Financing & Public Support of Biogas Plants

Overview

The cost necessary for the construction of biogas plants frequently exceeds the means at the disposal of the investor, in other words he cannot cover them from his regular income or savings. This could also apply to the larger replacement investments occurring at certain intervals during the economic lifetime of the plant. Besides the non-recurring i.e. a-periodical costs, the running costs of the plant have to be borne. This solvency outflow however, is set against solvency inflow in the form of regular revenue. A solvency analysis can show how far the net solvency outflow has to be financed and how much scope there will be from net solvency inflow.

Sources of Financing

Usually the construction and operation of biogas plants involve a demand for financial means which can only be covered by borrowed capital.

In general the following can be seen as sources:

Grants and credits from institutes for economic aid Means from the national budget of the developing country (public support) Credits from national (developing) banks Funding from international carbon trading schemes Resources of the project initiator Fees/contributions from the user

The various sources have to be individually examined for their ability to provide the means.

Financing by Credit

When financing by credit the questions of liability and debt provisions should be clarified. The borrower should always be able to bear the possible risk or be immune to this risk by having state credit guarantees. The debt provisions should be worked out so that they conform to the development of cost and yield. Credit repayment terms are frequently much shorter than the lifetime of a project e.g. 5 years compared to 15 - 20 years. The bringing up of capital often becomes an invincible barrier for the investor.

State Support

When the profitability of biogas plants are negative on a private scale, but on a national scale lead to positive results, state support measures are required.

On principle the following can be seen as starting points for the distribution of biogas plants to such an extent that would make them macro-economically feasible and socio-politically desirable:

• the creation or alteration of structural conditions for individual investment decisions in favour of biogas plants, e.g. more critical control of firewood consumption and tree-felling, regulations concerning the treatment and disposal of substrates (waste water, faeces)
• the subsidising of private and institutional community biogas plants by means of grants or inexpensive credits
• the construction and operation of biogas plants as public utility enterprises especially as municipal community plants, in appropriate instances by allocation of appropriated means to the municipalities.

Families with Low Incomes

The more plants are extended to families with low incomes, the less can the costs for construction and operation of the plant be met by contributions from the users. On village community plants in India providing energy for the households practical experience has indicated that not even the running costs can be met by user fees. Consequently, not only the investment costs but also a proportion of the running costs has to be covered by general tax revenue. The resolution of the Indian Government provides a guideline for the extent of public support whereby from case to case 50 to 100% of the cost for community biogas plants are subsidised.

Since the implementation of biogas plants necessitates considerable investment from public funds, sufficient public means for parallel socio-techno-economic investigations should be provided for, which allow a suitable feedback to promotion and distribution strategy.

Revenues

A biogas plant can generate revenues in the following ways:

• sale of electricity
• sale of heat
• sale of gas
• revenues from disposal of digestion substrates
• sale of digestate
• reduction of costs for disposal of agricultural residues
• Carbon emission reduction (CDM)

The principal source of revenue for biogas plants, apart from those which feed gas into a grid, is the sale of electricity. As the level of payment and the duration of the entitlement to payment are regulated by law, revenues from the sale of electricity can be projected without risk depending on the country of implementation.

In Germany, depending on the type and quantity of substrates used, the output of the plant and fulfilment of other requirements for payment of bonuses, the tariff for power generation is subject to considerable variation between roughly 8 and 30 ct/kWh. Bonuses are paid for various reasons, including for the exclusive use of energy crops and manure, meaningful use of the heat arising at the plant, use of innovative technology, and compliance with the formaldehyde limits laid down in TA Luft (cf. Section 7.3.3.3). The tariff arrangements are dealt with in detail
In rare cases, a disposal fee can be charged for substrates used in the plant. However, such a possibility must be carefully examined and, if necessary, contractually secured before being factored into the cost/revenue projections.

Financing of Project Implementation

The cost necessary for the construction of biogas plants frequently exceeds the means at the disposal of the investor, in other words he cannot cover them from his regular income or savings. This could also apply to the larger replacement investments occurring at certain intervals during the economic lifetime of the plant. Besides the non-recurring i.e. a-periodical costs, the running costs of the plant have to be borne. This solvency outflow however, is set against solvency inflow in the form of regular revenue. A solvency analysis can show how far the net solvency outflow has to be financed and how much scope there will be from net solvency inflow. Usually the construction and operation of biogas plants involve a demand for financial means which can only be covered by borrowed capital.

