the economics of dairy anaerobic digestion with coproduct marketing

Review of Agricultural Economics—Volume 31, Number 3—Pages 394–410

The Economics of DairyAnaerobic Digestion withCoproduct Marketing

Clark P. Bishop and C. Richard Shumway

Increasing national focus on renewable energy has prompted a reappearance of anaerobicdigestion technology installations on dairy farms. The focus of this study is on an opera-tional digester in Washington State. Using the first two years of physical and financial datafrom the operational digester, a base scenario is constructed. The analysis focuses on theimpact of developing various coproduct markets on the digestion system’s feasibility. Thecoproduct markets analyzed include electricity, digested fiber, tipping fees, and carboncredits. The results of the economic analysis show that tipping fees and electricity are keyrevenue sources for the digester.

The revival of interest in anaerobic digestion technology has followed globalrecognition of climate change and the need for environmentally friendly pro-

duction systems and alternative energy sources. Digestion technology is environ-mentally beneficial as it captures and combusts the greenhouse gas methane. Thetechnology consists of an airless vessel and heating system to optimize a naturallyoccurring biological process. The direct result of the process is the production ofmethane and a reduction in harmful organisms. A metric ton of methane has aglobal warming capacity twenty-five times greater than carbon dioxide (IPCC,p. 214).1 Digestion also reduces the organisms that generate high chemical andbiological oxygen demand in dairy manure. Further benefits of digestion tech-nology include electrical production, reduced on-farm odor, and pathogen-freefiber for animal bedding. These benefits make digestion technology potentiallydesirable for dairy farms and the surrounding communities.

While digestion technology has multiple benefits, it has not been widelyadopted in the United States.2 The limited adoption of digestion could be dueto financial infeasibility or lack of information regarding the financial feasibility

� Clark P. Bishop is a Peace Corps volunteer in Moldova and a former graduate researchassistant in the School of Economic Sciences, Washington State University.� C. Richard Shumway is a professor in the School of Economic Sciences, WashingtonState University.

DOI: 10.1111/j.1467-9353.2009.01445.x

The Economics of Dairy Anaerobic Digestion with Coproduct Marketing 395

of digestion, or both. This paper explores the possibility that the key to finan-cial feasibility lies in coproduct marketing. The “best-documented” coproduct ofanaerobic digestion is electricity (Lazarus and Rudstrom, p. 357). In addition tothe energy output, potential coproduct revenue streams include avoided costsof other farm inputs (e.g., bedding purchases) and revenue from services (e.g.,accepting food waste).

The purpose of this paper is to examine the economics of anaerobic digestersfor dairy manure under alternative coproduct marketing scenarios. Using projec-tions based on an operational digester, common indicators are calculated to gaugethe economic performance of the operational digester. Several coproduct market-ing scenarios are formulated to determine how the feasibility of the digester isaffected.

Anaerobic Dairy Manure DigestionDigesters have been installed on dairy farms for decades. Early installations of

digestion technology resulted in mixed reviews. Lazarus and Rudstrom reportedthat seventy-one digesters began operation between 1970 and 1990 and had a 60%failure rate. In a survey of six digester operators who installed digesters in the1980s, Morse, Guthrie, and Mutters illustrated the numerous problems with di-gestion technology. Lack of cooperation on the part of utility companies was citedby several producers as an obstacle to successfully operating digesters. Other pro-ducers cited design and technical flaws as the reason for unsuccessful operation.The economic and technical uncertainties, coupled with a large capital expense,made anaerobic digesters a risky venture for early adopters of the technology.As a result, anaerobic digesters initially failed to gain widespread adoption ondairies in the United States.

More recent installations of anaerobic digesters have had the opportunity tolearn from earlier technological shortcomings and take advantage of new tech-nologies. Further, the combination of available funding and innovative partner-ships has helped to make digestion technology feasible for a larger number ofdairy farms. In a national context, the U.S. Environmental Agency’s AgSTAR pro-gram reported that between the years 2000 and 2005, at least thirty-eight dairydigesters began operation nationally. In 2005 alone, eleven dairy digesters beganoperation. In the Pacific Northwest, there are currently five digesters in operation,all of which began operation after the year 2000.3

In the United States, the most popular system is the mesophilic plug-flow di-gester (US EPA 2006). Plug-flow systems are relatively simple. No mechanicalapparatus is required once the manure enters the digester. The manure is movedby hydraulic pressure through an airless concrete structure for approximatelytwenty-two days to complete the digestion process. During this time the manureis broken down by mesophilic bacteria, resulting in the release of methane, carbondioxide, hydrogen sulfide, and other trace gases. To maintain an optimal temper-ature of 35◦C during this process of methanogenesis (Nyns), a heat exchangercaptures waste heat from the generator to heat the manure entering the digester.

