2007 (IEA (2007)) predicts in the coming years the world wide demand for natural gas will grow by 2.1% per year (Reference scenario).

Beside this the IEA expects the share of oil in power generation to decrease from 7% to 3% in 2030, while the share of gas-fired generation grows from 20% to 23%. The share of renewable sources, other than hydro, will continue to grow from 2% now to about 7%.

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3. Global Developments

3.1. Major energy developments since WEO6 2006

A number of events led to a tightening of global energy markets, helping to drive up prices. Oil supplies from Nigeria were disrupted as a result of the civil conflict in the Niger Delta. In mid-2007, a total of 750 thousand barrels per day was shut in (IEA (2007)). Civil unrest in Iraq has continued to disrupt oil production, technical problems in the US refining sector causing additional tightness in the global refining capacity. The well known conflict in 2007, between Russia and some of his neighbours about oil and gas pricing and transit fees, caused great worries in many European importing countries over the security of supply. “Despite these various constraints and rising demand, the OPEC7

announced a production cut of 1.3e mb/d8 in November 2006 and a further 0.5 mb/d cut in February 2007. In the face of rising prices, OPEC agreed to raise output by 0.5 mb/d in September 2007” (IEA (2007)). When comparing the world oil supply and demand side (IEA (2010a)), demand of 86.7 mb/d during the whole of 2007 was larger than the supply of 85.5 mb/d, which can be seen as a cause of the price increases but also as an increasing uncertainty in oil delivery. Although the OPEC increased oil supply in the beginning of 2008 with more than 2.0 mb/d prices rose till July 2008 to over $140 (see Figure 2) per barrel.

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Figure 2

Europe Brent Spot Price FOB

Source: U.S. Energy Information Administration

Nevertheless, although oil prices were declining in the second half of 2008, it has to be mentioned this has several causes which did not exclude future oil price increases. First of all, the credit crunch, falling house prices, and food and energy inflation will effectively continue to constrain consumer spending as real incomes will at best remain stagnant (IEA (2008b)) which at this moment means oil demand in OECD countries is decreasing. Next to this oil stocks are increasing because of lower demand which causes lower oil prices (IEA (2008b)). Probably the most important factor for the future is the increase in energy demand by countries like China and India.

The WEO of 2009 confirms again the drop in global energy use, due to the financial and economic crisis, but also assumes that, on current policies, it would quickly resume its long-term upward trend once economic recovery is underway. Due to the sharp demand drop of 2009, the average demand during the period 2007-2010 declines marginally. It is assumed that the demand growth will rebound thereafter averaging 2.5% per year during 2010-2015. Developing Asian countries are the main drivers of this growth, whereas OECD oil-demand will actually fall (IEA (2009)).

The inexorable growth demand in energy needs for power generation is the main driver of demand for coal and gas. By 2030, globally, a total addition of 4800 gigawatts (GW) to power-generation capacity is estimated - almost five times the existing capacity of the United States. Over 80% of this growth takes place in non-OECD countries (IEA (2009)).

Within the Reference Scenario of the IEA the use of non-hydro modern renewable energy

technologies sees the fastest rate of increase. Most of it is in power generation, among which Biogas is one of the alternatives.

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The consequences for Europe, America, India, China and the rest of the world are, however, alarming. If current government policies are continued, the world‟s energy needs would be well over 50% higher in 2030 than today (IEA (2007)). 45% of this demand is coming from China and India. This scenario will lead to continued growth in energy-related emission of greenhouse gasses and to increased dependency for countries concerning the import of oil and gas. Therefore, immediate and collective worldwide policy action is essential to move onto a more sustainable energy path.

3.2. Energy investments and financing mechanisms

These concerns about climate protection and energy security are reflected by the investments done in the last three years. The report of UNEP (2008) shows that new investments in sustainable energy worldwide, have increased more than fourfold from $33.2 billion in 2004 to $204.9 billion in 2007. Asset finance was the main driver for the strong growth in new investments. In 2007, $84.5 billion was invested in building new sustainable energy assets, up 68% on 2006‟s $50.3 billion. Beside the increase in investment public market activity surged in 2007, with $23.4 billion raised, against $10.5 billion in 2006 (UNEP (2008)).

According to UNEP (2007) some commentators compared the surge in sustainable energy investment with the technology boom of the late 1990s and early 2000s. However the growth in the clean energy sector has continued longer and is showing no sign of abating. Last but not least renewable energy is a result of growing energy demand and is underpinned by regulatory support (which the dotcom boom did not have), as well as considerable tangible assets backing by manufacturers and project developers.

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14 M. Markerink University of Groningen Beside, cutbacks in energy-infrastructure investments also threaten to impede access by poor

households to electricity. According to the latest report of the IEA on Energy Poverty (IEA (2010b)), there are currently 1.4 billion people, some 15% of the world‟s population, around the world that lack access to electricity, mainly in rural areas. Beside these people currently rely on the traditional use of biomass in inefficient stoves. It is estimated that household air pollution from the use of biomass in these stoves would lead to over 1.5 million premature deaths per year in 2030, greater than estimates for premature deaths from malaria, tuberculosis or HIV/AIDS.

These required extra investments are more or less equally distributed between OECD+ countries and the rest of the world. Though it is widely agree that developed countries must provide more financial support to developing countries in reducing their emissions, the level of support, the mechanisms for providing it and the relative burden across countries are matters for negotiation (IEA (2009)). It is assumed that the international carbon market will play an important role as a financing mechanism.