In general the following can be seen as sources:

Grants and credits from institutes for economic aid Means from the national budget of the developing country (public support) Credits from national (developing) banks Funding from international carbon trading schemes Resources of the project initiator Fees/contributions from the user

The various sources have to be individually examined for their ability to provide the means.

Financing by Credit

When financing by credit the questions of liability and debt provisions should be clarified. The borrower should always be able to bear the possible risk or be immune to this risk by having state credit guarantees. The debt provisions should be worked out so that they conform to the development of cost and yield. Credit repayment terms are frequently much shorter than the lifetime of a project e.g. 5 years compared to 15 - 20 years. The bringing up of capital often becomes an invincible barrier for the investor.

State Support

When the profitability of biogas plants are negative on a private scale, but on a national scale lead to positive results, state support measures are required.

On principle the following can be seen as starting points for the distribution of biogas plants to such an extent that would make them macro-economically feasible and socio-politically desirable:

Since the implementation of biogas plants necessitates considerable investment from public funds, sufficient public means for parallel socio-techno-economic investigations should be provided for, which allow a suitable feedback to promotion and distribution strategy.

Financing of Plant Operation

Running, Maintenance and Repair Costs

The financing of investments and of the operation of the plant should be clearly settled at the preplanning stage. It has to be ensured that the quota derived from public funds is firmly planned in the budget. Special attention has to be paid to the question of how the running, maintenance and repair costs can be financed. Means for servicing and repairing are of essential importance and have to be available in sufficient quantity and in good time in order to make full use of the possible lifetime of the plant and also to insure the confidence of the user in the reliability of the plant.

Economic Optimisation

Economic optimisation is aimed at reducing costs and increasing yields. Like technical optimisation, economic optimisation can be applied to all sub-processes. In this case, too, the first step is to identify the substantial cost factors so that the related costs can be reduced accordingly. Specific variables such as electricity generation costs (e.g. in €/kWh) or specific investment costs (in €/kWel inst.) serve as the basis for an initial guide to plant performance as a whole. There are comparative studies for these (for example German biogas measuring programme), thus enabling the overall economic performance of the plant to be graded.

To conduct an in-depth study it is advisable to analyse and compare the following economic data:

• Operating costs
• Personnel costs
• Maintenance costs
• Repair costs
• Energy costs
• Cost of upkeep
• Investment costs (depreciation), repayment, interest
• Substrate costs (linked to substrate quality and substrate quantities)
• Revenue for generated electricity and heat
• Revenue for substrates
• Revenue for fermentation residues/fertiliser

Economic Consideration

Economically, electricity from biogas must compete with electricity generation from fossil fuels and other renewable energies such as hydro power. Supporting factors are:

• Rising prices of fossil fuels
• Low reliability of electricity provision from national grids with persistent risk of power cuts and vulnerability of hydro power to drought.

Inhibiting factors are:

• Relatively low prices of fossil fuels
• Need to buy high quality components from industrialised countries
• Unfavourable conditions for selling electricity
• Lack of awareness, capacity and experience preventing the economic operation of in-frastructure components.

The economic feasibility of a biogas plant depends on the economic value of the entire range of plant outputs. These are:

• Electricity or mechanical power
• Biogas
• Heat, co-generated by the combustion engine
• The sanitation effect with COD and BOD (chemical and biological oxygen demand) reduction in the runoff of agro-industrial settings
• Slurry used as fertiliser.

Most of the commercially run biogas power plants in developing countries are of medium size and are installed in industrial contexts, primarily using organic waste material from agro-industrial production processes such as cow, pig and chicken manure, slaughterhouse waste, or residues from sisal and coffee processing.

Assessments of economic feasibility are contradictory or inconsistent. Many press releases and information from biogas power plant producers refer to payback periods of only 1.5 – 2.5 years. In such cases, the electricity from biogas plants can be compared to the price of elec-tricity provided through the national grid or the price of bottled LPG.