The least expensive digestion system is created by covering an existing manurelagoon to capture combustible gasses. However, the digestion process is affectedby the seasonal variability of temperatures in a covered lagoon system. Another

396 Review of Agricultural Economics

system, similar to the plug-flow system, is the fixed-film digestion scheme thatis designed to reduce retention time and odor for dairies using a manure flushsystem (Wilkie). With reduced retention time, the fixed-film digester could poten-tially have a lower capital cost than the mesophilic plug-flow digester. The phys-ical structure of the digester is designed to maximize the bacterial contact withmanure using media suspended in the digester, thereby utilizing available bacte-ria efficiently (ibid.). Efficient digestion reduces capital costs because a reducedholding time means a smaller and less expensive tank is needed. Suspended me-dia are packed into fixed-film digesters, which increases problems with cloggingand limit their application.4

Construction of the first plug-flow dairy digester in Washington State wascompleted in 2004. Diverse parties lent support for the project. They includedresearchers studying digester coproduct extraction and technical feasibility, localpower utilities, and municipal entities. The use of a proven mesophilic plug-flow design and innovative partnerships helped the digester to avert many ofthe technical and economic issues hindering earlier digesters. Several more di-gesters are now in operation or under construction in the Pacific Northwest. Mostof these projects are taking advantage of diverse partnerships such as environ-mental groups, tribal governments, local businesses, and communities. In somerespects, digestion projects are a public relations tool for the dairy industry inaddition to a manure management technology.

Implementing digestion technology in the Pacific Northwest remains econom-ically challenging because of low power prices in the region. In regions whereelectricity prices are low because of inexpensive power sources, such as hydro-electric generation, other sources of revenue must be sought. Possible revenuesources include coproducts such as fertilizer, fiber, and carbon credits. The di-gester owner may also charge a “tipping fee” for receiving food waste from localprocessors. Each of these coproducts is discussed further in the next section.

Digestion Coproducts

ElectricityMost digesters in operation today have the capacity to generate electricity. De-

termining the price for electricity produced from biogas remains an ongoing issuefor potential adopters. Producers seeking economic benefits from electricity gen-eration have several options including power purchase agreements, net metering,green tag sales, and tax credits.

The power purchase agreement is a contractual arrangement between the pro-ducer and the local utility. Entering into the agreement requires negotiation, andthe contract does not guarantee a renewal. Further, utilities may require costlyfeasibility studies before power purchase agreements are accepted.

Net metering is an alternative to power purchase agreements. Washington netmetering policy requires utilities to accept power produced from renewable fuels.Net metering is an offset system; if the amount of energy produced exceeds theproducer’s need, it creates a credit (Washington State Legislature). Utilities haveargued that retail power prices would increase because of the instability causedby higher levels of aggregate power demand being met by net metering systems


(Cook and Cross). This increase in price could occur because utilities often arenot compensated for transmission and distribution under net metering systems(Cook and Cross). Further, as noted by Wirl (p. 81), “least cost planning is noteconomical for a utility that is regulated according to the common principle ofsetting price according to the fully distributed cost; in fact, such a utility is en-tirely indifferent and may or may not, start a conservation program, dependingon management’s preferences, because the profit does not change.” Wirl’s anal-ysis implies that the decision to support local digestion projects may be depen-dent on the utility’s management, which emphasizes the importance of fosteringpartnerships.

Sales of green tags are an increasingly popular option for digester operatorslooking to profit from their excess electricity. The green tag purchase replacesa certain block of traditionally produced energy with an equally sized block ofrenewable energy. This option allows citizens who view green power as a priorityto pay extra to support it.

Tipping FeesAnaerobic digestion is not limited to manure. Dairy anaerobic digesters can also

accept food wastes. Like manure, food waste is digested by the methanogenicbacteria in the digester that releases methane. Methane production from foodwaste is generally higher than from manure waste (El-Mashad and Zhang; Scottand Ma). Tipping fees for receiving food waste may raise revenue substantiallyand increase electrical production for digester owners.

In dairy digesters, the large feedstock of animal manure helps stabilize the di-gestion process by providing a high buffering capacity (Murto, Bjornsson, andMattiasson). Buffering capacity refers to how well the contents of the digestermaintain a constant pH. Digesters can operate with 100% food waste; however,given the absence of the manure, pH fluctuations can cause digesters to fail (Murto,Bjornsson, and Mattiasson; Scott and Ma). To safely increase the production ofmethane, food waste from dairy processing, fruit, and vegetable products couldbe considered in appropriate amounts (Scott and Ma). Moffatt ranks the gas pro-duction of numerous candidates for codigestion; manure ranks as the lowest gasproducer, while baking waste produces the most gas per ton. Even with the highbuffering capacity of manure, some food wastes are not compatible with manuredigesters and can have other adverse effects on digestion. Therefore, a digesteroperator faces additional risks when accepting food waste (Scott and Ma).