3.3. Copenhagen and government policies

The Copenhagen Accord and the commitments done by the countries to reduce their greenhouse-gas emissions, collectively fall short of what would be required to achieve the accord‟s goal of limiting the global temperature increase to 2°C. According to the WEO 2010 (IEA (2010c)), with these

commitment, rising demand for fossil fuels would continue to drive up energy related CO2 emissions. Hence, such a trend would make it all but impossible to achieve the 2oC goal as the required

reductions in emissions after 2020 would be too steep.

The future energy outlook will therefore depend heavily on global government actions. Recent

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4. European biogas market.

According to EurObserv‟Er (2010), the biogas sector has never before aroused so much attention as it does today. Gradually the sector is deserting its core activities of waste cleanup and treatment and getting involved in energy production. Across the European Union primary energy growth, out of biogas, leapt by a further 4.3% in 2009, with 25.2 TWh11 electricity being produced, see also Table 1.

Biogas has the advantage of reconciling two European Union policies (EurObserv‟Er (2010)):

1. The main objective of the Renewable Energy Directive (2009/28/CE) that is aiming for a 20% renewable energy share in gross final energy consumption by 2020.

2. The European organic waste management objectives enshrined in European regulations (Directive 1999/31/CE on the landfill of waste). This directive requires Member States to reduce the amount of biodegradable waste disposed of in landfills and beside (Directive 2008/98/EC) to implement laws encouraging waste recycling and recovery.

According to EurObserv‟Er (2010), methanisation is considered to be the best environmental waste energy recovery method. Beside, as mentioned earlier, biogas energy can be recovered in several ways. Within Europe the main part is recovered in the form of electricity. From the 25.2 TWh, 53.4% was produced in “other biogas” methanisation plants (purpose-designed methanisation plants for energy recovery), 37.2% by landfills and 9.4% by water treatment plants.

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Table 1

Gross Electricity output by gas deposit in the European Union in 2008 and 2009 (in GWh)

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18 M. Markerink University of Groningen Based on these policies, several Member States have encouraged biogas production by incentive systems like feed-in-tariffs, green certificates or tenders.

A short overview of the current status, in the most important European Biogas countries will be given. After which a more detailed view on developments in the Netherlands and Denmark will be given.

4.1. Germany

The German Government especially incentivizes agricultural biogas plants, a.o. by encouraging the planting of energy crops. Since 1999 Germany has a Feed in Tariff for Biogas plants, incentivizing every kWh produced. In 2004 there came an amendment on the existing act, which introduced the so-called “Nawaro-Bonus”, this premium gives an extra incentive per kWh electrical, in case the biogas plant is using energy crops like maize silage.

As an example, for a Biogas plant with an installed capacity of 500 KW the following rates will apply:

- 9.18 eurocent per kWh for biogas plants up to 500 KW. Additional

- 7.00 eurocent per kWh in case energy crops are being used - eurocent per kWh in case at least 30% of the input is manure

- Up to 3.00 eurocent per kWh in case the produced heat is being used

- 1.00 eurocent per kWh in case NOx and Formaldehydes emissions are reduced. This totals to more than 21 eurocent per kWh.

As a result of this strategy, Germany is the leading European Biogas producer, accounting for 50.5% of European primary energy output and 49.9% of biogas-sourced electricity output in 2009

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19 M. Markerink University of Groningen 4.1.1. Biomethane

Together with the growth in Biogas plants producing electricity, Germany in 2008 introduced a law giving biomethane suppliers priority to the grid, which caused outstanding growth in biomethane injection. According to the German energy agency, DENA, Germany already had 35 upgrading plants in 2009 feeding 190 million Nm3 of biomethane. A further thirty is expected to be connected to the grid during 2010 raising biomethane production to 380 million Nm3 (EurObserv‟Er (2010)). For 2010 the 380 million Nm3 biomethane would be equal to around 185 MWe, which is more than 8% of the expected electrical capacity in 2010 whereas it only comprises 1,1% of the total number of plants.

This clearly shows the advantage of gas upgrading plants, as it is possible to build larger plants in regions where biomass is available and then inject this biomethane into the gas grid and transport it to locations where the it can be used most efficiently, meaning both electricity and heat. The objectives of the German Government is to produce 6 billion m3 by 2020 and 10 billion m3 by 2030 almost 10% of the German natural gas consumption (VDI (2010)).

4.2. Italy

Europe‟s number four biogas producer in 2009 was Italy, with 444.3 ktoe as primary energy production increased by 8.4% over 2008 and electricity production by 8.8%.

Within the coming 5 years the Italian government is expecting to construct at least 2000 MWe13, whereas currently around 200MWe is installed and operational.

That the expectations are high, is being caused by the feed-in tariff set in 2009 for biogas electricity generated from agricultural feedstock at €0.28 / kWh. This tariff, only applicable for biogas plants smaller than 1 MW, is the highest in Europe.

4.3. UK

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20 M. Markerink University of Groningen Since 2010, there is a new Feed in Tariff for farm-scale biogas plants, up to 500 KW, with around €0,16-0,17 per kWh, whereas in 2011 a heat premium is expected. With these steps the UK is also moving forward to a more farm-based biogas system, by adapting the German system, but at the same time their input is not restricted to energy crops. Because of the restrictions on extra landfills, the current high landfill prices (gate fees) and the deficit on incineration capacities, the UK expects that methanisation is a good alternative for waste management. Therefore it is expected that the number of (large scale) waste methanisation plants will increase rapidly within the coming 5 years.

