Financing & Public Support of Biogas Plants

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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.

The figure shows different financial support to biodigesters in 2018, for the biogas implemented by SNV

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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.

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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.

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.

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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.

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Research and Development

Financial promotion from public or development funds is always necessary for research and development and for the organizations concerned with the implementation of biogas programs. Only in exceptional cases have private companies carried out research and product development, but even then, they sometimes relied on assistance from external donors.

Research and development on the following aspects of biogas technology are particularly worthy of sponsorship:

• reducing the cost of system construction
• increasing the gas yield, most notably of dome-digester systems
• storage and application of digested sludge
• socio-economic prerequisites and consequences
• financial analysis of biogas units and economic analysis of biogas programs
• plant design and operation modifications to suit locally available materials

Subsidies for Biogas

Subsidies for biogas plants may consist of grants, low-interest or no-interest loans and/or supplies in kind (materials). The response of the target group will usually depend to a large extent on the types of subsidies, the amounts available, and bureaucratic obstacles in gaining access to funding. The popularization of a subsidy program naturally plays an important role, too. The perceived reliability of the subsidy program is essential. Subsidy arrangements should therefore be underpinned by binding agreements with several years validity.

Graduated subsidies, the granting of which depends on, for example, the type of fuel in use prior to system installation or on the social situation of the applicant, are conceivable. In practice, this leads to socially justifiable differentiation in the extent of support granted.

Economic Benefits for the Target Group

The most important incentive for any potential investor are the monetary returns to be gained by installing a biogas system. Promotional programs and subsidies for biogas systems should therefore be oriented along the lines of the benefits to be expected.

The economics of a biogas system depend, first, on the type of construction and cost of operation and, second, on the resultant benefits and/or cost savings provided by the system. Since the savings can be quite considerable in relation to the cost to the individual, even modest subsidies can yield a net economic advantage for households considering biogas as an option. If, on the other hand, individual expenditures for fuel and fertilizer were relatively low, higher subsidies will be required. Thus, the subsidies should be geared to the respective regional and social situation. Financial assistance for individual households should not be based on fictitious market values for gas and fertilizer, but rather on the actual costs and benefits involved.

Financial Incentives

As a rule of thumb, financial incentives can be regarded as an essential prerequisite for the success of a large scale biogas program. If at least 70% of all households within the target area are to be supplied with biogas, all investors should be granted special allowances. The process of discussion requisite to defining the range of participation within the target area or community can, in itself, have a favorable impact on the project. Nonetheless, the maximum possible personal contribution should, as a matter of principle, be demanded of each household involved in a subsidized program. A maximum of contribution from the owner during construction of the biogas plant is conducive to the personal involvement of the system's future owner.

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

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.

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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.

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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

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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 electricity 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.

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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.

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Economic Effects of Biogas Plants

• Macro-economic Evaluation of Biogas Plants

Final Remarks

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

• All biogas articles on energypedia
• Financing and funding articles on energypedia
• Fluid biogas
• Profitability Calculator (KTBL)
• Presentation on how to create a business plan for a biogas plant

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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.

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