Wisconsin is already a leading producer of energy from dairy waste, and sunny industry reports suggest the opportunity for the number of digesters in the U.S. to grow more than tenfold in the next decade to a mature market worth nearly $3 billion a year.
But today, the market for anaerobic digesters—covered lagoons or tanks designed for efficiently extracting usable biogas from manure and other agricultural waste—is still small. And a thicket of complications need to be resolved before the industry can make the most of this optimistic future.
Dairy farmers, technology companies, university researchers, policy makers, and other groups in Wisconsin and beyond are trying to solve a complex puzzle that could make more digester projects economically viable through maximizing the value of all of their products, including monetization of their environmental benefits.
Digesters turn agricultural and food-production waste—which carries potent greenhouse gasses and can threaten water quality, particularly around large confined animal feeding operations—into a source of new revenue, rather than a cost. The trick is to use this raw material to make heat, energy and other useful products. Digesters capture methane, which is 20 times as potent a heat-trapping gas as carbon dioxide, helping the dairy industry meet a goal of reducing greenhouse gas emissions 25 percent by 2020.
One of Wisconsin’s largest dairies was just outfitted with a new digester, bringing the number in the state to 38. That’s progress, but another 45 projects—some dating to the early 1980s—have ceased operating, according to an Environmental Protection Administration database, underscoring the challenges inherent in this business, and in the dairy business more broadly. The EPA counted about 220 operational anaerobic digesters at commercial livestock operations nationwide as of November.
Inaugurated in December, the Rosendale Dairy project southwest of Oshkosh, WI, illustrates how each project requires a bespoke set of partnerships, financing agreements, and long-term supply and purchase commitments to go forward.
“Those economics are very, very challenging for every project that is being built or proposed currently in Wisconsin,” says Nadeem Afghan, CEO of BIOFerm Energy Systems, the technology provider for the Rosendale project.
Rosendale is BIOFerm’s fifth U.S. digester project, but the company’s German parent, Viessmann Group, a nearly 100-year-old, family-owned heating systems manufacturer, has built some 350 biogas plants, mainly in Europe. Based in Madison, WI, BIOFerm began U.S. operations in 2007.
The digester is designed to handle 240 tons of manure coming from the 8,500 cows at Rosendale each day. MilkSource, which owns the dairy, planned the digester to help reduce its environmental impact. It will also have a significant educational component.
“But based on the commercial payback in Wisconsin, they were quite concerned in going alone and doing that,” Afghan says, adding, “In Rosendale’s case, it took really the championship of the University of Wisconsin-Oshkosh Foundation, and our company, where we were willing to underwrite the risk.”
The Rosendale project is designed to produce 1.4 megawatts of electricity, but there’s enough capacity at the dairy to generate 2.2 megawatts, Afghan says. Madison, WI-based Alliant Energy, the local utility, is paying 9.2 cents per kilowatt hour, but would not contract for the additional power, he says.
The power output of the digester would generate only about 50 percent of the revenue necessary to cover its $7 million cost over the five-year term of its loans, which were provided by Wells Fargo, Afghan says.
In Wisconsin, as in many other states, power contracts with utilities are difficult and costly to negotiate, and do not bring premium rates for electricity from dairy digesters. (An earlier program that allowed Wisconsin utilities to offer digesters a premium, essentially as an experiment, has expired.)
“It would be easy if they gave me a German subsidy and bought my power for 29 cents [per kilowatt hour],” Afghan says. “I could quadruple the company’s size.”
Germany had some 7,800 agricultural biogas plants as of 2012 (8-page PDF). Renewable energy has thrived there thanks to a feed-in tariff that amounts to a government-guaranteed, long-term power contract, making the decision to build a biogas plant or put solar on the roof almost as easy as investing in a bond.
While feed-in tariffs have found little traction in the U.S., Wisconsin is one of 29 states with utility renewable energy mandates. Most of the utilities in the state have met, or are on track to meet, the target of generating 10 percent of their energy from renewable sources by 2015, says Gary Radloff, director of Midwest energy policy analysis at the Wisconsin Energy Institute, at University of Wisconsin-Madison.
Along with a lack of mandated demand for renewable energy, the U.S. natural gas boom has driven down electricity prices across the country.
“Biogas has had to compete, just like any market situation,” Radloff says.
Increasing Wisconsin’s renewable energy mandate could give dairy owners considering digesters the prospect of a higher price for power. But Radloff does not see the political will to do that in Wisconsin currently.