4.4. France

Biogas production in France is highly underdeveloped compared with the German market. In 2009, see table one. Only 45.1 GWh15 is produced in “other biogas” systems, i.e. plants specially designed to produce energy, which is just a fraction of the German production.

Knowing that France has the highest amount of arable land in Europe, 18.5 million hectares compared with 11.8 million in Germany (Nielsen and Oleskowicz-Popiel (2007)), makes clear that there is a great potential to develop farm-scale biogas plants.

The reason for this under development is mainly caused by the unattractive feed-in tariff. Biogas plants get an incentive of 11.3 eurocents plus an addition 3.1 eurocent if more than 75% of the heat produced is being used. This totals to 14.4 eurocent. Without investment subsidies or gate fees (receiving money to treat waste), investments in these plants do not generate enough return.

Experience by EnviTec, within the French market is that current methanisation plants which are under construction all receive an investment subsidy of 20 to 25%, next to the feed-in tariff. Beside for the first two to three years it is calculated, that the waste treated in these facilities will bring a revenue stream (acceptance fee) of €25 to €35 per ton.

4.5. The Netherlands

Digestion in the Netherlands has been a topic discussed already since the first oil crisis in the 1970s. Both Raven (2004) and Negro e.a. (2007), explain in their article that the development of biomass digestion in the Netherlands has been very sporadic and fluctuated substantially.

Because of lack of continuity and stability in government regulations, also due to changing

governments, and unanimity between Ministries on biomass digestions, there hasn‟t been a long term focus, and neither a chance, to develop a strong biogas industry in the Netherlands.

Whereas in the 1970s and 1980s the focus was on Energy Production, by the end of the 1980s

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21 M. Markerink University of Groningen In a technological sense it has become a mature technology, caused by the several actors experimenting with manure digestions since the 1970s. Nevertheless, because of the mismatch between informal design rules in the electricity regime and formal rules in the agricultural regime, implementation of the projects has been problematic. One reason was, in order to optimize biogas production and returns on investment, co-digestions (adding waste products) were required. At the same time however spreading this co-digested manure on agricultural fields was in violation with the agricultural regime.

In 2004 the Dutch Government finally agreed on a positive list of products which were allowed to co-digest, and at the same time introduced the MEP16. This Feed-in Tariff, made it possible to implement large-scale biogas plants, up to 5MW.

In 2006 the MEP was suddenly stopped, because of the unexpected high number of subscriptions, causing a deficit on the budget. Shortly after this announcement the Dutch Government collapsed, causing more uncertainty on the future of biogas plants in the Netherlands.

Since 2008 the SDE17 has been in place, which is being revised every year. Due to insufficient budget, the proposed incentive per kWh has been too low to realize projects. Only since the revision of 2010 there have been started a few new projects. Unfortunately after the collapse of the Dutch Government in 2010, it will probably again take some time to introduce a new tariff.

What in general is been seen as an important opportunity for anaerobic digestion, is the production of biomethane, also called “green gas” in order to replace natural gas. A study done by the study group “groen gas” (Wempe & Dumont (2007)), concluded that by 2020, 8 to 12% of the natural gas can be replaced by upgraded biogas. Since 2008 the SDE also included a separate budget for biomethane upgrading plants, in order to stimulate the production of biomethane. Especially due to the highly developed gas-infrastructure, the Netherlands could play an important role to showcase these systems18.

Summarizing it can be said that the Dutch Government played a crucial role in the Dutch biogas market. With the current production of 915 GWh, the Netherlands still have the fourth position, but this is mainly due to the fact that other European countries only started their developments in the last years. Looking forward, with the expertise available from the last 30 years, the current gas

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4.6. Denmark

In the field of wind energy Denmark is by far the most successful country. However in the field of biogas, since the first energy crisis in 1973, a substantial technology development has taken place too. Denmark together with Germany and the Netherlands were the frontrunners in Europe for promoting Biogas. Likewise as in the Netherlands, the main drivers for Biogas have changed throughout the years, from energy reasons to environmental reasons and finally to a combination of both.

Nevertheless it can be said that a lot of knowledge, nowadays used within the biogas market, has its origin in the Danish biogas market, especially the centralised biogas plant concept.

Denmark, as was also the case in the Netherlands, began to develop alternative energy sources in the 1970s as a result of the first oil crisis. The energy crisis in 1973 stimulated farmers, research centres and technology companies to investigate energy generation from manure. The program was called the STUB program19. Generally the programme demonstrated that biogas technology was by no means trouble-free. Because lack of technological and biological knowledge, from 21 registered biogas plants only nine were more or less in stable operation (Raven & Gregersen (2007)) but biogas yields

remained very much below the expectations (see Table 2).

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Table 2

Original calculated and afterwards realized biogas production per day.

This table shows the originally calculated biogas production per day in 1981 and the realized production in 1982 in m3 per day and the realized percentage of the calculated production (source: Raven & Gregersen 2007).

