Project Planning and Financing
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Assessing the financial feasibility of an anaerobic digester project is an iterative process. The first step is to do preliminary project planning. In this step, you do preliminary screening and a technical feasibility assessment to determine if the project can technically work. Then, using those assumptions, you can develop a high level estimate of the project’s financial feasibility considering revenues and expenses.
After the preliminary project planning is complete, you will likely have to refine your assumptions to optimize technical or financial performance with a new project plan. Next, you need to conduct detailed financial modeling. If the results are favorable, you can implement the project.
Determine whether anaerobic digestion is right for you by considering:
- manure availability,
- whether your manure management technique is compatible with an anaerobic digester,
- potential uses for recovered energy and
- whether you have the capacity to manage the system.
Start assessing your project’s technical feasibility by identifying the anaerobic digester components:
- onsite conditions,
- system type and size, and
- biogas use.
Financial Feasibility - Revenue and Expenses
Estimate the annual revenue you could receive from your project based on the anaerobic digester components identified in your technical feasibility analysis:
- The amount of biogas to be produced and how it will be sold
- Financial assistance
- Renewable energy and carbon credits
Estimate the annual expenses associated with your project. Include one-time (capital) and ongoing annual (operation and maintenance) costs of the system.
Refine Project Proposal, Plan and Select Approach
The feasibility of an anaerobic digester project depends on site-specific factors. These factors influence the amount and quality of methane generated, variability in electricity prices, availability of incentives and financing rates. In this stage of project planning, you can go through several versions of project plans, refining your assumptions until you identify the best possible anaerobic digester project.
Some of the key ways to improve project economics at this stage include:
- Increasing income from electricity sales (e.g., tariffs for biogas) or other types of energy sales.
- Getting direct financial assistance for feasibility studies and/or up-front costs.
- Using creative financing mechanisms such as tax credits and low interest program investment loans.
- Developing lower cost digester systems.
- Seeking additional revenue-generating options (e.g., finding additional uses for on-farm heat; accepting off-farm wastes for tipping fees; concentrating nutrients for fertilizer products).
- Implementing different business models, such as third party build/own/operate models.
Conduct Detailed Financial Modeling
Model Revenue and Expenses
Model revenue & expenses: Several tools provide comprehensive spreadsheet-based models to capture estimated revenues and expenses based on the selected anaerobic digester system.
- Cost of Renewable Energy Spreadsheet Tool (CREST) is a renewable energy cash flow model designed to assess project economics; includes a module specific to anaerobic digestion technologies. (National Renewable Energy Laboratory, 2011)
- Additional calculators that support detailed financial modeling:
- An Economic and Functional Tool for Assessing the Financial Feasibility of Farm-based Anaerobic Digesters includes a workbook to determine the financial feasibility of farm-based anaerobic digestion. (Renewable Energy International Journal, 2013. Cost: $35.95)
- System Advisor Model (SAM) calculates financial metrics for power projects based on a project's cash flows over an analysis period based on installation and operating costs and system design. Note: this model is not specific to anaerobic digestion. (National Renewable Energy Laboratory, 2010)
Determine Equity Share and Sources
Determine equity share and sources: Estimate how much funding you are able to put into the project as equity and where the equity funding will come from. A minimum of 10% equity is generally required, but investors and lenders prefer project owners take a higher equity share.
Identify Funding Sources to Fill the Gap Between Your Equity and the Project Cost
Identify funding sources to fill the gap between your equity and the project cost: Information is available to help you identify grants, loan guarantees and financial assistance from federal and state governments, nonprofits, and private companies.
- Database of State Incentives for Renewables & Efficiency (DSIRE) (funded by U.S. Department of Energy, updated monthly) — Information about renewable energy incentives and policies, which can influence project economics.
- Additional potential funding sources:
- USDA Energy Matrix identifies alternative and affordable energy solutions, funding for projects, available programs and program information, and research and development. (U.S. Department of Agriculture)
- USDA Natural Resources Conservation Service Funding Sources (USDA)
- USDA Rural Energy for America Program (USDA)
- USDA Rural Development Business Programs (USDA)
- USDA Rural Development Value-Added Producer Grants (VAPG) (USDA)
- USDA Farm Service Agency Energy Programs – Biomass Crop Assistance Program (USDA)
- Sustainable Agriculture Research & Education Sustainable Agriculture Grants (SARE)
Calculate Return on Investment
Calculate return on investment: Compare the annual revenue against expenditures to estimate when the initial investment will be paid back and the rate of return on the money invested. Methods include:
- Payback: the number of years it would take for a project to generate profits equal to the initial capital outlay.
- Discounted cash flow: estimate the net present value of future cash flows.
- Internal rate of return: total rate of return achieved by the project, which can be compared to return rates from alternative investment opportunities.
Select Financing Method
Select financing method: Use return on investment to attract financing, either through a lender (who provides a loan) and/or an investor (who seeks a return on the project). Some tools to identify project financing include:
- The Vendor Directory maintained by AgSTAR includes listings for financing specialists who provide loans for biogas projects, fund on-farm biogas systems for profit and broker the sale of carbon offsets and renewable energy certificates.
- Attracting Institutional and Impact Investors provides an overview of investor interests and needs and why biogas projects can be a good fit. (Wastewater Capital Management, 2013)
Negotiate Utility Agreement
Negotiate utility agreement: A utility contract or power purchase agreement has a major influence on the profitability of a project. Typical utility contract arrangements include:
- Buy all – sell all: the utility sells the farm all electricity requirements and buys all the generator output.
- Surplus sale: excess electricity produced is sold at avoided cost and excess consumption is purchased at the retail rate.
- Net metering: electricity produced is offset on a monthly or yearly basis against consumption; surplus production is purchased by the utility and shortages are purchased by the farm.
Learn more about utility agreements:
- Exploring Power Purchase Agreements: The Basics (PDF) (47 pp, 1.8MB) provides an overview of power purchase agreements and their use in financing renewable energy systems. This presentation focuses on solar energy projects, but the information is generally transferable to other technologies. (U.S. Department of Energy, 2011)
- The Basics of a Power Purchase Agreement is an overview of power purchase agreement considerations for AD projects. (Biomass Magazine, 2008)
- Power Purchase Agreement Toolkit provides links to several power purchase agreement templates. (RETScreen International, 2012)