Digested FiberMany dairy farms use fiber separators to reduce the amount of solids stored

in their lagoons. However, fiber separated from manure waste is not free ofpathogens. While they can be eliminated from the fiber through composting, fiberseparated following digestion is free from pathogens without the added capital,space, and time required for composting. This fiber is commonly used as beddingmaterial for livestock and offsets the cost of traditional bedding materials suchas sawdust. Digested fiber is also marketed as mulch for berry and hydroseedingoperations. Technology is currently being developed with the goal of producing


a potting soil amendment similar to peat moss from digested fiber (MacConnelland Coyne).

Carbon TradingDairy farms with anaerobic digesters are eligible for carbon trading on the

Chicago Climate Exchange (CCX). For digester owners, carbon trading is a poten-tial source of revenue because methane emissions are reduced. However, withoutcompulsory emissions caps, CCX prices are low, unlike in countries that ratifiedthe Kyoto Protocol and have access to world carbon trading markets. The pricesavailable to digester owners are further reduced by large brokerage commissionsrequired for trading. These factors greatly impinge upon possible current rev-enues for digester owners.

Other Potential CoproductsWhile the primary potential sources of revenue for dairy manure digesters have

been noted, several other sources may exist for some digesters. Notable amongthe possibilities are sales of scrubbed methane, value of services derived fromwaste heat, and sale of fertilizer-grade struvite. These additional revenue sourcesare potentially important; however, insufficient reliable economic informationwas available on any to include them in this analysis, so they are mentioned hereonly as potential sources of revenue.

The biogas produced from digestion is primarily composed of methane andcarbon dioxide. As an alternative to burning biogas, the gas can be scrubbed toremove everything but the methane. The methane can then be sold to natural gasproviders. Prototype research at Western Washington University is also exploringthe use of scrubbed methane for transportation applications (Leonhardt) that hasthe potential for substituting for large quantities of fossil fuel. For example, Krichet al. estimate that the biomethane produced by dairy cows in the United Statescould power 1 million cars if captured and used for transportation.

A large amount of waste heat is produced in anaerobic digestion, only a portionof which is needed to keep the tank at an optimum temperature. Remaining heatcan be used for such things as floor heating in livestock holding areas, heatingother farm buildings, ambient heating for adjacent greenhouse operations, andheating for neighbors.

As environmental regulations become increasingly strict, the amount of nutri-ents that can be applied to farm land may decrease. The extraction of potassium inthe form of struvite from digester effluent could provide additional benefits to di-gester owners.5 Fluidized bed reactors are under development to extract struviteunder controlled conditions in livestock applications (Bowers). If struvite reactortechnology comes to fruition for dairy manure digester applications, struvite maybe sold as a specialty or bulk fertilizer product.

Analysis and DiscussionThe operational digester in Washington serves as the “base digester” scenario

for economic analysis. Construction of the digester began in June 2004 and was


Table 1. Component costs, base scenario digester

Component Cost

Pit $19,435Digester 498,913Gas mixing 27,777Cogenerator 282,087Building 95,637Total capital cost $923,849Other costsa 212,515Total cost $1,136,364

aOther costs include engineering costs, feasibility studies, and administrative costs.

completed in November 2004. A “start-up” phase occurred between the end ofconstruction and when the digester was fully operational in March 2005. Theconstruction costs are presented in table 1. The digester is a hardtop plug-flowdigester constructed for a maximum capacity of 1,500 cows. It was installed on a500-cow dairy farm; the digester was oversized in order to accommodate possiblefarm growth, off-farm manure, and food waste receipts.

Assumptions underlying the base scenario rely on data from the first two yearsof digester operations provided by the digester owner, the company that con-structed the digester, and the Washington State University research team work-ing with the digester. Alternative scenarios are created that differ from the basescenario with regard to life of the digester, private investment cost, number ofcows serviced by the digester, and individual coproducts. To allow comparisonwith previous studies, we start the analysis with a scenario based on the opera-tional digester’s actual construction costs, using manure from the 500-cow herd,deriving revenue from electricity sales and tax credits, and using digested fiberas bedding. In successive scenarios, we account for grants received, trucked-inmanure from 250 neighboring cows, food waste, tipping fees for food waste, saleof excess fiber, and carbon trading by the operational digester. This sequence ofscenarios concludes with the “base digester” scenario that is fully representativeof the operational digester. The base digester is then used to conduct sensitivityanalysis on the real discount rate, depreciation period, power generation, herdsize, fiber sales, and carbon trading.

Three economic indicators are calculated for each scenario—net present value(NPV), internal rate of return (IRR), and the modified internal rate of return(MIRR).6 For investment in the digester to be considered feasible, the NPV must bepositive and the IRR must be greater than the discount rate (Kay and Edwards).The economic analysis is conducted as though the digester is an independententerprise from the dairy, enabling the results of this major investment to be ex-amined in the context of alternative investments (Martin).