Location Digester Size

(m3) Calculated Production in 1981 (m3 / day) Real production in 1982 (m3 / day) Real production / calculated production (%) Stenderup 45 63 45 71.4 Elsted 4*220 1232 17 1.3 Vilstrup 2*150 435 160 36.4 Sjoulundgard 6*60 504 180 35.7 Hjelmerup 100 140 80 57.1 Brested 100 140 85 60.7 Assendrup 2*200 560 150–200 26.3–35.7 Grasten 2*180 504 350 69.4 Gadebjergard 360 504 200 39.7 Lejre 20 28 6 21.4

Several problems caused this abandonment. Increasing oil prices created expectations about alternative energy production. The problem was most actors involved had hardly any experience with (manure) digestion. Farmers had no experience with operating such a plant, there were no specialised

construction companies (plants were constructed by farmers themselves) and technical problems caused numerous downtimes. Technical optimisation did not solve the problems, whereby farmers began to lose interest.

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24 M. Markerink University of Groningen 4.6.1. Centralised biogas plants

The first idea of larger (centralised) plants emerged in the early 1980s. The idea was to develop a centrally based biogas plant, which is supplied with liquid manure from a number of farmers in the region. In addition, organic waste from food processing industries and sometimes households is supplied. In most cases the transport to and from the plant is done by trucks. According to Raven and Gregersen (2007) “the biomass mix is processed for 10-25 days. During this process the biogas is produced and converted to electricity and heat in a CHP unit. Finally the digested manure is transported to storage tanks at the farms or near the fields where in the end it is used as an organic fertiliser” (see Figure 3). It was especially here that they experienced that manure only digestion wasn‟t economically viable and hence other biomass like organic waste from food factories was required. This increased biogas production per cubic meter digester volume and hence per unit of invested capital. Beside in order to treat this waste, the biogas plants would receive a gate fee in order to treat the waste in their facilities. This would imply a win-win situation for both parties because biogas plants would earn money and the industry has a cheaper alternative for handling their waste.

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Figure 3

The centralised biogas plant concept in Denmark

This figure is showing the concept of a centralized biogas plant. Manure is transported from surrounding farms and organic waste from surrounding industries either by truck or pipeline. The products are mixed and then digested in the biogas plant after which the electricity and heat are sold and the digested product, which is a

fertilizer, is transported back to the storage facilities at the farms.

In 1987 the Danish state took over the role as the main public actor. Despite the changing

circumstances in the oil sector, oil prices decreased enormously, the government decided to stimulate the construction of decentralised heat and power plant. District heating was an established

infrastructure in Denmark, but most plants only produced heat (Raven & Gregersen (2007)). The idea was to convert the boilers into CHP plants, which would run on natural gas or biomass in case there was no natural gas grid (rural areas are about one quarter of Denmark). Centralised Biogas plants were one of the options to fulfill the needs.

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26 M. Markerink University of Groningen A second important factor which stimulated the development of biogas was the changing agro-environmental framework in Denmark (like in the rest of Europe). The Danish Environmental Protection Agency (EPA) published a report on the pollution caused by nitrate leaching from

agricultural land (Raven & Gregersen (2007)). This resulted in the fact that farmers had to store their manure between 6-9 months and they were only allowed to spread the manure when the risk of nitrate leaching was low. Beside this, the EPA published the Water Environment Action Plan I which

regulated the number of animals per hectare as well as the maximum input of nitrogen per hectare. The surplus of manure had to be distributed and therefore farmers started to participate in centralised biogas plant organisations in order to outsource the transportation and distribution of manure. As pointed out both energy and environmental/ agricultural reasons finally became a reason to support biogas developments.

4.6.2. Governmental support

The developments which have taken place in Denmark are partly explained by the long term governmental support. As Nielsen (2007) mentions, the development depend on the framework conditions which was laid through the coordinated public-private cooperation.

Raven & Gregersen (2007) argue that three factors have been important for the current status of biogas plants in Denmark. First, “the Danish government applied a bottom-up strategy and stimulated

interaction and learning between various social groups. Second, a dedicated social network and a long-term stimulation enabled a continuous development of biogas plants without interruptions until the late 1990s. Third specific Danish circumstances have been beneficial, including policies for decentralised CHP, the existence of district heating systems, the implementation of energy taxes in the late 1980s and the preference of Danish farmers to cooperate in small communities.

4.6.3. Current developments

Since the beginning of 2000 there has been a period with less development in the Danish biogas market a.o. due to lack of Governmental support. Since 2010 however the Danish Government and Energy industries favor the possibility of Biogas to replace Natural Gas and use it as a car fuel.

4.7. Outside Europe

Summarized it can be said that throughout Europe governmental support, i.e. supportive frameworks, has appeared to be of enormous importance for the development in the biogas market.

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5. Biogas market in the USA and India.

5.1. USA

Hog and dairy farming are major industries in the US. According to the NASS (2008) there are 68 million hogs and pigs and 8.3 million milking cows on farms nationwide, and the statistics indicate that the shift from small animal operations to large ones in the US is “more dramatic for swine than for any other major livestock type”(Kellogg, Lander, Moffitt, and Gollehon (2000)). For hogs and milk cows this would result in the following amount of manure in the USA (see Table 3).

Table 3

Quantities of manure produced by cow and hog farms in the USA.

Animal Type Amount of manure / animal / year (tons) Total amount of manure / year (million tons) Milk Cows 15.24 126.49 Hogs 14.69 998.92

Especially the concentrated hog farming operations often generate manure quantities too large to be applied to the surrounding land at agri-economic rates (Kellogg et al. (2000)). Furthermore, according to Mueller (2007) the nitrogen-rich odour from hog manure is often more offensive than cow manure. The concentration of this type of industries is expected to grow, which will create a problem.

