«IEE Project ‘BiogasIN’ Examples for financing of biogas projects in Denmark D.3.2., WP3 - Henning Hahn, Dominik Rutz, Erik Ferber, Franz Kirchmayer ...»
IEE Project ‘BiogasIN’
Examples for financing of biogas projects
- Henning Hahn, Dominik Rutz, Erik Ferber,
Franz Kirchmayer November 2010
2. Basics of financing biogas projects
3. Financing of biogas projects in Denmark
3.1. Support tools in Denmark
6.2. Financing tools in Denmark
1. Introduction The implementation of biogas projects requires three preconditions: good and stable legislative framework conditions, easy and transparent permitting procedures, as well as access to financing. If one of these three preconditions is weak or not given, the biogas project risks failure. In Europe, these preconditions are very good in countries like Germany and Austria. In other countries there is still considerable effort needed to improve them.
The present report provides an outline for financing conditions and procedures in the
top 5 EU countries with developed biogas market for agricultural biogas plants:
Germany (about 5000 agricultural biogas plants), Austria (320 biogas plants), Denmark (about 22 co-operated and 60 farm scaled biogas plants), the Netherlands (about 90 agricultural biogas plants) and Italy (150 farm based biogas plants). The graph on the next page illustrates the energy production of biogas in Europe.
This report serves as overview of good practices for biogas financing in countries with developed biogas markets. More precisely, this report shall assist policy makers and financing bodies in the BiogasIN countries: Bulgaria, Croatia, Czech Republic, Greece, Latvia, Romania and Slovenia to develop good framework conditions for biogas financing.
The BiogasIN project is supported by the “Intelligent Energy for Europe Programme” by the European Commission and aims to create a sustainable biogas market in Central and Eastern Europe (CEE): Bulgaria, Croatia, Czech Republic, Greece, Latvia,
Romania and Slovenia. Core of BiogasIN is the removal of framework barriers in CEE:
high administrative barriers both in permitting and financing phases.
Figure 1: Primary energy production of biogas in Europe in 2007 [EurObserv‘ER] Legend: Landfill gas Sewage sludge gas Other biogas (decentralised agricultural plant etc.)
2. Basics of financing biogas projects The initial investment for a biogas plant is generally very high and it usually requires the application of sound financing tools. The following list includes the investments
and costs for a typical agriculture biogas plant:
Costs for planning: engineering costs, costs for permits, taxes, certificates, etc.
• Costs for equipment (investment costs): technical equipment, buildings, • storage facilities, infrastructure, grid connection, etc.
Depending on the size of the biogas projects and the feedstock type, typical investors in biogas plants are single farmers, several farmers jointly investing in one biogas plant, and industry. In some cases also other investors are involved, such as e.g.
municipalities or waste companies.
Financing bodies will finance biogas projects depending on the expected financial performance compared to the project risks and depending on the credit worthiness of the investor. In general, profitability of investment in biogas project strongly depends on availability of the national supporting scheme (either as feed-in tariff or green certificates) and assurance that the project in question will be eligible to benefit from the support system at the operational phase.
Due to the high capital costs, usually debt capital is required for the implementation of biogas projects. Furthermore, equity capital of 20-30% of the total capital cost is usually required. In some countries, it is possible to receive a certain amount of project funding from public sources or to obtain low-interest credits. Public sources should be considered and included in the calculation/financial planning process.
Subsidies for biogas plants can be received for various fields of interest: agriculture, regional development, renewable energy projects, environment, structural funds, etc.
Common financing methods are credits from private banks. As indicated in Figure 2 below, there are two main types of typical financing for biogas projects: traditional financing by loans and project financing.
Figure 2: Traditional loan financing and project financing concepts For traditional financing the credit history of the company or investor (e.g. farm) plays an important role. On the one hand, the liability of the company depends on the assets of the biogas plant and, on the other hand, of the company which is in many cases the farm. Decisions of the financing bodies depend upon the annual financial statements of the company. This is the typical financing tool for single farmers investing in biogas projects.
