Impact of single versus multiple policy options on the economic feasibility of biogas energy production: Swine and dairy operations in Nova Scotia

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1 ARTICLE IN PRESS Energy Policy 35 (2007) Impact of single versus multiple policy options on the economic feasibility of biogas energy production: Swine and dairy operations in Nova Scotia Bettina B. Brown a, Emmanuel K. Yiridoe a,, Robert Gordon b a Department of Business and Social Sciences, Agricultural and Resource Economics Research Group, Nova Scotia Agriculture College, P.O. Box 550, Truro, NS, Canada B2N 5E3 b Department of Engineering, Nova Scotia Agriculture College, P.O. Box 550, Truro, NS, Canada B2N 5E3 Received 27 September 2006; accepted 23 March 2007 Available online 16 May 2007 Abstract The economic feasibility of on-farm biogas energy production was investigated for swine and dairy operations under Nova Scotia, Canada farming conditions, using net present value (NPV), internal rate of return (IRR), and payback period (PP) economic decision criteria. In addition, the effects of selected environmental and green energy policy schemes on co-generation of on-farm biogas energy production and other co-benefits from anaerobic digestion of livestock manure were investigated. Cost-efficiencies arising from economies of scale for on-farm anaerobic biogas production were found for swine farms, and less so for dairy production systems. Without incentive schemes, on-farm biogas energy production was not economically feasible across the farm size ranges studied, except for 600- and 800-sow operations. Among single policy schemes investigated, green energy credit policy schemes generated the highest financial returns, compared to cost-share and low-interest loan schemes. Combinations of multiple policies that included cost-share and green energy credit incentive schemes generated the most improvement in financial feasibility of on-farm biogas energy production, for both swine and dairy operations. r 2007 Elsevier Ltd. All rights reserved. Keywords: Biogas energy; Livestock production; Policy schemes 1. Introduction Political and economic pressures arising from concerns with depletion of global fossil fuel reserves (Cicchetti and Reinbergs, 1978; Freeman, 1996; Liao et al., 1984; Rowlands et al., 2003) have renewed interest in green (i.e., environmentally benign) energy alternatives in North America and other more developed countries. Public concern and awareness about the environmental impacts of fossil fuel use are growing in Canada (Proops, et al., 1996; Rowlands et al., 2003), while current (i.e., 2006) and previous world oil price shocks (e.g., of the 1970s) are prompting governments, power utility companies, and even private individuals to more carefully evaluate technologies Corresponding author. Tel.: ; fax: address: eyiridoe@nsac.ns.ca (E.K. Yiridoe). for generating green energy which previously were considered technologically infeasible (Lichtman et al., 1996; Reis and Engel, 2003; Welsh et al., 1977) and/or not economically viable (Rowlands et al., 2003; Tiffany, 2005). A study of existing initiatives to increase renewable energy production across Canada noted that biogas and biomass, wind power, and tidal energy have considerable potential in Atlantic Canada (Nyboer and Pape-Salmon, 2003). Renewable electrical energy from wind power and tidal energy depend on endowed natural resources and phenomena. For example, generation of wind and tidal energy require optimum location selection, with persistent unobstructed winds (for wind energy) and where considerable tides are present (for tidal energy). Uncertainty associated with climatic and weather conditions raise concerns with the variability and reliability of such green energy sources. Furthermore, wind and tidal energy /$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi: /j.enpol