According to Mueller (2007) integrating these hog operations with anaerobic digesters, combined with CHP system, is a financially and economically attractive solution.

5.1.1. Anaerobic digestion in the USA

According to the EPA (2010) from July 2010 there were about 157 digester operating at commercial livestock facilities. Where according to the USDA (2010) there were 16000 milk cow operations and more than 18000 hogs and pigs operations, both facilities with more than 100 heads, the chances for biogas are enormous.

5.1.2. Anaerobic digestion study in the US

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“The study hypothesizes that the findings from the case and economic studies are very specific to the location and that the financial, environmental and economic benefits from CHP/AD20 vary by

geographic/ economic region21” (Mueller (2007)). To test the transferability of the cost, emissions, and employment benefits and see if CHP/AD becomes feasible, results from previous studies were

employed to other geographic regions within the US. The study of Mueller (2007) finds that the hypothesis can be partially supported.

According to Mueller (2007) capital costs were estimated at $4564/ kW ($1400/ kW for the CHP system plus $3164/ kW for the anaerobic digester). O&M costs are assumed to be $0.015/ kWh. The discount rate was set at 8% with an equipment life of 20 years. Further it was assumed the CHP units are running at 80% capacity factor. Taken into account these assumptions, costs per kWh were

estimated at $8.1 cents. Thereby it has to be mentioned that the heat produced is only used for digester heating, whereas in Europe most plants use excess heat for heating up stables or homes, which could generate extra cost savings.

If a farm already used an anaerobic digester for manure management, only the incremental CHP equipment cost should be used to calculate the cost to generate electricity. Costs will then drop to $3.5 cents per kWh, a substantial reduction.

When the study was performed, average retail prices of electricity for the commercial sector in 2005 were used as a benchmark. The average commercial electricity rate in the US was $8.08 cents per kWh. Figure 4 shows the average electricity prices in the commercial sector in the 36 most expensive states of the US.

As can be seen in Figure 4 California and Pennsylvania, two major hog farming states, the electricity rates were slightly above cost of CHP/ AD produced electricity making the system competitive. However electricity rates in the Midwest are about $1 cent per kWh lower than CHP/AD generated electricity. Based on this Mueller (2007) concluded the financial benefits documented in the case studies cannot always be transferred to other geographic/ economic regions.

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30 M. Markerink University of Groningen 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Haw ai i N ew Y o rk Co n n ec ti cu t M as sa ch u set ts N ew Ham p sh ir e N ew J ers ey M ai n e R h o d e I sl an d Ca lif o rn ia D is tr ic t o f Co lu m b ia Ve rm o n t A la sk a M ar yl an d D el aw ar e N evad a Texa s Fl o ri d a Pen n sy lv an ia Lo u is ia n a Ill in o is M is si ss ip i M ic h ig an A la b am a Ohio W is co n si n A ri zo n a G eo rg ia Ten n es see M o n ta n a So u th C aro lin a N ew M exi co Co lo ra d o N o rt h Ca ro lin a M in n es o ta O kl ah o m a O reg o n In d ia n a Io w a Kan sa s A rk an sa s Ken tu ck y W as h in gt o n So u th D ak o ta U ta h T o ta l N o rt h D ak o ta Vi rg in ia N eb ra sk a Cents/ kWh

Major hog farming states Other state

Figure 4

Figure 5

Average Retail price of Electricity in the commercial sector 2007 in different states of America

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31 M. Markerink University of Groningen 5.1.3. Environmental benefits

In contrast with the financial benefits, Mueller (2007) finds that the large environmental benefits shown in the case studies prevail in almost all hog farming regions.

The AP-42 Emission Factors, which are compiled by the US Environmental Protection Agency, represent the typical emissions of general classes of equipment. In his analysis Mueller (2007), used the emission factors for uncontrolled digester gas-fired turbines and compared these with the average emissions in the US.

Table 4 shows that installing CHP systems integrated with anaerobic digesters can result in substantial emissions savings (98% reduction in SO2, 24% reduction in NOx, 73% reduction in CO2) compared to emissions from current centralized power plants; additional emissions savings are achieved from avoided methane emissions (a potent greenhouse gas).

It has to be mentioned that these emission reductions achieved by power production, could be enlarged by taking into account the excess heat that could be used to heat up stables or houses. These reductions are not taken into account here, but this would result in reduction of the overall energy needs at farms as well as the associated emissions with these energy requirements.

Table 4

Emission comparison between manure based digester systems and average US electricity production.

Emissions factor

(lb/MWh) SO2 NOx CO2

Uncontrolled digester gas fired turbines

0.0422 1.01 170.00

Average US electricity production

2.72 1.33 627.00

Beside emission factors for electricity generation, the US Clean Air Act sets standards for the

permissible levels of certain pollutants in the air on a pollutant-by-pollutant basis. The results for hog farms are the large ozone nonattainment areas, which means the level of a pollutant, for instance ozone, is above the standard in that region. As of November 2004, several areas are classified as nonattainment areas for ground level ozone, which forms when sunlight combines with nitrogen oxides (NOx) and volatile organic material such as chemicals released from gasoline, hairspray and others (EPA (2008)). Current nonattainment areas are particularly prevalent in hog farming states including California, Arizona, Illinois, Indiana, the Carolinas, and Pennsylvania.

