Business case of a bio-gas project in Asia
A previous article “bio-gas and the greys of green solutions” argued that, while the net improvement of green-energy solutions is often given for granted, thorough analyses show that potential benefits are to be found behind more technical and articulated discussions. Such activity usually reveals grey aspects of renewable energy which become critical for effective implementation. In our first article, we leveraged engineering concepts to specifically argue that, while bio-gas (i.e. bio-methane) is far from being a definitive solution, it can bring environmental benefits. Even mere natural gas and methane - fossil fuels widely deployed nowadays - can help decarbonize the environment during the transition towards more sustainable energy. Again, the type of implementation is key to the result. We will now cover the financial and economical implications of a project related to similar solutions. Since this entire discussion originated from one of the latest projects that my recent relocation to Taiwan allowed - not without a few struggles - I will keep presenting numbers related to that specific experience. The interested reader will be able to easily customize the model. The result may surprise some readers: we will see that some solutions can repay themselves and start generating profit after only three years. That is a surprising result when it comes to green or decarbonizing solutions, often turning positive in 10+ years.
Beyond the financial case that we are making here, the interested reader should refer to the first article for the discussion about CO2 emissions.
As per that first article, the terms “natural gas” and “methane” will be used interchangeably, as well as “bio-gas” and “bio-methane”.
In the first article, we briefly mentioned two major types of machines producing energy from gas. The first is an engine very similar to the one we have in our cars - just slightly customized and of a bigger size. The second is generally a bigger machine substituting pistons with a rotating axial turbine – the axial construction usually allows for greater load and capacity. We will discuss here a solution of the former type, that is in general the choice of preference in modular and decentralized projects.
The real-case application behind this article involved a medium-size manufacturing plant looking for ways to lower both emissions and the energy bill. This is not an energy-intensive plant like for example a metallurgic process where steel is liquefied in big tanks at more than a thousand degrees Celsius. In those cases, any type of renewable solution would require completely different design. Conversely, our medium-sized plant is meant to represent a manufacturing process within industries like food & beverages and many others presenting some assembly lines. The reader can picture a business with annual revenues between 10 and 100 million USD – linking revenues to the energy consumption is a long shot, but it becomes pretty accurate after we have isolated the industry and the type of plant. Similar manufacturing processes usually require about 1 million kWh per year of electricity – note that a normal household requires about 20 kWh per day or 7,000 kWh per year.
We can immediately disclose that the required investment for the new machinery involved in the processing of the gas and the generation of the electricity is about $1 million. That is mainly for the purchasing of the machinery and some basic installation. Depending on the actual implementation, the engine may require additional contractors and changes to the real estate, though for the solution we are discussing they are usually very limited being the machinery designed for modular installation. Since we have anticipated that the breakeven can be reached after only three years, we are saying that our machine should improve the profit & loss statement of about $300k per year – on the $1 million investment. Of course, the realized saving would be only the after-tax portion of those $300k per year, for if that amount was otherwise expensed in the tax report, the company would lower the tax bill. However, the new investment could also be amortized along 10 years with annual expenses of $100k, therefore recovering about $30k/year of that savings in tax. Let us keep this simple: since tax breaks and amortization of energy-related initiatives are usually linked to volatile and different regulations, we will not consider tax implications here. The interested reader can apply tax-savings specifics to the region and industry of interest – please feel free to inquire if You think we are capable of some helpful comment on that.
Let us go through the specific financial dynamics. We will start with a machine fueled by natural gas and we will close with the changes caused by the adoption of a bio-alternative (i.e. bio-gas or bio-methane) – the machine would be the same with some possible tweaks related to a slightly different composition of the two types of gas. In figure 1 we can see the brief business case for our medium-sized plant – the right part of the picture includes useful notes. Starting from the assumed annual energy consumption and a general cost per kWh, we have an annual electricity bill of about $130k (figure 1, line 3). After “installing” the machine, we now focus on natural gas, which is the main fuel – natural gas is a fossil fuel, please refer to the first article. A quick technical analysis would show that a plant of similar size could be associated with a machine of about 1 kW capacity (power). Multiplying that number times the number of hours and days of functioning during the year, we get the total energy produced annually, 6M kWh/year in our case (figure 1, line 7). Those are machines usually running non-stop during working days. However, real-world applications always present unexpected additional costs – a lot related to repair and maintenance – and that is the nature of the following 75% rate of efficiency assumed in the model (figure 1, line 8). That 75%, that we can think of as the result of a combination of additional costs and lower energy production, lowers the annual capacity to 4.5M kWh.
Trying to attach a value to that electricity produced, we have to first decide what we want to do with that energy. We decide to first take care of the entire internal need by directing 1M of those 4.5M kWh produced towards the internal requirement. Basically, we would stop buying electricity from the grid. We can then sell the portion in excess to the grid. As per the notes in the picture, we value energy in two ways. The energy utilized internally is valued “at cost”, the assumption being that we would otherwise have to sustain that cost by purchasing the same quantity of energy from the grid. Making a long discussion short, the energy sold back to the grid is valued at about 70% of its retail price, which is 70% * 13 cents, about 9 cents (figure 1, line 15 and 16 show the values of the energy respectively redirected internally and sold back to the grid).
