BUILDING A WORLD OF DIFFERENCE® Barriers to Biogas Utilization for Renewable Energy: How to Clear the Economic Hurdle VWEA Water Jam - 2012: Biosolids Workshop John Willis, Brown and Caldwell Lauren Fillmore, Water Environment Research Foundation Lori Stone, Black & Veatch September 10, 2012 Acknowledgements WERF, Lauren Fillmore NYSERDA, Kathleen O’Connor Project Team Brown and Caldwell – John Willis, Karen Durden, Marc Walch, Anne Hajnosz Black & Veatch – Lori Stone, Yinan Qi, Mike Elenbaas Hemenway Inc. NEBRA, with Ross & Associates and BioCycle PSC Members Utility Participants (33 initially signed up, 100+ utilities responded to survey) 2 Today’s Presentation Overview of Barriers to Biogas Use Project and Findings Economics Methodologies for a Simplified Case Study Conclusions 3 BUILDING A WORLD OF DIFFERENCE® Overview of Barriers to Biogas Use Project and Findings 4 Project Approach PHASE I PHASE II PHASE III PHASE IV Establish Framework Develop and Launch Survey Conduct Focus Group Meetings Analyze Results/Summari ze • Conduct Kickoff • Develop Mtg. to Align Goals electronic survey and Objectives • Roll-out to utilities • Collect and mine • Analyze survey relevant project results experience • Develop online survey content and define output requirements 5 • Conduct meetings (over course of project) - WEF Nutrient Mgmt. (Jan. 9, Miami) - NYWEA 2011 (Feb. 9, New York) - WEF R&B 201 (May 25, Sacramento) - WEF Water & Energy (Aug. 3, Chicago) • Analyze barriers • Identify strategy recommendations to overcome barriers • Summarize – Draft and Final Reports including Utility Profiles Final Report is Available from WERF Executive summary Introduction Biogas uses for renewable energy Online survey overview, results & interpretation Focus group summaries Small plant barrier mitigation Non-utility perspectives on barriers Conclusions and recommended next steps Plus: case studies, focus group minutes Report is available at: http://www.werf.org/a/ka/Search/ResearchProfile.aspx?ReportId=OWSO11C10 6 Conclusions The most significant barriers to biogas use are economic: higher priority demands on limited capital resources perceptions that economics do not justify investments Outside agents like power utilities can be barriers Air permitting can be a significant barrier in specific geographies/permitting situations Public agencies’ decision-making practices often hinder biogas use 7 Economic Barriers Inadequate Economics “The low cost of electricity is the most significant barrier for us. This makes it very difficult to justify the capital expenditure. The cost of electricity now is approx. $0.055/kWh. If this were to increase by even one penny, CHP would be more easily justified.” Charles Bott, Hampton Roads Sanitation District (VA) Uses biogas for digestion process; CHP project under design 8 low electricity cost = barrier Economic Barriers Competing Demands for Capital = No Go “Limitation of capital funds is a major barrier to implementing a CHP project. Ongoing challenges to rehabilitate aging facilities, which is necessary to maintain the District’s mission, take priority. This issue could not be overcome by 20- to 30year paybacks for biogas use projects.” Carrier Clement, WLSSD (MN) Uses biogas for winter building heating competing capital = no go 9 Decision Making Processes What Economic Rules Do You Impose on Yourself? “Required economic standards often relate to decision-maker preferences. In some cases, the threshold for payback may be only three to five years, killing a project. For other utilities, a reasonable payback might be 10, 20, or even 30 years – the ‘bond period’ for the expended capital.” New York City Focus Group 10 Decision-Making Processes “Others avoid using payback and find that biogas projects are easier to justify based on: • Impact on cash flow • Annual reduction in operating costs • Improved present worth” Sacramento Focus Group 11 Decision-Making Processes The Human Factors, Leadership, & How You Deal with Change “Advocates’ own conservatism in prediction of benefits can be a hindrance…. If anyone doesn’t want to do the project, they can just keep asking questions and creating doubt.” New York City Focus Group 12 Juxtaposition on Size Criterion How do Small Plants justify what Larger Plants can’t??? 13 Many smaller-capacity facilities found means to justify biogas use projects: 5- or 10-mgd lower-capacity barriers can be overcome with creative approaches In contrast, many 10- to 25mgd plants often consider their size to be too small BUILDING A WORLD OF DIFFERENCE® For the Answer: Consider Economic Methodologies applied to a Case Study 14 Fictitious Case Study Simplifies Assumptions Assumptions and Unknowns are rolled into this Simplified Case Capital costs are summarized Operational costs and savings are summarized Assumes no varied escalation or growth Uses 20-year life cycle at 2% net discount rate Unclear if this includes “monetized” non-monetary benefits and costs or not… 16 Simple Payback is Used, but has Shortcomings Does not consider time-value of money Does not consider impact on case flow Criterion: Allows a sliding scale for determination of suitability 13.3 years = Undetermined 17 Net Present Worth (NPW) is another familiar methodology Often used by utilities for master planning Does consider Cost of Money Careful “undervaluing” differences Criterion: If “Upgrade” NPW is better then “go” $7.9M < $8.2M; “GO” 18 Discounting is Important when Methodologies are used that Account for the Time-Cost of Money Do Nothing: $500k times 20 years = $10M $8,175,717 shown discounts annual to present cost $500k annual cost is multiplied by 16.35 to get “present cost” 16.35 = f(2%, 20yrs) 19 Benefit Cost Ratio (BCR) compares Changed Values Compares Benefits to Costs Criterion: If ratio > 1.0, then “go” 1.086 < 1.0; “GO” 20 Internal Rate of Return (IRR) finds Rate at which PW of Savings equal Costs 4.22% is the rate that, discounted over 20 years, makes the annual savings equal the capital investment Criterion: If the IRR > net discount rate, then “go” 4.22% < 2.0%; “GO” 21 Equivalent Uniform Annual Cost (EUAC) Compares Net Annual Costs Converts all costs to annual costs for comparison Criterion: Select the lowest EUAC Upgrade saves $14k/yr: “GO” 22 Reviewing the results of all five Methodologies… ? 23 Analyses are Sensitive to Term: 20-yr, 30-yr, or Other Try to select an appropriate term, equivalent to the anticipated life of the major equipment Include costs to “keep everything working” Sensitivity to term should be tested 24 BUILDING A WORLD OF DIFFERENCE® Conclusions 25 Conclusions There are opportunity-specific reasons for choosing one of these methodologies over another and multiple methods can used BCR – Direct comparison to see if benefits outweigh the costs IRR – is a good relative comparison that has context for most people but care must be taken with projects that have radically-changing annual cash flows or large future capital outlays NPV and EUAC – present project value as “capital” or “annual” costs Conclusions, continued… Use multiple methodologies and test sensitivity of any uncertain parameters: i.e. would the answer be the same if this was different Avoid Simple Payback – it’s easy… misleading… and used way too often… 27 These methodologies can be use for Biogas-Use Opportunities or any project that saves operating costs BUILDING A WORLD OF DIFFERENCE® John Willis, P.E., BCEE Brown and Caldwell Jwillis@BrwnCald.com (770) 361-6431