The revenue and operating cost expectations for the “base digester” scenarioare presented in table 2. The first two years of net incomes are from historicaloperations data for the digester.


Table 2. Yearly net income, base digester scenario

Source Year 1 Year 2 Expected

RevenueElectricity sales $97,088 $90,617a $97,088Tax credit 38,835 36,247a 38,835Avoided bedding cost 18,000 18,000 18,000b

Renewables (Tipping Fees) 82,169 121,564 111,767Digested fiber 10,265 2,372 6,319Carbon credit 4,932 16,425 14,527Other income 4,306 2,331 0

Total revenue $255,595 $296,615 $286,536Operating Costs

Manure delivery 47,539 18,016 32,778Building repairs 7,088 16,058 3,500Engine repairs 11,569 25,808 11,569c

Equipment repairs 27,199 49,668 29,000Oil 24,187 25,795 24,991Utilities 30,139 16,949 6,000Legal fees 9645 751 751Other professional service 11,212 4,810 8,011Miscellaneous 11,898 224 4,297

Total operating expenses $180,475 $158,078 $120,894Income above operating costs $75,119 $138,537 $165,641

aHerd size dropped from 500 in the 1st year to 416 in the 2nd year. In each scenario, herd size washeld constant at 500 (or in one case, 1,300) in all years. Electricity sales and tax credit were adjustedto a 500-cow herd when calculating total revenue for year 2.bAvoided real bedding costs are expected to increase 5% per year in years 4–7.cExpected engine real repair costs are $34,517 every 4th year and $25,808 in years 6, 10, 14, etc.

Several categories of expected real operating costs were based on the average ofthe first two years of operation. Two exceptions were lower expected building andequipment repairs because some of the costs in the first two years were relatedto needed modifications that were not anticipated during construction. Also, asthe farm gained experience using residual heat from the digester, utility expensesdropped markedly and are expected to stabilize at a lower level than either of thefirst two years of operation. Repetitive legal fees are expected to follow the secondyear’s experience and a variety of miscellaneous expenses are not expected to berepetitive.

Expected maintenance costs were extrapolated from a twelve-year maintenanceschedule provided by the construction company. As noted in a footnote to thetable, they are greater in some years than in others. For example, regular engineoverhauls are expected every two years and major engine overhauls are expectedevery four years. These irregular costs were included in the economic calculations.

The real cost saving incurred by using digested fiber as bedding is expectedto increase 5% per year in years 4–7. This expectation is driven by the fact that alarge mill in the area recently installed a cogeneration unit fueled by wood wastethat will reduce the local supply of sawdust bedding.


Table 3. Base digester real revenue expectations, beginning withyear 3

Revenue Source Unit Year 3 Based On

Electricity production volume kWh 1,941,760 year 1Electricity value $/kWh 0.035 averageGreen tag sales $/kWh 0.015 averageTax credit $/kWh 0.02 averageTrucked in manure Cow 250 averageHauling cost $/cow 131 averageFood Waste Volume:

Salmon carcasses Truckload 893 averageCheese whey Truckload 500 averageInedible eggs Truckload 300 year 2

Tipping Fee Charged:Salmon carcasses Truckload 66 averageCheese whey Truckload 66 averageInedible eggs Truckload 66 year 2

Fiber sales volume: cu. Yard 468 year 1Fiber sales price: $/cu. Yard 13.5 averageCarbon credit volume: Credit 7,300 year 2Carbon credit price: $/credit 3.98 2008Herd size Cow 500 year 1Total cows AUM 1,013 year 1

Real revenue expectations and pertinent technical coefficients for the “basedigester” are presented in table 3. Most are based on the first two years of expe-rience, but there are exceptions. Expected electricity volume is based on the firstyear because the modeled herd is based on that year’s 500-cow herd. Expectedfood waste volume and tipping fees include inedible eggs that were only receivedbeginning in the second year. Fiber sales volume is based on the first year’s experi-ence because modeled herd size is the same as the first year’s herd. Carbon creditvolume is based on the second year because the digester owners fully engaged inthat market only in the second year.

The costs and revenues used for the analysis began after the four-month start-up phase ended. Income exceeded operating costs during the start-up phase by$3,588 that was discounted and credited to the initial cost.7

The “base digester” scenario had actual investment costs of $1,136,364. Grantscovered 38% of the total investment cost. The physical depreciation period wasconservatively estimated to be twenty years for the digester (pit, digester, and gasmixer) and seven years for the cogenerator. The milking herd in 2006 consisted of500 cows. Manure was trucked in from another 250-cow milking herd. Based on2006–2007 food waste from salmon carcass and cheese whey and 2007 food wastefrom inedible eggs, real tipping fees were expected to add $111,767 in annualreceipts. Electricity was sold for $0.05/kWh, including green tag sales. A tax


credit of $0.02/kWh was received and was expected to continue over the life ofthe digester. The value of carbon credits was computed at prevailing early 2008CCX rates of $3.98/carbon credit with a 50% commission charge. Nearly 85% ofthe extracted fiber was used as pathogen-free bedding, and 468 tons were sold for$6,319.