Let us now scroll figure 1 further down and estimate the fuel cost to run the new machine. To get to the annual consumption of natural gas we need some efficiency rate. From the manufacturer we have that our machine has about 40% efficiency when it comes to the generation of the electricity. Additionally, the machine returns about 10% efficiency in thermal efficiency. What that means is that, if we think about some fuel able to generate 100 kWh of energy once burned, we would be able to extract about 40 kWh in electricity and an additional 10kWh in heath – for sake of the post, there is no need to disturb Helmholtz nor Gibbs to make a precise argument on the maximum energy that could be extracted in different conditions from the fuel. As the reader may have already realized, 10% in heath seems low, however, we should be conservative since not all processes continuously require energy in that form. Plants and processes like the ones involved in the food & beverages industry could accommodate a higher quantity of energy in the form of heath, hot vapor, etc. However, that is not always the case.
Our numbers result in a total efficiency of 50%, meaning, for any quantity of energy produced, we need double that amount stored as energy-content in the initial fuel, which is 9M kWh. Line 21 in figure 1 introduces an average cost of the single kWh that could be extracted from natural gas, $0.033. That value is obtained by dividing the average price of natural gas per liter in our region over the energy content of that same liter of gas – the latter can be found in tables detailing for example the Btu per liter of gas. The resulting cost for the fuel would be $295k (figure 1, line 22), which subtracted from the total value of the energy produced (line 15 + line 16) would result in an operating profit of about $155k per year (figure 1, line 23). The term “operating” means excluding any CAPEX (say the $1M investment to purchase the machine).
Wait, we anticipated before that we would reach breakeven in about 3 years. The operating profit we just calculated would allow breaking even in about 6 years. That is correct, however, we did not mention that the 3-year period refers to the case of bio-fuel. Let us go over the immediate changes characterizing that bio-scenario.
Please note, while the reader can follow up with detailed net-present-value analyses, it should be noted that many dynamics are likely to be included in the penalizing operating efficiency we introduced in figure 1 at line 8 (75%). Such a summarizing value, possibly representing both planned and unexpected reinvestments in time, is often more easily explainable during presentations and similar situations.
How would bio-gas (e.g. bio-methane) change the picture if utilized to fuel the new machine?
The machine we “installed” at the plant could be customized to run on bio-gas rather than fossil fuel. The main differences that the bio-alternative would bring into the model are twofold. The first change is about a different value assigned to the kWh generated and sold to the grid (figure 2, lines 10 and 16). The second is the different cost of the fuel (figure 2, lines 21 and 22). As per the specific region of the project behind this article (i.e. Taiwan) in many countries incentive plans are in place involving feed-in-tariffs (FIT): according to those incentives and plans, energy generated through decarbonizing solutions is valued at specific and convenient rates. Again, the reader can go through the specifics of the region of interest. In our case, we present our local FIT associated with bio-gas generated from waste fermentation – see the first article if interested in more info on that specific source. The value is about 14 cents per kWh, and figure 2 shows that the $318k previously calculated (figure 1, line 16) now become $490k (figure 2, line 16). What was previously valued at 70% * 13 cents, is now valued at 14 cents USD.
The annual operating profit rises to almost $326k (figure 2, line 23) and the breakeven is indeed reached in about 3 years on the original $1M investment. That value is still based on a cost of the fuel utilized in the machine equal to the cost of natural gas of the initial business case (figure 2, lines 21 and 22). Since in this second scenario we may not be purchasing bio-gas from the grid, but we may be producing it in-house from waste fermentation, the cost would likely be different. However, we decided not to show potential additional savings related to that because we believe a separate and dedicated discussion would be needed. The actual cost of bio-gas from waste would highly depend on the specific implementation, and it is not worth showing a mere placeholder in figure 2 – moreover, it could also imply additional investments. Using the same cost of natural gas seems a good approximation and a possible conservative one – at least in terms of operating costs and profit.
We can summarize this article by saying that, beyond the fast breakeven period, the machine represents an investment potentially allowing a 33% return on the investment (ROI) – $325k per year on a $1M investment. After the third year that number would be real profit (or saving) for the company. Moreover, even utilizing natural gas from fossil fuel - without leveraging the FIT of bio-fuel – a 6 year breakeven period seems fairly good. As per the previous article, natural gas presents also CO2 improvements compared to other fossil fuels - at least during operations, without discussing the potentially controversial extraction and storage of natural gas, an additional "grey" aspect.
Again, as per the first article, the whole project and discussion want to focus on reducing CO2 emissions. However, the financial analysis presented here is critical because the financial sustainability of energy solutions is a fundamental ingredient to the adoption and to the actual transition.
Once again: whether the reader does not agree with the analysis, or just wants to share additional thoughts, please feel free to be in touch. I’d like to meet by discussing this further. riccardo[at]m-odi.com
Tags of the two original images used for the following customization for the main image of the article: