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Digester Economics

March 4, 2016

Agriculture reportedly produces 36% of the methane associated with human activity, and methane is worse, according to climate alarmists, than CO2 when it comes to global warming.

Enter, stage left, anaerobic digesters.

Animal waste, manure from cows, cattle, pigs and chickens, can be put into a digester and be converted into methane, i.e, natural gas, plus some byproducts, such as fertilizer.

The methane can be used to generate electricity which can be sold to a utility company.

Flow chart courtesy of American Biogas Council

Flow chart courtesy of American Biogas Council

A Wisconsin utility was paying around 8 cents per kWh for the electricity purchased from digester systems, but will now only pay 3 cents per kWh because of the low cost of producing electricity from natural gas combined cycle (NGCC) power plants.

NGCC power plants typically generate electricity for 5 cents per kWh, so paying 8 cents for electricity generated by digesters only made sense where utilities had to meet renewable portfolio standards (RPS), which was the case in Wisconsin.

RPS laws require that a certain percentage of electricity sold to consumers by utilities comes from renewable sources such as wind and solar … and digesters.

Or, in the case of Germany, which has over 8,000 digesters, where the farmer is guaranteed above market rates for electricity, for years.

The cost of a digester runs into the millions of dollars, and farmers have found that maintenance costs are higher than expected.

Clearly, a farmer wouldn’t invest in a new digester system if he can only get 3 cents per kWh for the electricity generated by his system.

But why would a farmer, who has already invested in the digester, sell electricity at such a low price?

The same question can be asked of wind farms and solar power plants that enter into agreements to sell electricity at a below market price, such as for less than 5 cents per kWh.

The media has cited purchase agreements with low prices for electricity to demonstrate that wind and solar can produce electricity for less than natural gas or coal.

But, these low price agreements obscure a fundamental economic factor, and they don’t establish that wind and solar are the lowest cost producers of electricity.

The farmer who has already invested in his digester system need only recover more than his variable cost when producing and selling electricity to the utility. If he can recover more than his variable cost, the additional revenue can go toward covering the cost of his fixed investment, or be profit if the fixed investment has already been recovered.

Variable costs would include, for example, the cost of handling the manure and maintaining the equipment.

If he can’t recover more than his variable cost, he would be throwing good money away.

The same is true for the wind farm or solar installation, where, in many cases, the investment has been covered by a subsidy. Companies with an existing investment need only recover more than their variable costs.

Reports in the media that wind and solar generate electricity for less than natural gas or coal-fired power plants need to be viewed very skeptically. They are in all probability wrong … especially if the media reports are based on purchase contracts for electricity.

There are very few instances where wind and solar can generate electricity at a lower cost than natural gas or coal-fired power plants, and they are unique situations, such as on isolated islands, e.g., Hawaii. See, High Cost of Renewables

When a farmer, wind or solar company sells electricity at below cost, so as to recover more than variable costs, it’s not proof these installations can produce electricity at a lower cost than NGCC or coal-fired power plants, where their costs include both fixed and variable costs.

Claims of being the low cost provider of electricity need to be carefully examined, because media reports are frequently wrong.

* * * * * *

Part 2 of Nothing to Fear describes the cost of renewables and how they can have negative economic consequences.

Nothing to Fear is available from Amazon and some independent book sellers.

Link to Amazon: http://amzn.to/1miBhXy

 

 

Book Cover, Nothing to Fear

Book Cover, Nothing to Fear

* * * * * *

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11 Comments leave one →
  1. March 4, 2016 2:24 pm

    We must also point out that that in the EU the cost of gas is about 4 eurocents/kWht or about 3 times what it costs in the USA

    • March 4, 2016 3:33 pm

      Thanks. Natural gas in Europe is more expensive than in the US, and has been higher in the recent past because its price is linked to the price of oil.

  2. donb permalink
    March 4, 2016 4:01 pm

    Another reason that “green” energy producers wish to sell power at below market cost is that sometimes (but only sometimes) they produce more power than the market (power Co. etc.) needs or can use. They want to give the market an incentive to purchase their power. Typical power companies like to plan ahead as to where their power is obtained, and “green” power is unpredictable, so an incentive is perhaps needed. Thus, this situation means that, in order to buy the cheaper power at unpredictable times, the Power Co. must curtail power generation from more reliable generators, such as fossil fuel plants. Overall efficiency goes down.

    • March 4, 2016 4:27 pm

      Very true. There have been instances in Texas where wind was sold to ERCOT at a negative price, i.e., the wind company paid ERCOT to take the electricity so that the wind company could receive the 2.3 cent per kWh subsidy. A similar situation occurred in Michigan where a utility had to accept the wind generated electricity due to the RPS, and then had to offload it at a loss because it was not needed to meet demand.

  3. mjangwin permalink
    March 4, 2016 4:25 pm

    In the United States, many utilities are required to buy RECs (Renewable Energy Certificates). When a participating renewable resource makes 1 kWh of power (which it may sell to the grid for a penny, perhaps) it also makes a 1 kWh REC, which it sells separately. The prices of RECs vary, but the REC is another income stream for the same kWh. So the farmer selling power from his digester may be making 3 cents for the power, and perhaps another 3 cents for the REC. As I said, though, REC prices vary. This is just an example.

    When a utility pays for the REC, this is an expense that the utility can pass on to the customer. The REC payment raises the price of power to the customer, but not the price of power on the grid.

    • March 4, 2016 4:29 pm

      Excellent point. I overlooked this when writing my article, which was intended to demonstrate that PPO pricing doesn’t establish that renewables generate electricity at a lower cost than natural gas or coal.

  4. Don Shaw permalink
    March 5, 2016 11:16 am

    Donn
    Some data to support your cost of renewable s
    http://instituteforenergyresearch.org/renewable-mandates/new-jersey-renewable-electricity-mandate-status/

  5. Don Shaw permalink
    March 5, 2016 11:28 am

    Wonder why electricity is so expensive in New Jersey and about to rise as Oyster Creek is arbitrarily shut down?
    Here is the low cost renewable:
    http://www.njcleanenergy.com/srecpricing

  6. Alex Carr permalink
    March 10, 2016 7:26 am

    It nice to know and learn more about this issue. Looking forwards for more information about the issue.

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  1. Weekly Climate and Energy News Roundup #217 | Watts Up With That?

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