The real discount rate was set at 4.0% based on the opportunity cost of farmcapital. While considerably higher than the real interest rate for capital borrowedto construct the digester, it is close to the average of the 4.3% rate of return to U.S.farm assets reported by Blank for the period 1960–2002 and the 3.4% rate of returnto U.S. farm equity based on ARMS data (USDA) for the period 1996–2006.

Two additional assumptions were applied to all scenarios. The first is that thepotential investor is risk neutral, so the analysis does not make any adjustment forhigher risk.8 The second is that manure management real net costs do not changeover the planning period.

The NPV, IRR, and MIRR for sixteen scenarios are reported in table 4. The firstseven sequentially develop the “base digester” scenario, and the last nine reportsensitivity analysis results relative to the base digester scenario.

Electricity Sales from 500 CowsIn Scenario 1, which provides a reference for direct comparison with previous

studies, the full cost of the digester is borne by the owner, manure enters thedigester from the 500-cow herd, electricity is produced and sold, and digestedfiber provides a cost saving through its use as bedding. No manure is receivedfrom other cows, no food waste is received, and no coproducts are sold. Becausethe digester would be used at far less than its capacity, the physical depreciationperiod is expected to be forty years for the digester and fourteen years for thecogenerator.

This scenario provides a negative estimated net present value of nearly $650,000and an MIRR of 1.8%. Electricity sales, even with green tags and tax credits, aregrossly inadequate to make the investment in an oversized digester for this farmeconomical.

GrantsOne of the purposes of public grant support for private investments is to help

compensate for the learning costs of implementing new technologies. The digesterin this analysis was the first such project completed in Washington. If the sametype of digester was built several times, it is likely that some costs would bereduced. An example is the difference between digesters installed in the 1980sand digesters installed today. The basic technology is similar but recently installeddigesters provide cost savings and fewer technical deficiencies.9

Federal and state construction grants for this project were received shortlyafter construction was completed. In Scenario 2, the value of the grants receivedis subtracted from the digester’s investment cost. Although still negative, thisscenario adds $442,000 (the amount of the grants) to the NPV. The IRR is 2.0%and the MIRR is 3.1%.


Table 4. Digester system results

NPV IRR MIRRScenario $ % %

1. 500 cows, electricity @ $.05/kWh +$.02/kWh tax credit, fiber used forbedding, 4.0% real discount rate,forty-year depreciation

(644,556) – 1.8

2. 1 with grants = 38% of digester cost (202,073) 2.0 3.13. 2 with manure trucked in from 250

cows, thirty-year depreciation(727,607) – −9.7

4. 3 with food waste, twenty-yeardepreciation

(404,597) −3.3 −0.2

5. 4 with tipping fees for food waste 1,094,948 17.1 9.16. 5 with sale of excess fiber at $13.50

per ton1,185,416 18.1 9.3

7. Base digester: 6 with carbon creditsand 50% commissiona

1,375,371 20.0 9.9

8. 7 with 3% discount rate 1,579,458 20.0 9.39. 7 with 5% discount rate 1,196,597 20.0 10.4

10. 7 with thirty-year depreciation 1,970,747 20.5 8.811. 7 with no power generation 319,750 9.3 6.412. 7 with 1,300 cows, no food waste 1,270,566 19.3 9.613. 7 with sale of all fiber at $13.50 per ton 1,424,067 20.7 10.014. 7 with sale of all fiber at $20 per ton 1,623,366 22.7 10.515. 7 with 25% commission on carbon

trading1,470,349 20.9 10.1

16. 7 with carbon trading at ECX price of$20.48, 50% commission

2,164,889 27.4 11.6

aRevenues in excess of operating costs for the first ten years of the base digester are, respectively,$75,119,138,537, 165,641, 143,592, 167,486, 154,241, 169,520, 146,572, 169,520, 155,282. After year 6, netrevenues stabilize on a four-year rotation.

Transported ManureAs the primary feedstock for the digester, the amount of manure directly affects

the amount of electricity produced. In addition to the digester owner’s 500-cowherd, the digester receives manure from 250 cows on a neighboring dairy ap-proximately 1 mile away, which is subsequently returned after processing. Thisresults in a large cost for transporting manure to and from the digester. Manurefrom the neighboring dairy has been transported by the digester owner withoutpayment or tipping fees for the manure. With the increased amount of manure, itis expected that the physical depreciation period will decrease to thirty years forthe digester and 10.5 years for the cogenerator.

The cost to the digester owner of transporting the manure is much greater thanthe value of the additional electricity generated. The estimated NPV for Scenario3 is more than a half million dollars lower than for Scenario 2, and the MIRRis −9.7%.


