Journal of the NACAA
ISSN 2158-9429
Volume 3, Issue 1 - July, 2010
The Economics of On-Farm Dairy Methane Digesters on Vermont Dairy Farms
- Rogers, G. F., Regional Farm Business Management Specialist, University of Vermont Extension
ABSTRACT
Abstract: Dairy farmers are using methane digesters to produce electricity for the farm, for the electrical "grid", to reduce odors on the farm, to reduce the environmental impact and to reduce bedding costs on the farm. Dairy farmers also need to make a profit. A study of 4 dairy farms in Vermont was undertaken to look at the economics of On-Farm Dairy Methane Digesters. Results show that 42.8% of the income was from Electricity sales. REC's amounted to 21.7%, 31.7% was for bedding and 3.8% for misc. income. Study also showed that large dairy producers need 21 cents/KW plus 2.5 cents/KW to have a Return On Equity equivalent to the amount allowed by law in Vermont. Study showed that enterprise analysis of the methane unit was not a standard practice and that the dairy farm carried some of the construction, and maintenance cost. Methane digesters also have a high carrying cost. Bedding was used on the farm and sold to off farm enterprises.Situation:
Recently Vermont’s dairy farms have seen input costs, such as energy, fertilizer, bedding, soar. Manure spreading costs are also very high and reducing volume means reducing costs. Manure agitation also increases smells which affects the public perception of agriculture. Also, electricity costs are expected to go higher.
Vermont farmers are seeking alternative energy sources, decreased bedding costs, and increased financial efficiency on the farm. Some dairy farmers are installing methane units which decrease environmental issues, air quality issues, are an energy source, provide a bedding source for animals, and may increase the farm financial situation as well as potential by-products for sale off the farm. The question remains: How financially viable are they for the dairy community with and without grant funding?
Project scope:
This project addressed the following items:
1. Conducted an analysis of existing on-farm dairy methane digesters to determine actual costs to construct, finance, and operate on-farm dairy methane digester.
2. A financial analysis of dairy operations, who have installed methane digesters which produce electricity, was completed to determine if these digesters help the viability of the farm with, and without, obtaining public grants for the planning and construction of the digester?
Methods:
Data from 4 large dairy farms were collected over a 4 month period. The data included all income-expense and balance sheet data. 3 of the 4 farms provided financial data for the 2008 year. The 4th farm provided data for ½ of the 2009 year and the data was reviewed with the farmer to assure that it could be doubled and used as a full year.
A spreadsheet was developed to show just the enterprise data associated with the digester enterprise and not the entire farming operation. This allowed the researcher and the farmer to focus on the operation and treat the farming activities which, while related, as separate enterprises. The data is averaged for the 4 farms to obtain a general financial analysis.
Discussion:
Sources and Uses of funds Table
Sources of funds for the four digester projects examined come from various sources. These funds were used to plan, obtain permits, excavate, pour, and build the digester. The funds were also used to for all system construction costs included but not limited to: the various piping, heaters, methane collector, buildings and other long-term depreciable items. In addition, they purchased equipment, inter-connections, and 3 phase power devices, and all of the start-up costs which one could allocate to short-term depreciation items.
The average cost of the units involved not just the digester/cover, buildings, and equipment but also the establishment of 3 phase line upgrades from the closest available power source and also initial start up costs. Farmers applied for grants, from various agencies. Farmers also obtained loans and provided labor and cash to the building of the digester and the associated equipment.
Initially farmers did not include the cost of their labor nor the cost of their dairy associated equipment into the project. In other words often the dairy operation “footed the bill” of much of the management and equipment rental that is associated with excavation and backfilling the pit, and methane unit piping and other items. All enterprises should “carry their own weight” financially and farmers were encouraged to calculate the cost of the work, cash and equipment associated with the project
During the interview process, it was also discovered that farms did not account for all of their time to the operation of this enterprise. Rather, much of the research and planning for the operation was borne by the dairy operation. As mentioned before much of the construction costs, and implementation of the digester system was carried financially by the dairy operation. Finally, although not accounted for in the budgeting – the cost of the land was not accounted for in the enterprise.