However these figures are unrealistic, except for direct thermal energy use as for cooking energy, or in very few locations with extremely expensive diesel fuel.

More realistic figures seem to be those calculated by GTZ experts in Kenya for medium and large plants (>50kW):

They anticipate payback periods for plants under the DBFZ tariff scheme (~0.15 US$/kWh) of 6 years under very favourable conditions, and 9 years for unfa-vourable but still economically viable investments.

In spite of this theoretical profitability, recent examples from Africa show that electricity gen-eration from biogas has not really captured the market as a ‘profitable’ technology. None of the plants described here could have been installed without international technical and finan-cial support. This is due to the pilot status of the market and barriers such as a lack of awareness, experience, local capacity, upfront financing for project development (for own consumption projects, i.e. where there is no feed-in component) and the existence of policy barriers in cases where feed-in is required.

Many new studies come to the conclusion that biogas power plants are not commercially viable without subsidies or guaranteed high prices (~0,20US$) for the produced outputs. In Germany and other industrialised countries, only guaranteed feed-in tariffs have led to a breakthrough. Almost all well-known biogas power plants in developing countries depend on financial support from a third international party.

Framework Conditions

In Germany, power generation from biogas is only profitable due to grid connection and sup-porting feed-in tariffs. By contrast, power generation in most developing countries seems to be especially profitable in settings far away from the national grid and other energy sources, as the legal framework conditions and the lack of appropriate feed-in tariffs do not support feeding into the grid. However, there are the first signs of financial and legal support for feed-ing in electricity from biogas power plants in countries such as Brazil. Output-oriented support schemes (such as the German EEG) have proved to be more successful than investment-oriented financial support.

Direct subsidies and public financial contributions to installation costs have been crucial for the installation of some pilot plants. However, they have not provided incentives for proper and efficient operation. By contrast, the establishment of appropriate feed-in tariffs stimulates the construction of efficient plants and their continuous and efficient operation.

Through its projects and programmes, GTZ therefore recommends the establishment of guaranteed feed-in price schemes similar to the one in Germany.

However, besides price considerations, there remain many barriers to market penetration and development of the biogas sector:

• Lack of awareness of biogas opportunities
• High upfront costs for potential assessments and feasibility studies
• Lack of access to finance
• Lack of local capacity for project design, construction, operation and maintenance
• Legal framework conditions that complicate alternative energy production and com-mercialisation: for example, the right to sell electricity at local level has to be in place.

As long as the national framework conditions are not favourable, electricity generation from biogas will remain limited to a few pilot applications.

Overview

The economic analysis assesses a project in the context of the national economy rather than of the project sponsor (i.e. private enterprise or a public authority).This means that government economic policy has to take into account the effects of a project on the national or regional economy as a whole.

The decisive difference between the economic analysis and the financial analysis is the way in which inputs and outputs are valued. The financial costs of resources, which are expressed by market prices, differ from their economic values. This is due to the fact that market prices do not reflect true marginal social costs and thus do not match with the actual value of consumed scarce economic resources.

Economic Effects of Biogas Plants

When evaluating biogas plants from a macro-economic point of view there are several reasons why price adjustments in favour of the biogas technology are required.

• The production of biogas creates external economies. It means that the biogas production influences the utility function of the consumer (i.e. better sanitary and hygienic conditions) and the social welfare function of the society (i.e. reduced health costs). Considering national wide effects on energy balance, the biogas supply creates external economies on the balance of payments to the economy (import substitution of fossil fuels). As well external diseconomies then should be included, amounting to less income of import duties because of substitution of traded fuel (i.e. petroleum) by biogas.
• Biogas use, replacing conventional fuels like kerosene or firewood, allows for the conservation of environment. It therefore, increases its own value by the value of i.e. forest saved or planted.
• The price of supplied energy produced by biogas competes with distorted prices on the national or regional level of the energy market. Monopolistic practices, which enable energy suppliers to sell their energy at a price higher than the competition price, still dominate the energy market in many countries. A decentralized, economically self-sufficient biogas unit therefore, - under competitive conditions - provides its energy without market distortions.
• Furthermore, other macro-economic benefits arise when comparing on the one hand the benefits of decentralized energy generation (improved power system security) and the disadvantages of centralized energy generation: incremental costs of investment in additional networks and the costs of losses on the transmission network, due to the distance of energy customers, may be added to the benefits of decentralized energy generation from the macro-economic point of view.
• Labour intensive decentralized biogas units, on the regional level, improve income distribution amongst income brackets and reduce regional disparities, enhancing the attractiveness of rural life.
• Investors should aim at carrying out the construction of biogas plants without any imported materials in the long run. The lower the import content of the total plant costs (i.e. amount of steel), the less the external diseconomies which may arise in consequence of sliding exchange rates.