Food Waste and Tipping FeesThe digester receives food waste from several local food processors. The food

waste consists of salmon carcasses, cheese whey, and inedible eggs, which aretransported to the digester without cost to the digester owner and a tipping fee ispaid. In terms of volume, food waste accounts for only 17% of this digester totalinfluent. However, because it has higher energy content than manure, approxi-mately 37% of total digester gas production comes from the food waste.

Even without considering tipping fees for the food waste, the value of the addi-tional electricity generated by the food waste in Scenario 4 adds nearly $325,000to the estimated NPV. However, the NPV, IRR, and MIRR remain negative.

Tipping fees from food waste are the largest source of revenue to the digester.When they are included in the Scenario 5 calculations, estimated NPV grows bynearly $1.5 million and results in the first scenario with a positive NPV. The IRRis 17.1% and the MIRR is 9.1%.

One important caveat to these findings is that the cost of on-farm nutrient load-ing from food waste is not considered in the calculation of the financial measures.A plan must be in place to remove excess nutrients, if any, from the farm. Thisanalysis did not quantify the value of nutrients, either in terms of increased re-moval costs or marketable value. Digester effluent has value when it can be usedas a fertilizer for agricultural operations with high nutrient demands. However,this could result in transportation costs that would depend on the distance thedigested effluent must be transported. The base scenario’s NPV is large enoughthat some added transportation costs will not alter the viability of the investment,especially if the digester owner can make revenue from selling liquid effluent.10

Fiber SalesBesides using digested fiber for pathogen-free bedding, 15% of the fiber was

sold as a soil amendment. Expected continuation of this level of fiber sales isconsidered in Scenario 6 and would add about $90,000 to estimated NPV, increaseIRR by 1% and MIRR by 0.2%.

Base DigesterCarbon credits provide the final source of revenue for the “base digester” and

do so without adding any direct costs to the digester owner. Without access tothe European Carbon Exchange (ECX), the digester uses the Chicago ClimateExchange (CCX) market value for carbon credits. Even with a 50% commission,the sale of carbon credits in Scenario 7 adds $190,000 to expected NPV, 1.9% toIRR, and 0.6% to MIRR. Thus, after accounting for actual grants received, allfeedstocks entering the digester, and all coproducts marketed, the base digesteris expected to generate an NPV of nearly $1.4 million with a 20% IRR and a 9.9%MIRR. The estimated NPV is large enough to suggest that even if costs exceedexpectations by nearly 75%, the digester could remain economically feasible. TheIRR for the base digester scenario is also large enough to imply that the digesteris competitive with many nonfarm investments.

The most important single contributor to the base digester’s NPV is tipping fees,followed in turn by electricity, grants, and food waste. The carbon market and


fiber sales also added to the NPV, but the negative economic impact of trucked-inmanure more than offset the contribution of electricity generation. However, fora small-herd digester that receives food waste, manure from other farms may benecessary to provide adequate buffering for fluctuations in the quantity of foodwaste received. While the value of buffering capacity is difficult to quantify, thecost of inadequate buffering is operational failure.

In the following sections, several alternatives to the base digester scenario areexamined by way of sensitivity analysis. We examine the impact on NPV, IRR,and MIRR of alternative discount rates, depreciation period, power generation,herd size, fiber sales, and carbon trading conditions.

Discount RateThe real discount rate used for the NPV calculations is 4.0%, which is similar

to historical rates of return on farm equity. It is higher than the actual real intereston the digester’s loan. The sensitivity of the NPV to discount rate is illustratedwith two alternative scenarios, one with a lower (3.0%) and another with a higher(5.0%) real discount rate. The lower discount rate increases the NPV in Scenario 8by more than $200,000 but decreases the MIRR by 0.6% because the rate of returnon reinvestments is lower. The higher discount rate reduces the NPV by nearly$180,000 and increases the MIRR by 0.5% in Scenario 9.

Physical Depreciation PeriodThe life of the base digester is estimated to be twenty years (Martin). The di-

gester is a concrete structure and physically should last well beyond twenty years.Sensitivity to this conservative assumption is tested with a thirty-year physicaldepreciation period assumption in Scenario 10. While the NPV increases by nearly$600,000, the IRR increases by only 0.5% and the MIRR decreases by 1.1%.

Power GenerationBiogas produced in the digester is piped into a reciprocating engine, retrofitted

for natural gas combustion. The maximum generator capacity is rated at285 kWh. Since the base digester includes several coproducts, Scenario 11 ex-cludes electrical generation for comparative purposes. Since the investment ingeneration equipment would not be needed, it is also excluded. While the invest-ment remains feasible, the NPV drops by more than $1 million, the IRR by 10.7%,and the MIRR by 3.5%.