Even if there were, digesters—even large ones like Rosendale—are quite small by the standards of modern utility-scale wind and solar projects. Radloff says an expanded renewable energy mandate that carved out a chunk specifically for digesters could help.
In addition to fueling electricity generation, biogas from digesters can be compressed and used as a transportation fuel. “It’s gold if it competes with diesel as opposed to grid electricity,” Afghan says.
It can also be injected into natural gas pipelines, as is the case at some landfills. But both of these options carry heavy up-front costs, and, in the case of transportation fuel, the gas is only useful if you have a properly equipped vehicle fleet that can consume it.
At bottom, energy production alone in the current market is insufficient to make most U.S. digester projects financially successful. They need other revenue streams.
The partnership behind the Rosendale project also includes Madison, WI-based Soil Net and Milan, IL-based Infinity Lawn and Garden. Those companies plan to market clean manure that emerges from the digester as a soil amendment at major home improvement stores. This business line is expected to generate the other half of the revenue needed to make the project pencil out, Afghan says.
Last year, the Innovation Center for U.S. Dairy commissioned a report on the potential market value of all digester products. These include energy; clean manure for animal bedding, soil amendments, and alternatives to peat moss; concentrated fertilizers created from nitrogen and phosphorous recovered from the manure; tipping fees that digesters could receive for taking waste from food production and other sources that would otherwise go to a landfill; and carbon and renewable energy credits.
If digesters were to be built on the 2,647 dairies nationwide where the EPA has deemed them feasible (41-page PDF), these digester products could generate $2.9 billion a year, at mid-range estimates, according to the report, by Informa Economics (119-page PDF).
But it’s not at all clear to digester developers that long-term supplies of food waste exist for most dairies, or that there are long-term buyers willing to pay adequate prices for the volume of phosphorous, nitrogen, and other products that would be produced by the hundreds of digesters envisioned in the report.
And, as the Rosendale example shows, assembling all of these revenue streams and packaging them in a way that will make bankers comfortable enough to lend is costly, time-consuming work that has to be done in advance—and may ultimately reveal that a project does not make financial sense. “Who pays the pre-development charges for these projects?” Afghan says.
Farm Power Northwest, which has built five dairy digester projects in the Pacific Northwest, is putting further development on hold.
“There’s just not that many sweet spots where everything works,” says co-founder Kevin Maas.
Unlocking the economics of that next tier of projects requires some combination of higher power prices, better support from utilities, or federal tax grant support, he says.
Dairy digester project economics are even more difficult since a federal tax credit that covered up to 30 percent of eligible project costs expired Dec. 31.
Farm Power is also trying to develop some of the other digester products listed in the Innovation Center report. Working with researchers from Washington State University, the company is testing production of a nitrogen-based fertilizer that is on par with commercial fertilizers at its digester in Enumclaw, WA, Maas says.
“But to actually make it and not lose money on it is difficult,” he says. “I think we can do it. It’s not going to be a huge profit center.”
Rather, it’s a nutrient-management strategy for an area that has too much manure, impacting local water quality. In other places with similar issues—around Chesapeake Bay, for example—this approach gets really interesting. “But I think even there, the stick is not big enough to force farmers to do anything,” he says.
Wisconsin farmers face a stick in the form of phosphorous regulations that could drive them to use digesters to manage their waste. But implementation of the rules has been delayed, says Radloff, the energy policy analyst.
“I still think that some combination of this phosphorous rule coming on line—which requires you to manage your waste differently—and the economic opportunity of the energy and the co-products, at some point, it will come in line, it will make sense,” he says.
BIOFerm’s Afghan is also optimistic.
His company is working on reducing costs through innovation and market expansion. It recently introduced a containerized digester suitable for the smaller herds—as few as 100 head—that characterize most Wisconsin dairies. The units were developed and are manufactured in Europe. Afghan would like to see them manufactured in the U.S. to save shipping costs.
“Innovation is one part of the equation, but how do we get the acceptance and adoption of these technologies,” he says.
BIOFerm’s next project in the works is at a 25,000-cow dairy in California, a state that is perhaps the most promising for digester development—as it is for virtually all renewable energy technologies—thanks to its regulation of carbon pollution. While large industrial emitters are currently the only ones subject to California’s cap and trade rules, their emissions can be offset through investments in projects including dairy digesters.
A dairy owner typically makes an investment if it will provide a return in three to five years, Afghan says. The outlook for a return on digesters can sometimes fit within that window.
“But if you have a long-term outlook on the carbon market—and big institutions in California have that—that creates interest in looking at manure and waste [projects],” Afghan says. He adds: “The U.S. market is a long-term investment we’ve made.”