In a macro-economic level these effects are significant and only unfold themselves fully if biogas plants are introduced over a wide area i.e. for closed settlement areas. This refers primarily to biogas plants as an improvement for inferior sanitary and hygienic conditions for members of the poorer classes. These are problems which cannot be solved on an individual basis but only by collective decisions and measures.

How far biogas plants in a definite case are the suitable and advantageous solution to a problem has to be discovered with reference to alternative sectoral measures. The macro-economic evaluation needs to account for effects of benefits within the fields.

Energy and Slurry

Energy

Many developing countries, especially the LLDC base their energy consumption upon traditional energy sources (wood, plants and crop residues and animal waste, as well as animal traction and human muscle power). Biomass energy use varies widely in developing countries from as little as 5% in Argentina to over 90% of the total supply of energy sources in countries like Ethiopia, Tanzania, Rwanda, Sudan and Nepal. In the case of wood, plant and animal waste, according to local necessities, the energy source is collected and used. Surplus of energy sources are traded informally on the local and regional level. In so far estimations on the potential effects of biogas use instead of the use of traditional energy sources do not have any impact on government`s budget, presuming the non-existence of taxes on traditional energy sources.

Negative consequences on the income of the local traders may result, presuming less demand on traditionally traded energy sources, causing a slump of its prices. On the other side biogas users may continue with trading of traditional energy sources on more distant markets (or even will be encouraged to trade on regional levels), not willing to forego secure earnings.

Consequently, the substitution effect of biogas results primarily in environmental benefits due to less consumption of i.e. firewood, leading to less deforestation (under the presumption of a declining or constant price of firewood).

Commercially or monetarily traded sources like petroleum, coal and natural gas on the other hand have impacts on the balance of payments and therefore influence governmental budgets.

The macro-economic effect of a biogas use by import substitution of i.e. kerosene is due to decreasing duty income. On the other side petroleum import dependancy sinks, giving more relative stability to an economy.

Although only less than 10% of a country's commercial energy is consumed by the rural population (LLDC and in some MSAC), the effects of biogas use, substituting systems for generation, transmission and distribution of electricity shall be mentioned.

The macro-economic benefits of a biogas plant result in its self-efficienciy and reliability (benefits from avoidance of black-outs and supply interruptions) and in less costs for networks and distribution infrastructure. On the other side a national wide operating power supplier competes with a biogas supplier as unserved energy implies by revenue forgone as a result of non-supplying its customers.

Slurry

On the assumption that the slurry of the biogas plant is used as fertilizer and, when spread on the fields, it increases the crop production, that is more productive than the undigested dung, the economies' benefit amounts to a higher supply of fertilizer given the same output level of crops.

Moreover, the substitution of commercial fertilizers with slurry produced by biogas technology reduces the impacts on balance of payments (assuming a dependence on imports of chemical fertilizers).

The consequence of reliance on digested dung and residues (in a biogas plant) is that valuable nutrients and organic matter are led back to the soil in an improved stage, rising agricultural productivity and soil stability (combating devegetation and desertification). The higher productivity of crop production results in higher yields, maybe keeping pace with the increase in population (maybe: because one has to estimate the balance of populational fluctuations).

Final Remarks

Biogas gained by a three-step digestion process (two hydrolysis phases followed by one acid phase) containing 60-80 per cent methane and 20-40 per cent carbon dioxide makes it a potencial source of renewable energy.

Given a heating value of about 5,5 kcal/m³, its uses for electricity generation, as a heat resource, for internal combustion engines, boilers, as a suplementary fuel for diesel engines or substitution of firewood for cooking purposes in rural areas are widely reported.