In the framework of the project financing, the biogas project itself is regarded as legal entity (Figure 2). This tool is often used for projects in which several shareholders are involved (e.g. several farmers). Main criteria of this future oriented concept are rates of return and success of the project. Decisions regarding loans are based on the assets and the cash-flow of the biogas project. The predictability of the
cash-flow is thereby the important parameter/criteria, depending on following factors:
Contracts of electricity and heat sale • Availability and price of feedstock material • Legislation and insurance • Qualification and knowledge of the operator • Due to the good and predictable framework conditions, this cash-flow based concept is widely applied, for instance, in Germany.
Another financing tool is investment funds. An investment fund involves money from several small investors. All of them are investing in one biogas project. Costs and benefits are shared between the investors upon the consortium or joint venture agreement. Farmers can form a cooperative where each farmer has a share in biogas revenues proportionally to the provided substrate and its biogas yield and methane content.
Another financing option would be the cooperation with energy contractors. A contractor is usually a company specialised in biogas production. The type of cooperation with these contractors is manifold.
Finally, a biogas plant or dedicated equipment can be leased. The leasing company and the biogas plant operator are concluding a leasing contract. This may include whole biogas plants or the cogeneration unit, only. Leasing of cogeneration units is widely applied.
All above financing options could be combined and form some kind of derivative tailored for targeted niche of investors.
3. Financing of biogas projects in Denmark Danish biogas market recognises biogas production as an independent business activity, in contrast to national biogas markets. Namely, it is often the case that a farmers’ cooperative is based as non-profit company for production of biogas in codigestion with manure and bio-waste (common ratio 80:20 in favour to manure). The rationale of the cooperative is application of best agricultural practice in terms of manure management where biogas production is perceived as a tool for manure management. The produced biogas is sold to energy producer that utilised biogas either for heat purposes (usually district heating) or in cogeneration for simultaneous production of electricity and heat. In 1988, Danish government has provided Biogas Action Programme which was focused on the construction and monitoring of biogas plants, information activities and R&D work construction. It included a 40% investment grant for development of centralised biogas plants (farmers’ cooperatives) with CHP and a financing scheme with long term, low interests indexed loans. The programme was closed in 2002 but significantly boosted development of Danish biogas market in terms of both quality and quantity.
In the last decade the development of biogas projects in Denmark was very low due to the lack of an adequate legal framework for biogas plants. But this changed as the Danish feed-in tariff scheme was substantially improved in February 2008 through the VE-Lov. (Lov on fremme af vedarende energi No. 1392/2008 - Law on promotion of Renewable Energies). Today the biogas market in Denmark comprises about 80 installed agricultural and approximately the same amount of industrial biogas plants with a rising tendency.
Typical investors for large scale biogas plants in Denmark are consortiums of farmers organised in cooperation with a limited liability company or a private limited liability company. Other typical organisation models are independent foundations or consumer (heat consumer) cooperations with limited liability. Biogas plants owned by municipalities were used in the past but are actually not common. Investors in small scale biogas plants are normally single farmers.
3.1. Support tools in Denmark The main legislative driver for renewable energy development in Denmark is the VELov. (Lov on fremme af vedarende energi No. 1392/2008 - Law on promotion of Renewable Energies), promoting renewable energies through a feed-in tariff scheme, which was substantially improved in 2008. Biogas plant owners in Denmark receive a variable bonus for the production of electricity, paid on the top of the market price. The sum of the bonus and the market price is capped by a certain statutory maximum depending on the date the plant was connected to the national power grid system. If the market price exceeds the total amount specified by statutory law, the exceeding amount will be deducted from future bonus payments.
Since February 2008, all biogas plants receive either a total of about 10 c€/kWh1 or an additional payment of about 5.4 c€/kWh when biogas is used together with natural gas for the generation of electricity. The tariff will be adjusted with 60% of the price index increase. Upgraded biogas is rewarded with about 40.30 c€/m³ methane.
