The Economics and Feasibility of Electricity Generation Using Manure Digesters on Small and Mid-Size Dairy Farms

The thrust of this paper has been significantly revised since the project was first conceived. The initial aim was to assess the economic viability of electricity generation using methane from manure digesters on dairy farms under different electricity rate regimes. The initial idea was a simple one. If electric companies (transmitters and distributors) buy and sell electricity to the same generator/user at different rates, there is potential for significant economic inefficiency. It was my hope that a sense of the magnitude of this inefficiency could be assessed. The assessment would begin with the determination of the number of generators likely to operate under different pricing regimes. Taking the price regime wherein electricity would be purchased and sold at the same price to be the efficient benchmark, an estimate of the cost inefficiency from extant price regimes could be recovered.As I have learned more about digesters, three points have emerged that speak to the inadvisability of using such an analysis to determine appropriate rate structures. The first, is that there are significant external benefits to producing electricity using digesters instead of coal. This means that the marginal social benefits of using biogas to generate electricity instead of coal are positive, implying that an otherwise efficient rate structure will err against biogas.The second consideration is that manure digester technology is still in its infancy. In the U.S., there are almost as many different digester designs as there are manure digesters. In 1994, there were only 25 digesters operating on commercial farms in the U.S. Today that number is up to 32, although only 14 of them are on dairy farms.Many of those digesters that are in operation are supported by research grants and “green power” prices for their electric output. The diversity of design is appropriate given the diversity of farm size, location, management, energy needs and climate, as well as the potential gains from further experimentation. However, it does make identification of a “typical” digester difficult, and prediction of adoption levels nearly impossible. It also means that entering into the digestion/generation business today is a risky proposition and that the risk is likely to decline significantly as the data and experience accrued by early adopters leads to improved design and operating guidelines. The existence of substantial external learning-by-doing benefits from the investments of early adopters implies that the pricing scheme conventionally regarded as efficient (wherein the distributor pays a buy-back rate equal to its selling price) would only be appropriate if accompanied by subsidies to early adopters. The asymmetrically large risks faced by early adopters are likely to reinforce the need to subsidize them.The third realization is that it is not useful to consider a farm’s digestion/generation operations merely as an appended operation that could marginally improve its bottom line. The economic linkages between digester and dairy operations are significant and complex. For example; the profit potential of a digester/generator depends critically on the quantity and quality of the manure and bedding that it must digest. In particular, there is evidence of economies of scale in the digestion/generation process, in large part due to the substantial fixed costs (with respect to size) of building a generator and equipping it to supply power to the grid. At the same time, smaller farms, which pay higher rates for purchased power, and use more energy per unit of dairy output, might stand to make relatively larger cuts in the costs of their dairy outputs. Thus, the impact of digestion technology and rate structure on the competitiveness of dairy farms of different sizes is, at least in theory, a qualitatively open question. And if the distribution of farm sizes is revised, then the predicted patterns of adoption must be revised as well.Even if this issue could be adequately resolved empirically, and a policy maker’s preferences with regards to farms size were clear to begin with, the interconnectedness of digestion and dairy operations has another influence on the policy debate. Manure digestion is extremely helpful in the elimination of odors. This could substantially reduce the legal costs, barriers to, and reasons to dislike, larger dairy farms. For all the above reasons, the impact of digester technology cannot be seriously assessed unless close attention is paid to its likely impact on dairy operations, the distribution of farm size and the economic implications of such distributions. Furthermore, while standard economic arguments suggest that the benchmark efficient pricing scheme, propped up with some lump sum subsidies to deal with potential externalities, should still be optimal, agricultural policies tend to be evaluated largely in terms of their distributional impact. Given the plethora of other distortions to the distribution of agricultural production over farms of different sizes, it is not obvious that rationalizing the price system for electricity sales promises obvious efficiency or equity gains.These concerns have led me to conclude that assessment of the correct rate structures for electricity produced from agricultural biogas should not be attempted outside of a complete model of a multi-output dairy farm, or in the absence of good, representative estimates of the parameters of the system.Instead, this paper will serve as a first pass at the economics of digester/generators. It is hoped that the calculations and insights will be of interest to potential adopters and policy practitioners alike, even though they will not yield strong conclusions for the reasons presented above. Some of the information presented in this paper was picked up in discussion with experts, from a tour of Tinedale Farm, and from a presentation by Dr. Robert Fick at the annual meeting of the Wisconsin chapter of the ASAE. Numerical values presented without citation fall into this category.