Herd SizeTo determine the effects of operating the digester at near capacity with manure

produced on the farm, Scenario 12 represents a 1,300-cow herd. With a maximumcapacity of 1,500 cows, a reasonable operational upper limit is 1,300 cows. Thislimit provides flexibility to accommodate fluctuations in influent flows from man-agement practices and weather. The larger amount of manure will increase theproduction of electricity, carbon credits, and fiber proportional to the increase in


manure. The additional cattle provide enough gas to run the generator at nearly100% capacity, but it is insufficient to compensate fully for lost electricity gen-eration and tipping fees from food waste. This scenario decreases NPV by morethan $100,000, IRR by 0.7%, and MIRR by 0.3% relative to the base digester. It isclear that digesters installed with excess capacity can more than make up for thesmaller amount of manure if they can add food waste.

Potential Fiber MarketsBesides being used for pathogen-free bedding, all the digested fiber could be

sold to firms that use fiber in value-added markets such as potting amendments.In the base digester scenario, most of the fiber is used as a bedding substitute onthe dairy, and a small portion is sold as a raw material for soil amendments. Asbedding is the lower-value alternative, sales of the separated fiber are preferred.Early tests suggest it can substitute for peat moss, but this market for the fiberis new and underdeveloped. It will take empirical evidence of a reliable supplyand consistent quality for the price of digested fiber to reach a level comparableto peat moss.

Without established markets, fiber sales are unpredictable. The fiber from thedigester has been sold for $13.50 per cubic yard, but sales have varied. The firstalternative, Scenario 13, considers the possibility that all digested fiber is sold atthe current rate of $13.50 per cubic yard. This scenario increases estimated NPVby nearly $50,000, IRR by 0.7%, and MIRR by 0.1%.

Scenario 14 anticipates development of a potting medium market for the fiber.Selling all the fiber produced at a modestly higher price of $20 increases NPVby nearly $250,000, IRR by 2.7%, and MIRR by 0.6% from the base digester. Thishigher price is considerably lower than the price of imported peat moss. But,marketing the fiber as a peat substitute will require a concerted technological andmarketing effort to develop a reliable, high-quality product.

Carbon Credit TradingThe first carbon credit option, Scenario 15, considers the impact of cutting the

carbon trading brokerage fees for trading on the CCX from 50% of the tradedvalue to 25%. This decrease in trading commission is comparable to changesthat occurred in sulfur dioxide trading commissions in the early 1990’s (Joskow,Schmalensee, and Bailey). Reduced trading commissions would increase the NPVby $95,000, IRR by 0.9%, and MIRR by 0.2%.

A final possibility examined, Scenario 16, considers how the digester ownerwould benefit by having access to the European carbon markets (ECX). The dif-ference between the NPV value of the base digester scenario and the ECX tradingscenario is substantial because the ECX price is so much higher than the CCXprice. NPV gains approach $800,000, IRR increases by 7.4%, and MIRR increasesby 1.7%. These are the largest increases in financial measures of any individ-ual option examined in the sensitivity analysis. While the future of voluntaryU.S. carbon markets is uncertain, several state and local governments are tak-ing action in lieu of the federal government’s failure to act (Bang et al.). Stateactions to cap carbon emissions should grow the carbon trading market. Yet,


without a homogenous federal cap policy, it is uncertain how stable the emerg-ing market will be and whether prices will reach ECX levels without federalmandates.

Conclusions and Inferences for Decision MakingThis paper has examined the economic feasibility of anaerobic digestion. A

base digester system scenario was developed sequentially for a dairy based oncost and revenue data from the first operational digester in Washington. Baseexpectations were established regarding how coproduct markets will develop,and resulting net income projections were computed for the operational life ofthe digester. From these projections, estimates of NPV, IRR, and Modified IRRwere computed. A wide range of alternative scenarios was considered to addressthe sensitivity of the base digester scenario to assumptions. They included thediscount rate, physical depreciation period, power generation, herd size, fibersales, and carbon credit trading.

An alternative power generation scenario documented the importance of elec-tricity as a source of revenue. Although the base digester would be economicallyfeasible without generating power, electricity prices are important and warrantattention both by those considering investment in digester technology and bypolicy makers. Because of the way public utilities are regulated, additional legis-lation may be required to align the goals of utilities with those of small generatorsof green electricity.

The analysis demonstrated that the traditional perception of digesters as pri-marily being electrical generators is outdated, at least for oversized digesters. Ifdigestion were used on the base dairy only for waste management, pathogen-freebedding, and power generation, it would not be economically viable. However,with the availability of digestion coproduct market opportunities, it is an attrac-tive investment. One implication is that geographic placement of the digester canbe important in order to take full advantage of potential coproduct markets.