It was also surprising to this author the amount of time and effort that the dairy operation continued to contribute to the digester operation. While it is not the focus of this study it is obvious that the continued operation of the digester takes considerable time.
A spreadsheet was developed for each farm and an average derived from the four farms to develop a combined model for all farms. Activities having to do with manure movement outside of the digester were NOT included in this analysis
Operating Budget / Financial Data Sheets
Income:
Electricity sales accounted for 42.8% of average project the income. Electricity sales averaged 7.8 Cents/KW during 2008. In many cases, the electricity sale price was not a contract (or fixed price), instead it was a variable price based on demand. Thus income from the sale of electricity varied and could increase or decrease depending on demand. The wholesale price for electricity for 2009 was below the average cost of production and thus the average for the farms in the study actually lost significant funds from the sale of electricity in 2009. (While individual farms might vary the average was below the cost of production).
In some cases the electricity price was fixed over a number of years thus electrical generation income variation was not noted except in amounts of electricity produced. In 2008 the demand was high and electricity rates were stable throughout the year and farms and electrical companies were seeing stable prices. In 2009 the price of wholesale electricity decreased and while the farm received a stable price, power was available elsewhere at lower rates.
REC’s or Renewable Energy Credits were paid to all farmers in the amount of 3.9 – 4.0 cents/KW for the entire year. This amounted to 21.7% of total digester-related income.
Post digester, separated dried manure bedding, a by-product of the process, was also produced. The process of separating manure solids from liquids via a separator is a great value to farmers
Other minor sources of income included dividend and individual sales of bedding. These sources of income amounted to 3.78% of gross income.
Expenses were broken down into maintenance, insurance, oil/fuel, office, other (legal, accounting, etc.), taxes, supplies, labor, and interest.
Maintenance/repairs include a multitude of items depending on which farm allocated the items. We called this category: “Repairs to buildings and equipment”. Note that while the farm may put 800 hours/year on a tractor a generator may run more than 8,000 hours in a year. While these generators are built to last, all have reported replacing cylinder “heads” or other major parts in just one year. As buildings age maintenance costs also increase due to corrosion, moisture, weather changes including expansion and contraction, or other issues but they do increase
Insurance on the structures are very high as compared to the other buildings on the farm but it is because of the machinery involved, the liability of dangerous gases, open manure pits, pumps, and open space around the digester itself.
Oil. One change of oil may take 2 barrels or more and may cost $1,500.
Office costs were minimal
Other include such items as legal fees, permitting issues, phone, accounting, tax preparation, and the like.
Taxes are minimal with this type of agricultural enterprise
Supplies are such items as paper towels, spark plugs (at $100 each), light bulbs, educational and warning posters, and other items.
Labor includes management, supervision, oil change labor, sparkplug change labor, tours, educational programs, constant monitoring, phone calls, and repairs.
Interest was calculated based on the debt associated with the enterprise as some farms had loans for many different items tied together thus it was initially hard to calculated the exact interest on the enterprise.
Debt service was the debt service as determined by the lender. In all cases it was over a 5 -7 year payback
Depreciation was NOT calculated into the net cash income but was calculated after net income.
Results:
Financial Data Sheets Column details:
The attached sheet shows that without renewable energy grants, the Agency of Ag grants, and other grants that the use of methane digesters is not feasible at nearly any value of electricity. The pure investment is just too high without some investment
by others for renewable energy sources. The benefit comes from the sale of electricity, the REC’s, the bedding sales and the bedding savings. However, if bedding is valued at $20/yard and electricity has a value of 9 cents/KW and investment costs remain constant then the process begins to pay back over a period of years.
Column 1:
Column 1 is the average of the 4 farms in the study. Size of the operations varied from 900 cows to 2,000 cows but not all the manure from the cows and heifers go into the manure pit. Thus the average at the time of the study was 1212 cow equivalents. At the very bottom is the Return on Equity utilizing the formula as outlined previously.