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32 M. Markerink University of Groningen A third important environmental impact is the odour from swine operation. In Mueller (2007) his research, it was clear that between 2000 and 2004 the population levels in such hog farming states as California, Arizona and the Carolinas grew above the US average. At the very least this will most likely increase the urgency to deal with odour nuisance from swine operations.

Whether these environmental benefits can be monetized is currently unknown, but it could be an extra incentive for AD systems in case it can be monetized.

5.1.4. Economic benefits to states

CHP/ AD systems will require generally higher investment costs on a dollar per invested kilowatt basis compares to centralized power plants, but have lower fuel expenses (manure costs are low). Installing a CHP/ AD system in states which import fuel (such as coal, natural gas, oil); will reduce import of fuels while stimulating the other economic sectors (manufacturing, engineering services etc.). A recent report by the University of Illinois at Chicago has shown that investment associated with an CHP/ AD systems would result in approximately 10-20 jobs (direct and indirect jobs) per installed MW of CHP/AD in the state of Illinois (Bournakies, Cuttica, and Mueller 2005). Obviously, job creation from CHP/ AD will vary from state to state depending on the various economic

conditions. However, for a first approximation, the intensity of hog farming is correlated with employment in the engine and power system-manufacturing sector as can be seen in Figure 6. Increased demand in the engine, turbine and power equipment-manufacturing sector would result in job creation. So the employment potential is considerable, for instance in Germany, one of the world‟s largest biogas producer, it was estimated that by the end of 2010, 19000 were working in the biogas industry (Fachverband Biogas (2010)).

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33 M. Markerink University of Groningen 5.1.5. Incentive of $1 cent.

Mueller (2007) concluded his research that CHP/ AD provides a market-proof solution for the problems associated with concentrated swine operations. For making it economically feasible a modest support of $1 cent per kWh would be necessary, for which in return hog-farming states would experience a cleaner environment, job growth and additional electric generating capacity. Currently every State within America has its own incentive scheme for different renewables, which are all set up differently. This research focuses more on large-scale co-digestion, and it will be interesting to see if the current available incentives are sufficient to make these investments viable.

5.2. India

In 2006 India had the fourth-largest economy in the world, after the United States, China and Japan in PPP terms (IEA (2007)). Over the last three decades India‟s economic growth has trended upwards, averaging 7% per year since 2000. Growth of the GDP is an important measure for economic growth. Service activities account for a large share of India‟s economy, for example IT-services. They

contributed 54% of GDP, industry contributed 27% and agriculture 19%. Despite this relative small contribution of agriculture, nearly 60% of the workforce is employed in farming (IEA (2007)). According to the McKinsey Global Institute (2007), labour is four times more productive in industry and six times more productive in services than in agriculture, where there are estimated to be 160 million surplus workers. In India, labour productivity, measured as added value per person, is

estimated to be about 13% of productivity in the US (IEA (2007)). In order to capture the full potential from productivity gains, level of education needs to rise to prepare the growing labour force for employment in the industry and services sectors as these sectors are expected to remain the main drivers of India‟s economic development.

In India‟s five-year plans the rate of growth of GDP has traditionally been the central objective. The current plan also sets targets for other dimensions of economic performance, including reversing the deceleration in agricultural growth and providing education and health services to all citizens

(Government of India (2006)). Economic growth will reduce poverty but needs to be combined with strong policies targeted on the rural sector, including improved access to cleaner, more efficient cooking fuels and technologies.

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Beside cleaner cooking fuels, education is still a major problem in the rural areas. In over one-quarter of rural households, not a single household member can read or write (IEA (2007)). As said, the productivity in agriculture is low, besides working people don‟t have time to go to school.

Improvements in infrastructure, like electricity connection and roads, and new cleaner cooking fuels can improve both productivity and education.

The IDS (2003) uses a theorem of a vicious circle of energy poverty to explain the relation between energy and poverty.

Figure 7

The vicious circle of energy poverty

This figure shows the vicious circle between lack of energy supply, low productivity and hence no money to invest in improved energy supplies. (Source: IDS 2003)

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Figure 8

The vicious circle to break out of energy poverty.

This figure shows the vicious circle between having increased access to improved energy services, increased productivity, sales and income resulting in the possibility to invest in improved energy supplies

(source: IDS 2003).

In 2007 India imported almost 70 percent of its crude oil needs, at a cost of more than 17 billion USD a year. Estimated is that by 2011, total demand for crude oil will have risen to 190 MMT, an import dependence of 81 percent.

Natural gas currently provides only 8 percent of India‟s primary energy supply and most of that gas comes from domestic sources. This position will change significantly if gas utilization rises, as predicted, to 20 percent by 2025, as India moves toward the world average for the use of natural gas. In 2005 nearly one third of India‟s energy needs were supplied by renewable energy. Most of this was traditional biomass. According to the IEA (2007) the potential installed capacity for biomass power generation is about 20 GW, where the current installed capacity is 0.3 GW.

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Figure 9

Fuel shares in Household energy consumption for cooking in India by area in the Reference Scenario

This figure gives an overview of the used cooking fuels in Rural and Urban areas in India (Source: IEA 2007).

In India rural households depend on biomass for almost 85% of their cooking needs. LPG meets 56% of this need in urban households (NSSO (2007)). As can be seen in Figure 9, the use of cleaner cooking fuels like LPG is significantly higher in Urban areas as it is in Rural areas. Urban households account for 75% of India‟s residential demand for LPG. Rural households, which make up over 70% of the population, account for 92% of India‟s residential use of biomass (IEA (2007)).