A comparison of the scenarios that consider power generation and tippingfee receipts reveals that, while important, the emphasis on electrical generationmay even be a secondary concern to establishing relationships with food pro-cessors. Food processors already disposing of food waste are unlikely to have apreference where waste is dumped as long as cost is similar. As such, workingrelationships with food processors could be relatively easy to negotiate. Whenplanning a digester, the proximity to potential food waste sources should beconsidered.

Of the alternatives considered, the only scenarios that made the investment in-feasible received no food waste. Even with food waste, the investment remainedinfeasible without tipping fees. Further, no single change would fully compen-sate for loss of tipping fees from food waste to the base digester. The only optionthat would come close to fully compensating would be to build the digester ona dairy that could provide enough manure to use it at near capacity. Because thedigester configured for this dairy had excess capacity, it would not be econom-ically feasible without the additional electricity generated from the food waste.Further, revenues from tipping fees were more important than all digester productrevenues combined.


Receiving food wastes has the added environmental benefit of diverting nutri-ents and energy currently dumped in landfills. It should be noted that the value ofthe diversion was calculated only in terms of private costs. While not consideredhere, the social value of avoided landfill use may be higher than the private cost.In addition, capturing new sources of fertilizer that can displace conventionalsynthetic fertilizers promotes a more sustainable food system. Using digestion, itmay be possible to efficiently redistribute nutrients in a manner that is optimalfor the dairy farm, crop farms, and society in general.

However, the benefit of food waste for digestion is limited by how many nu-trients the farm can effectively utilize or move to productive off-site uses. If thefarm does not have the means to take advantage of available nutrients, excessaccumulation on the farm could become costly. Nutrient extraction technologiescurrently in development could prove a critical link in assuring economic fea-sibility of digesters and sustainable waste management practices. Neither thepotential on-farm value of beneficial nutrients nor the costs of disposing of excessnutrients were explicitly assessed in our analysis because their value or cost isfarm specific.

Development of other coproduct markets could greatly improve the economicfeasibility of digesters for a large audience of potential owners. Revenues fromcarbon credits, revenues from fiber sales, and/or cost savings from on-farm useof digested fiber can provide important supplemental income to digester own-ers. Both can be enhanced by public policy to promote investment in digestiontechnology as a holistic approach to renewable energy and sustainable food pro-duction. Policy aimed at significantly reducing carbon emissions could result incarbon credit prices approaching those of the European carbon market. Invest-ment in research and development could enhance the quality of the digested fiberproduct for organic uses and facilitate the movement of extracted nutrients offthe farm.

As world energy markets fluctuate, there may be increased interest in scrubbingthe gas for sale to gas companies or for use as a transportation fuel. Renewableenergy issues were hyped in the 1970s and 1980s but then retreated from thepublic consciousness for more than a decade. While a decline of interest in alter-native fuels would not behoove society, the economics of digester operations andadoption under harsh market conditions should be considered. Too much em-phasis on “best case” scenarios could prove economically disastrous for adoptersof digestion technology.

The broad benefits of digestion systems warrant careful policy attention whenconsidering the direction of future renewable energy programs. In comparison tothe current emphasis on biofuels that use conventional inputs to produce modestnet energy gains from renewable sources, digestion is an integrated sustainabletechnology that contributes to climate, air, and water protection.

AcknowledgmentsWe want to thank the anonymous reviewers for their constructive comments and the following for

financial support of this project: the Washington Agricultural Research Center, the USDA CooperativeState Research, Education and Extension Service (Hatch grant number #WPN000275), and the USDANatural Resources Conservation Service (grant 3025-7554).


Endnotes1This figure is for a 100-year time horizon from findings of the third Intergovernmental Panel on

Climate Change (IPCC). A value of 21 based on an earlier IPCC still appears in some literature.2Anaerobic digestion and corresponding coproduct markets are considerably more advanced in

Europe than they are in the United States. Because digesters operate in a very different policy andeconomic market there, we consider only one scenario in this paper based on the European case.

3The Pacific Northwest encompasses Washington, Oregon, and Idaho.4They cannot be used on dairies with high solids manure or food waste. These systems are designed

for flushed manure.5Struvite is magnesium ammonium phosphate hexahydrate.6The NPV, IRR, and MIRR estimates are based on pretax net income forecasts. The net income

calculations exclude federal and state income taxes. Thus, the net present value and rate of returnestimates can be compared with those for alternative investments on a pretax basis. The MIRR differsfrom the IRR in that we use the real discount rate for reinvestment returns rather than the calculatedIRR.

7This procedure imposes a slight bias on the results since the full cost of the investment was incurredduring construction. However, relative to the total investment cost, the impact of treating it as a costoffset rather than a return on investment is trivial and simplified the calculations.

8For instance, a risk premium could be added to the discount rate.9The base scenario digester uses remote monitoring systems that save time and money. Another

example is an improved system for cleaning the digester when it becomes clogged.10The value from selling nutrients could be enhanced if technology currently in the development

stage for extracting dry nutrient products such as struvite is successful.

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