Column 2:
Column 2 is a scenario to see what the return on Equity would be should the power price be at 21 cents/kw and 2.5 cents/kw for RECs. The grants are included in the formula.
To meet the goals of the law it would appear that the cost of power using the data that I have gathered from the subject farms would need to be in the 20 cents/KW range plus RECS.
Return on Equity analysis
For the purposes of this study we will use the same formula as printed in the Northeast Dairy Farm Summary as printed by the Farm Credit systems in the Northeast (*).
Net Income +(change in Accounts Receivable) + (change in inventory) - (depreciation) *
Average Net worth
It should be noted that in this study on average, there was a small amount of equity put into the business: 11.7% in owner cash and equity, with 53.58% in loans and 34.67% in grants. In addition there was a small net income after depreciation because of price. In addition to the above factors, and since there was variability in net income between farms and there were a small number of farms in the study, one could easily say that a ROE could be negative for the year. In fact this is occurring in year two as energy rates have decreased considerably with the recession.
Other discussion:
Methane digesters, with associated separators and electricity generators, provide benefits, such as:
1) A decrease in the odors emitted by the manure.
2) A liquid and solid portion which can reduce the cost and timing of spreading the waste product.
3) Obtaining a by-product – manure solids – which is used as a bedding product as well as for sale products.
4) The harnessing of methane gas which can be burned in a methane powered generator and the resulting power is converted to electricity to be used on the farm and/or sold to the power grid thus reducing costs on the farm and generating additional revenue.
5) Methane is being looked at as a propane type power source to power trucks much like propane powers trucks.
6) An added income source to what was once a sole outflow of dollars and an environmental issue from the dairy operation.
There are some drawbacks to the installation of a methane digester on the dairy farm. These are:
1) Initial investment into the operation generally runs in excess of $2.0 million prior to start up.
2) A variability of the amount of methane being generated depending on what is being fed into the methane digester system.
3) Design and set up of the operation to meet environmental standards, efficiency standards, and to economically produce and contain methane - and generate electricity economically at the rates demanded.
4.) The time involved to design and set up the initial operation,
5.) The size of the infrastructure required to carried out the project and
6.) In most cases, the need for 3 phase electrical power.
7.) Finally, it is not a foregone conclusion that if the producer has 750 or more cows that a methane digester can be built on their property or if it will work! In Vermont, we have at least three digesters that were built which ran into problems generating electricity. The reasons: Design flaws, concrete stability issues, new ideas not yet fully tested, or financial stability of the farm, have all led to the projects not working or being completed.
Summary
Methane digesters are going to be a vital part of Vermont renewable energy infrastructure as long as they are financially viable. Farmers must research them closely and do a complete enterprise analysis before constructing the system. In that enterprise analysis one needs to include all input costs including those costs often carried by the dairy enterprise without recognition that another enterprise exists on the farm. Capital losses are also high.
Methane digesters have a high carrying cost due to 24/7 operation, specificity of the system, the acid and H2S factors. The depreciation on the buildings and the equipment is very high. A significant by-product to the methane generation program is the production of bedding that is of value to other farmers, to greenhouse operators, and to landscapers. Unfortunately this is not yet fully accepted and prices have not reached full retail price and might not for some time as the overall dairy economy continues to struggle.
The electricity price variability, and low electricity price, is a danger to the long term success of methane digesters. A constant price above the cost of production with a reasonable Return to Equity is needed to assure continued success with this program. This study shows that a combined price of 23 cents/KW (from electricity and REC sales) for the large farms in this study was sufficient to yield a profit and to gain the return on equity that is allowed by regulations.
The implications of methane digesters for dairy farmers are huge. Farmers are innovative, and are willing to take the risk for a new project if the investment can be clearly justified, if there are positive outcomes outlined, and the risk is mitigated via specific knowledge of those risks.