Especially the economic benefits of biogas utilization in selected agro-industries (palm oil mills, tapioca starch factories and alcohol destilleries) amount to savings due to electricity generation by biogas, fertilizer savings and rising productivity in agriculture. Moreover, the environmental benefits due to substitution of energy sources based on wood (firewood, charcoal) or on fossil energy sources are outstanding.

To assess correctly the macro-economic benefits of biogas production in small size biogas plants is a difficult undertaking. Generally, very optimistic assumptions on positive effects on employment, balance-of-payments and health sector can cause overwhelming expectations on planning biogas based energy systems.

Nevertheless, these external economies are substantially influenced by the quantity and (regional) density of biogas plants, contributing to the countries' share of energy sources.

Without any doubt -even if there would be constructed only one biogas plant in a country - the following valueable assets of biogas use from the environmental point of view can be determined.

As CO₂ generation by burned biogas only amouts to 80 per cent of the CO₂ generation of fired fuel oil (per kWh electrical energy) and is even more advantageous in relation to coal (about 50 per cent), the environmental benefits of biogas in relation to fossil fuels are indisputable.

Due to the high cohere efficiency of wood (0.7 kg CO₂ per kWh gross energy), the substitution of the wood based biomasses by biogas rise the national and global storage capacity of CO₂.

Facing more and more the challenging phenomena of global warming and setting global standards of polluting potentials, environmental external economies are getting steadily very important issues and may stimulate a government to start investing in appropriate energy technologies rather than to follow the conventional way to solve the problem of generating energy in remote areas by rural electrification based on fossil fuels.

A financially viable and well structured joint implementation concept may help to generate (financial) facilities to governments in order to invest in energy generation, based on sustainable energy sources. In how far and to which partner (of the partnership) the positive effects of the project shall be ascribed to, may be determined politically. In the long run each saving of irretrievable damage of environment helps to saving the world in a whole.

Further Information

• DMS folder for further reading on financing.
• Excelsheet for detailed  financial calculation
• Costs of a biogas plant
• Fluid biogas
• Energypedia for financing domestic biogas applications
• Profitability Calculator (KTBL)
• Presentation on how to create a business plan for a biogas plant
• Sales and trade of Biomethane

References

• Bateman, Ian: Ökologische und ökonomische Bewertung. In: O' Riordan, T. (Hrsg.): Umweltwissenschaften und Umweltmanagement. Berlin u.a. 1996. S. 81-117.
• v. Braun, J., Virchow, D.: Ökonomische Bewertung von Biotechnologie und Pflanzenvielfalt in Entwicklungsländern. In: Entwicklung und ländlicher Raum. H.3. 1995. S. 7-11.
• Hall, David O., Rosillo-Calle, F.: Why Biomass Matters: Energy and the Environment. In: Energy in Africa. International Solar Energy Conference. Harare, Zimbabwe 14-17 November 1991. Bochum 1993. P. 27-34.
• Heber, G., a.o.: Biofuels for developing countries: promising strategy or dead end? Publ. by GTZ GmbH. Eschborn 1985.
• Intergovernmental Panel on Climate Change: IPCC Guidelines for National Greenhouse Gas Inventories. Vol. 2. IPCC WGI Technical Support Unit Hadley Centre. United Kingdom.
• Oelert, G., Auer, F., Pertz, K.: Economic Issues of Renewable Energy Sytems. A Guide to Project Planning. 2nd corrected Edition. Publ. by GTZ GmbH. Eschborn 1988.
• Munashinghe, M.: Environment Economies and Valuation in Developing Decisonmaking. Environment Working Paper No. 51. The World Bank. Washington D.C. 1992.
• Economic and Social Commission for Asia and the Pacific, Bangkok, Thailand: Rural Energy Technology: Biomass Conversion. United Nations. New York. 1991.
• Sasse, L.: Methodology and Criteria for the Evaluation of Biogas Programmes. In: Indo-German Joint Steering Committee: Report of International Conference on Biogas - Technologies and Implementation Strategies. Pune/India. 1990.
• Wlde, K.: Macro-economic effects of Biogas Plants (BGP). In: Biogas Forum. No. 59. 1994. P. 14-22.