Biogas: Value Engineering
Most biogas projects constructed these days—typically variations of an anaerobic digester —are successful projects for the owners, but unfortunately, not all are. Accurate statistics on exactly why some projects succeed, and others fail, are frustratingly hard to come by. The U.S. EPA Ag-Star program's website maintains a useful database on agricultural digesters that are currently in operation, but for the most part, the database does not include all the digesters that have ceased operations or the reasons why, nor does it include non-agricultural installations. Some states track biogas projects within state boundaries, but many do not.
Anecdotally, it appears as if there are two fundamental ingredients that are key to any biogas project's success: a suitable technology must be selected to solve a particular problem, and the benefits that a biogas project afford an owner must absolutely justify its cost. In other words, the economic return of the project must be acceptable to whoever is paying for it, and the specific technological solutions applied need to be appropriate to the waste stream(s). If either of these key ingredients is missing, the biogas project cannot succeed.
Digester designs vary considerably, and finding the most appropriate technology to process a given waste stream requires performing a reasonable level of due diligence. When one hears of a biogas installation that is struggling because the type of digester installed was inappropriate for its feedstocks, it often becomes evident that before choosing a specific technology provider, the developer did not engage with multiple anaerobic digestion vendors, or hire an experienced consultant familiar with more than one type of digester.
Once a technology provider rises to the top, next steps should include speaking with the provider’s customers and employing independent resources to determine their track record. It is much simpler to perform this research beforehand, than to later suffer the consequences of a technological “bad fit.”
Good, Better, Best
Two projects in the same county process a similar volume and type of material. Both will probably generate a similar amount of biogas. However, one cost $7 million to construct, and the other will cost $22 million. It is not only possible to find such a disparity—this is a real-world example. Can both projects be successful? Yes. Can either or both fail? Also, yes. Of course, there are many independent variables and circumstances to consider for each individual project, but what holds true for one may not for another.
That being said, the more expensive “platinum-plated” installations do need to justify their additional cost, especially if the extra expenditures are not offset by higher revenues. Keep in mind that top-end equipment sometimes comes with higher maintenance costs, too. For example, an engine/generator (genset) provider might require $500 spark plugs for their engines, while others do not.
Sears stores famously offered “good, better and best” products. Sometimes the “best” components and configurations are required. But when they are not, perhaps “good” or “better” will do. Your reward for performing prudent due diligence may just be lowered financial risk and a more attractive return on investment.
Rainbows and Unicorns
You’re well into the research and planning process. You’ve made your preliminary technology decisions and your financial pro-forma is looking great. But, are you considering only the most optimistic conditions and performance assumptions? How flexible is your pro forma to fluctuations in the nation’s economy? Or to swings in commodities such as natural gas or diesel? Will you depend upon a market for biosolids that already exists, or are you assuming that if you make it, they will come?
Overly rosy predictions for biosolids sales, biogas production, conversion efficiencies to other saleable products such as electricity or compressed natural gas, power purchase agreement renewal rates and long-term feedstock availability are among the culprits found in some underperforming biogas sites. Your project should be robust and flexible enough to handle a range of possibilities. In short, taking a more skeptical, “squinty-eyed” perspective of your own pro forma can be a very helpful exercise.
Project Creep and Greed
No, this isn’t someone who hovers around asking too many questions. Anyone who has done any home remodeling can relate to the phenomenon of project creep. "As long as we're doing this, we might as well do that too." It's incredibly easy to fall victim to it. For example, amenities such as landscaping, a visitor's observation deck, additional offices, larger gensets, an architect to design the utility building, a fountain and lighted sign out front may not seem expensive or extravagant individually. Sometimes they are justifiable expenses, but taken together they can add up to a sizeable sum. Project creep leads to budget creep.
Some biogas projects are overburdened by an unreasonably high cost of financing. Biogas projects have really never been get-rich-quick schemes, and generally one shouldn’t expect a mountain of revenues from only one installation. In fact, one sign that a biogas pro forma may be overly optimistic is an atypically high rate of return.
However, as long as they are put together smartly, biogas installations are good, solid investments with an excellent track record, and do not justify a high-risk percentage/classification. The cost of money is quite low these days, and pairing an appropriate funding vehicle with a well-planned biogas opportunity is very much worth the additional matchmaking effort.
Don’t forget the adage “Success breeds more success.” One might consider first determining a very stable financial template for a biogas project that provides a reasonable and steady return, then repeat as many times as desired.
Everyone knows how difficult it can be to take more than one bite at the financing apple. Therefore, it can be critically important not to undershoot a project’s estimated capital cost. Here, experience counts and a reputable consultant, general contractor or biogas vendor can help accurately estimate the total project expenses, including the products and services that are not directly provided by them.
Even so, there are often certain expenses, such as interconnect costs to a utility that are difficult or impossible to estimate beforehand. There could be other expenses that crop up in the course of construction or startup that nobody anticipated, so setting aside an amount on your pro forma for such unexpected contingencies will lessen the likelihood of a situation where there isn’t quite enough funding to get a project finished. In some cases, the contingency budget could be as high as 10 percent of a project’s total cost. Ideally this cushion will not be needed, but it is included in the event it is.
One often-overlooked or under-considered expense is the time it will take for a digester to ramp up to full operation. Depending upon the waste stream, it could take days, weeks or even months for the digester system to reach its maximum output. Every waste stream is unique, and sometimes adjustments need to be made to the process. The bottom line is that there will be a time frame between when you start feeding a digester, and when it begins performing to the point of earning revenue. Expect it.
Congratulations on your new and successful biogas project. Have you already started the next one?
Author: Doug VanOrnum
Business Development, DVO Anaerobic Systems