Furthermore, the sale of waste heat which occurs through the production of electricity is exempt from energy and CO2 taxes. This framework is a good legal basis for planning the financing of biogas projects.
6.2. Financing tools in Denmark In Denmark, the financing of biogas projects includes biogas plants owned by farmers, and centralised co-digestion biogas plants owned by groups of farmers or heat consumers, which is very special for Denmark.
In Denmark, during the last two decades, consumer-owned and municipality-owned CHP (Combined Heat and Power) plants have delivered a significant share of the national power production. Also the majority of district heating loops are predominantly owned by the inhabitants of the community. This gives control to the people and ensures that energy is distributed to the communities at fair prices. Such systems are often used as non-profit ownership models to the direct benefit of the involved municipalities and are supported through attractive governmental investment grants, loans with very low interest rates and municipal guarantees. The Danish central authorities strongly support the development of district heating through measures, which combine the advantage of strong regulation and controlled use of market forces.
Thus the main financing instrument used to finance centralised biogas plants is to finance them in connection with a district heating system, where the waste heat of the CHP plant is utilized to supply private households. In Denmark 60% of all private exchange rate in July 2010: 1 Euro = 7.4446 DKK; 1 DKK = 0.134326 Euro households are connected to a district heating system. Biogas plants which are connected with a Danish district heating system are legally regarded as being a part of it and therefore receive the same financial and legal support.
Most companies finance their investments in district heating systems by international credits at lowest market interest rate. Banks compete to offer the best conditions as long as they can see that the security is high. And the security for such projects in
Denmark is high, due to the following points:
Therefore other private investors offer no real competition.
Biogas projects are also financed by means of index-regulated annuity loans, guaranteed by the municipalities. These loans are low interest loans with indexation, which secure the investor against inflation through a re-evaluation of the unpaid debts according to the inflation rate. The pay-back period is normally more than 20 years.
Before 2002 most of the biogas projects in Denmark also received supplementary government subsidies, representing up to 40% of the investment costs of the project.
But this changed when the Biogas Action Programme which has supported biogas projects with investment grants and a financing scheme with long term, low interests indexed loans was closed.
Single farmers finance biogas plants through credits from private banks including both traditional and project financing. For them it is currently not easy to finance biogas projects, because of high credit prices. Credits from private banks for financing biogas projects do not offer any special conditions. Most biogas plants established during the last 10 years in Denmark are actually farm scale plants.
4. References Dyrelund A., Best practice in Danish district heating. News from DBDH 3/1999, Steffensen H. (1999) Denmark Federal Ministry for the Environment, Nature Legal sources on renewable energy, http://www.res-legal.eu, standing 14.07.2010 Conservation and Nuclear Safety Maegaard P. (2003) Danish Renewable Energy Policy, Denmark http://www.wcre.de/en/images/stories/pdf/WCRE_Maegaard_Danish%20RE%20Policy.pdf Raven R.P.J.M., Biogas plants in Denmark: success and setbacks.
Gregersen K.H. (2005) 5. Contacts Fraunhofer-Institute for Wind Energy and Energy System Technology Division Bioenergy System Technology M.Sc. Henning Hahn Königstor 59 34119 Kassel Germany Phone: +49/(0)561/7294-261 Fax: +49/(0)561/7294-260 firstname.lastname@example.org www.iwes.fraunhofer.de WIP - Renewable Energies Dipl. Ing. Dominik Rutz M.Sc.
Sylvensteinstr. 2 81369 München Germany Phone: +49/(0)89/72012739 Fax: +49/(0)89/72012791 Dominik.email@example.com www.wip-munich.de European Biogas Association Ing. Franz Kirchmayr Vice President Avenue de la Fauconnerie 73 B – 1170 Brussels Belgium Mobile +43/6643040761 firstname.lastname@example.org