As a result of higher incomes and urbanization, reliance on traditional biomass is reduced as can be seen in Figure 10.

LPG, like kerosene, is subsidized in India. The choice between using fuel wood or LPG depends on income, but also differs between rural and urban areas. Although LPG is a more efficient, cleaner and safer fuel, only 8% of the rural households (mainly the richest) used it as a cooking fuel. Poor

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Figure 10

Fuel Wood and LPG use for cooking in India by Income class, 2005 (source IEA 2007).

Initiatives are required to bring a change in the cooking fuel use pattern. Transition to modern, clean cooking fuels should get significant attention by the supply side of the industry.

High reliance on traditional energies has significant social costs including costs due to health effect on women and children. It is suggested that use of traditional cooking fuels leads to 0.5 million deaths and 500 million cases of illness in India each year (UNDP/ESMAP (2003)).

As rural households across all expenditure classes rely significantly on traditional energies for

cooking, the issue of access to clean energies assumes greater importance, because affordability alone cannot explain such widespread reliance on dirty energies

5.2.1. Transportation

Transport demand and vehicle sales are expected to grow rapidly in India. The production of the Tata Nano is an example of the fact that every Indian citizen should be able to buy a car. This has an enormous impact on the future fuel demand.

5.2.2. CDM23

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Of the total Indian GHG24 emission methane makes up 29% (see Figure 12 ), where the global average is 15%. The largest discharge of methane is due to the large amount of agricultural methane emissions, from rice and ruminant livestock.

Figure 11

Paddy straw burning on the field (source: Meester 2008).

Figure 12

Greenhouse gas emissions for the world and for India 2005

In this figure an overview is given of the CO2 emissions in 2005 for the World and a separate pie chart for India. Of the total GHG emissions in India, 24% is originating from methane emissions and 19% out of agricultural

methane emissions equal to 0.45 Gt CO2 eq. (Source: IEA 2008c).

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Figure 13

Methane emissions projections in India.

In this figure an overview is given of the predicted Methane emissions (in Mt CO2 eq.) till 2030 by the different types of emitters (Source: IEA 2008c).

5.2.3. Biogas

Biogas systems have been implemented in India since the 1960‟s, but it was in 1982 with the

beginning of the sixth 5-year Plan and the formation of the National Project for Biogas Development (NPBD), when the drive to step up dissemination was taken. These, mostly small scale digesters were concrete domes build next to family their homes (see

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Figure 14

Schematic design of a concrete household type biogas plant (source: Ashden Awards)

5.2.4. The EnviTec biogas project

In the state of Punjab, EnviTec is participating in a biomass based power project. This project will have a total capacity of 156 MWel. Of this 30 MWel will be based on biogas, for which EnviTec is going to build 30 biogas plants of each 1 MWel. The biomass needs for these 30 MWel are

approximately 750.000 MT25 of which is 150.000 MT of manure and 540.000 MT will be paddy straw. As these input materials are leftovers from harvesting, fruits like maize are not used for biogas production but only for food consumption, this project does not compete with the food chain. Beside on the downstream side of the energy-production process the residues of the biogas-plants can be used as high quality fertilizer that will assist local farmers to ease fertilizer shortage and bring down

fertilizer costs. Additionally the co-generated heat supplied by the CHP plant can be utilized for cooling fruits and vegetables. This provides local farmers with higher flexibility in terms of marketing their harvest.

A study done by Meester (2008) showed the fertilizer use in the state of Punjab and by farmers in the village of Boran.

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The farmers of Boran, who own farms on the scale of 2.5 to 25 acre of land, with an average of 9 acre per farm, used on average 405 kg of chemical fertilizer per acre. They paid an average of Rs 8,270 per metric ton, which means 3,357 Rs per acre in total.

The current use of organic fertilizer (cow manure) by farmers was very diffuse, this mainly depended on the fact if they had cattle or not.

According to Das and Kandpal (1998) the average CO2 emission per tonne of ammonia varies, depending upon the feedstock, from 0.69 tonne for gas to 5.72 tonne for coal. For urea this ranges from 0.73 to 3.91 tonne emission per tonne of urea produced. For the state of Punjab this means a CO2 emission of:

tonnes (based on natural gas) (1)

The prices of nitrogenous fertilizer are directly related to the prices of natural gas. The price of Urea in world markets had increased from $102 (4.120 Rs.) in 2002 to $213 (8.250 Rs.) in 2005, an increase of 100% in 3 years time (Meester (2008)).

To compensate farmers for the higher cost of fertilizer, the Indian government pays subsidies on chemical fertilizer. The surge in oil prices in 2007 and 2008, however, has increased the financial burden on the government (IEA (2007)). Provision for payments to fertilizer producers in the 2007/08 budget therefore had to be reduced. But fertilizer prices have not been allowed to increase and now the producers are facing large losses.

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Figure 15

Influence of fertilizer on farmers income under different scenarios

This chart gives an overview of the extra income generated by farmers when applying organic fertilizer, as a substitute of chemical fertilizer, under different price increases of chemical fertilizer. The chart shows that

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6. Context specific variables

For analyzing the profitability of a biogas plant, all context specific variables which are influencing the return and eventually the NPV of the investment should be in place and analyzed.

In case of a biogas facility the following variables in general are of importance.

