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Macro-economic Evaluation of Biogas Plants

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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).


Environment

Consumption of Firewood

Wherever a region is confronted with acute problems of deforestation and soil erosion resulting from excessive firewood consumption, biogas plants can provide a suitable solution. Biogas is able to substitute almost the complete consumption of firewood in rural households.

Traditionally, woodfuel claims the largest proportion of biomass fuels (in some regions up to 90%) used in developing countries, where about 40% of the total wood cut anually is used for domestic purposes (cooking and heating). Estimating an average per capita consumption of 3 kg of wood per day for energy (cooking, heating and boiling water) in rural areas in Asia and Africa, the daily per capita demand of energy equals about 13 kWh which could be covered by about 2 m3 of biogas. A biogas plant therefore directly saves forest, assuming that not only deadwood is collected for fuel.

In order to predict the direct monetary savings to an economy, two procedures are to be carried out:

If the forest has not previously been used economically, shadow pricing has to be based on the valuation of saved biodiversity, respectively on the capacity of reducing the effects of global warming.


If the forest has been used economically, several procedures of shadow pricing can be carried out, like:

  • Value of saved forest via price of firewood



Given the price of cut firewood on the local market, the savings of forest by substitution of biogas can be determined by multiplication of the number of trees cut, its tree growth ratio per year and the average price of firewood.

  • Value of saved forest as an area for nourishment (hunting, collecting fruits, etc.)



The value of the forest equals the sum of income forgone from these activities. The correct shadow pricing would be based on the prices of the goods on the formal consumer markets (i.e. price of meat).

  • Value of saved forest as a recreation area



The value of the forest equals the sum of the incomes obtained by charges for admission to National Parks, Wildlife Areas, etc.


Deforestation

Without any effective political measures, the problem of deforestation and soil erosion will become more and more critical. As the population increases the consumption of firewood will increase more steeply.

Without biogas the problem of deforestation and soil erosion will steadily become more critical as firewood consumption rises relative to higher density of population. The demand for nourishment also rises accordingly, which means that constant extension of agricultural land increases at the expense of forested areas.

Deforestation contributes considerably to soil erosion which, in its advanced state, reduces quantitively and qualitatively the potential of agricultural land. Finally, this leads to future increases in the cost of food production. Moreover, the advancing soil erosion increases the frequency and extent of floods and their disastrous consequences. According to an Indian estimation, a biogas plant of e.g. 2.8 m3 capacity can save a forested area of 0.12 ha. In each case it has to be discovered the contribution of biogas plants to a reduction in land usage and costs for reforestation or protection of remainig forests.


Health Sector

In order to estimate the impacts on the health sector, benefits arise on the individual level, as well as on the level of the society.

Biogas plants serve as methods of disposal for waste and sewage and in this way directly contribute to a better hygienic situation for individual users. By collecting centrally dung and by connecting latrines, open storage is avoided. Apart from this, pathogenes are extensively eliminated during the digestion process. All in all quite an improvement of sanitation and hygiene is achieved and therefore a biogas plant can contribute to a higher life expectancy.

In the People's Republic of China this effect became apparent in the bilharziosis, worm and gastro-disease endangered areas where the number of people suffering was greatly reduced. Theoretically, a reduction in the frequency of disease comprises economically a saving in medicine and consultation costs. Regarding the leakage of health services in rural areas, another approach to savings is suggested: Labour productivity rises due to elimination of potential disease-causing agents due to the better hygiene situation in consequence of biogas plants.

Applied to individual biogas projects, these economic effects cannot be credited directly to biogas projects in monetary terms, as there are plenty of influences on the health sector.

If the main goal of a biogas plant is to achieve a higher standard of hygiene, one possible method of shadow pricing would be the answer to the question:Which alternative investment in providing the same result of hygiene equals the positive hygiene results of a biogas plant?. The evaluation of sanitary and hygienic effects can be made i.e. by means of the alternative costs for a purifying plant.

But the incisive doubts of "correct" shadow pricing the benefits in the health sector remain.


Employment

During construction of biogas plants unless these are built by the investors themselves, there are effects on regional/local income and employment which subsequently continue. Permanent jobs, unless users participate, are created for the operation personnel and indirect effects result in contracts with local and regional companies for the service and maintenance of a plant including the gas-burners in the households and resulting from the procuring and processing of increased agricultural production. The utilization of biogas contributes to an enlarged range of energy fuels offered on the market. In this way the local basis of the energy supply can be extended and secured, and it also simplifies the setting of additional commercial activities where the factor energy has so far proved to be a problem.


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.


Bibliography Economic Viability (Financial Analysis) and Macro-economic Evaluation

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Further Information