- Input materials:

A wide range of organic materials can be used to digest and convert it by anaerobic digestion into biogas. Depending on the quality characteristics, something which we will not explain in this thesis, every product can produce a certain amount of gas. Based on the input materials a biogas plant will be designed. From an economic perspective, the input materials can cost money, for instance maize, or generate a revenue stream in the form of a gate fee, in case of waste products like food leftovers.

- Digestate (output):

After having digested the organic material, a mineral rich product is left over. This product can be used as a fertilizer and soil improving material. The value of this product will depend on the fertilizer characters, like nitrogen, potassium and phosphates (NPK).

- Energy production:

The energy production depends on the produced amount of biogas, including the specific methane percentage. Based on the characteristics of the different input materials the specific gas production per product can be calculated. Eventually this will determine the total biogas and energy production of the biogas plant.

- After the biogas has been produced, it can be used for several purposes: o Electricity and heat generation.

With a CHP system, the biogas can be used as a fuel to produce electricity and heat. The electricity can be used to sell directly to the grid or to a large off taker close to the biogas facility, for example an industry.

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44 M. Markerink University of Groningen To optimize the profitability of a biogas facility, all the energy produced meaning electricity and heat, should be used effectively. Inside the fence projects, this are projects where industries have their own biogas facilities to provide their own power and heat, or projects close to villages with a district heating network are good examples of the optimization of energy usage.

o Gas injection.

Besides using the biogas directly as a fuel for a CHP system, it is possible to upgrade the biogas to natural gas quality, also called biomethane. As biogas consists out of 55% methane and 45 % CO2, it is essential to remove the CO2 and possible other pollutants. The upgraded biogas can then be used as a natural gas substitute and injected into the gas grid. The advantage of injecting the gas is the possibility to use the gas effectively at a place where there is high energy consumption. For instance when it is not possible to use the heat, produced in a CHP system, it is more attractive to upgrade the gas and transport it to places where they can use the energy effectively, in other words using all the electricity and heat.

o Car fuel.

Alternatively to injecting green gas into the grid, it can be used as a car fuel. In the Netherlands we are already familiar with LPG; biogas could be a good substitute for LPG26 or even CNG27 and LNG28. Especially for local solutions it might be attractive to bottle biomethane and sell it as cooking fuel or car fuel because it could compete with current market prices.

- Carbon emission reduction.

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Besides offsetting the usage of fossil fuels, biogas plants also reduces emissions by capturing methane and preventing it to be emitted into the air. As described, in the US there is a growing concentration of feedstock facilities. These facilities produce enormous amounts of manure, which are stored in open lagoons. As these lagoons are open, the manure is exposed to sun radiation, especially in regions with warm climates this means there are large methane emissions coming from these lagoons. Compared with CO2, methane emission are twenty one times worse, therefore every ton of methane captured generates 21 Carbon Credits. When installing a biogas plant, these methane emissions will be captured and turned into energy. Obviously this environmental benefit is included in the simulation.

6.1. Context specific variables in the Netherlands

Before starting the analysis it might be interesting to give a description of a study done in the Netherlands which determined the required subsidy level on a.o. biogas. With the help of a Monte Carlo simulation, they determined the required incentive per kWh, also called the financial gap, necessary to make the investment feasible.

6.1.1. Netherlands: profitable digestion

Till the 18th of August 2006 the Netherlands had an incentive per kWh, regulated trough the MEP-subsidy (Milieukwaliteit Electriciteitsproductie). Thanks to this incentive, projects producing renewable energy were economic viable by means of return and payback time. After the 18th the government stopped the subsidy, which caused a stop in investments concerning manure-digesters. In a feasibility study done in the Netherlands by Oei & de Vries (2007), they looked for solutions to make the investment in co-digestion viable without subsidies.

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46 M. Markerink University of Groningen The conclusions of this report were amongst others:

- Current legislation makes it impossible to add several highly valuable co-products into the digesting process.

- There are enough alternative, „waste-streams‟ out of the food-industry which can be used as a co-product. This means lower costs for the food-industry and income for the digester. In this way the agricultural sector contributes to the society by using „waste-products‟ mostly produced in the Netherlands as an energy source. In this way a chain will be closed (closed loop).

- Better cooperation and creativity between different agro-sectors are essential for profitable co-digestion.

6.1.2. Monte Carlo simulation for determining the Over Profit.

A study done by Mulder, Korteland & Blom (2007) is conducting a research to look at the over-profit which is created after obtaining the MEP-subsidy. The MEP-subsidy is an incentive per kWh

produced electricity which is fed into the grid. This incentive will be obtained by the owner of the plant. The definition of the over-profit (OT) are the earnings which go beyond an appropriate reward considered the risk that is taken, which is the risk that the investment isn‟t recouped.

The supposed demanded return for investments in renewable energy is 15%, with the exception of incineration facilities and facilities which use biomass as a second fuel, where 12% is used.

Mulder e.a. (2007) writes that the reason behind these returns is the fact that the owner of the facility is taking risk with investing in these plants. For example: electricity prices can be lower than expected in the beginning or technical problems can be the cause of lower than predicted energy production. For a proper calculation of the over-profit it was essential to compare the data on which the MEP-incentive is based with the actual characteristics of the investment, so as to ensure a good picture of both the risk and return.

According to Mulder e.a. (2007) realised (ex-post) figures can be asked, but don‟t give a realistic view because investors normally aren‟t keen on giving openness in their figures and would probably

maximize costs and minimize earnings.

The Financial Feasibility of US and Indian Biogas-projects