2 4598 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) location may not correspond with areas where supplemental electrical utility system needs are highest, such as rural agricultural regions, which are typically farthest away from conventional electrical generating plants, and main transmission lines (Government of Nova Scotia, 2001). Compared to tidal and wind power, on-farm biogas energy production from livestock manure has potential in rural agricultural regions in Atlantic Canada, where farm operations are fairly distributed throughout the countryside and where power utility companies have difficulty adequately fulfilling electrical power needs (Mattocks, 2001). Livestock manure, which poses serious environmental concern in intensive livestock producing regions in Atlantic Canada (Nova Scotia Department of Agriculture and Fisheries, 2004a), can be converted into biogas energy with a wide array of location opportunities (Anderson, 1982). Other co-benefits of biogas production from anaerobic digestion of livestock manure include reduction of greenhouse gases such as methane, reduction of pathogens and weed seed viability, and reduction of noxious manure odors. In addition, biogas digesters can also convert organic waste into biologically stable fertilizer or soil amendment, as well as help to mineralize nutrients (i.e., N, P, and K), thereby allowing for improved crop nutrient uptake (Moser et al., 1998). The agricultural industry in Atlantic Canada is also seeking new, high value-added products to compliment primary production, and enhance farm income. Development of new bio-based industries offer potential additional income for agricultural producers, as suppliers of biogas and biomass feedstocks. However, the ability of farmers to respond to new market prospects from development of such new bio-based industries may be constrained by onfarm economic, and resource constraints. In addition, the volume of manure produced is now increasingly becoming a social and environmental problem (Nova Scotia Department of Agriculture and Fisheries, 2004a). For example, the swine industry in Canada as a whole has grown by over 400% since 1982, resulting in intensive commercial operations, associated environmental and manure management problems (Coˆte et al., 2006), and health hazards from zoonotic pathogens (Guan and Holley, 2003). Anaerobic digestion of livestock manure can generate biogas for energy and, at the same time, help reduce the environmental problems associated with animal manure. On-farm energy use accounts for up to 50% of farm cash production costs (Potter, 2002). Thus, cost-effective onfarm green energy production can substantially improve farm profitability and farm environmental sustainability. There are also potential economies of scale associated with anaerobic digestion systems (Kobayashi and Masuda, 1993; Mehta, 2002). For example, large initial capital investment to acquire anaerobic digestion equipment is a fixed cost that can be spread over an increasing number of farm animals, thereby improving the economic feasibility of anaerobic digestion for energy (Mehta, 2002; Stowell and Henry, 2003). In general, average livestock farm size in Nova Scotia is smaller than in other parts of Canada and the US. Consequently, the threshold farm size and, in particular, the farming conditions under which on-farm biogas energy generation may be economically viable for Atlantic Canada may be different compared to other agricultural regions. In addition, although various government incentive programs to support farm environmental stewardship and green energy production is available to producers in Nova Scotia, the impact of such public policies and programs on renewable energy production in general and, in particular, on on-farm biogas energy production has not been studied. The purpose of this study was to investigate the economic feasibility of on-farm biogas energy production from anaerobic digestion under Nova Scotia farming conditions. The economic feasibility was evaluated by taking into consideration: (i) livestock type (i.e., farrow-tofinish swine operations versus dairy operations); (ii) farm size, ranging from 200 to 800 sows (for swine operations) and cows (for dairy farms); and (iii) using three economic decision criteria (i.e., net present value (NPV), internal rate of return (IRR), and payback period (PP)). In addition, the impacts of environmental stewardship and green energy policy options and programs were investigated, including: (i) low-interest loans for capital expenditure; (ii) cost-share programs subsidizing a portion of the capital investment costs; and (iii) green energy credits (i.e., cash payments per kwh of green energy produced). Furthermore, the effects of single versus combinations of multiple policy options were assessed in a sensitivity analysis. In the following section, background on on-farm biogas energy production is reviewed to provide context for, and highlight key assumptions considered in, the economic analysis. 2. Background 2.1. Factors which affect operation and performance of anaerobic digestion systems The physical composition of the manure used, manure type and manure collection method, and frequency of feeding the digester, along with suitable conditions for bacteria growth, all affect the operation and performance of on-farm biogas energy production. Anaerobic bacteria grow and perform best under optimal temperature (i.e., F) (Kobayashi and Masuda, 1993; Nelson and Lamb, 2002), optimal retention time (i.e., days) (Engler, et al., 1999), and optimal ph (i.e., 7 8.5) (Blanchard and Gill, 1987) (also, see Table 1). Digester feedstock with high solids content (i.e., volatile organic matter) tend to result in greater biogas production per unit volume of material (Nelson and Lamb, 2002). In

3 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Table 1 Operating conditions for anaerobic digestion, and characteristics of animal manure for biogas production Parameter Typical value Source (a) Operating conditions for anaerobic digestion Temperature (1C) (or F) Engler et al. (1999) ph level Burke (2001) C/N ratio o43 Burke (2001) C/P ratio o187 Burke (2001) Loading rate (lb of vs/ft 3 per day) a Engler et al. (1999) (or kg vs per m 3 per day) ( ) Retention time (d) Engler et al. (1999) (b) Characteristics of animal manure Variable Dairy Swine Chicken Source Animal live weight (kg) (2 4 lb) Mid-West Plan Service (1993) ( lb) ( lb) Weight of manure produced (lb/d/1000 lbs) b USDA (1992) (or kg/d/ 454 kg) ( ) (9.3 29) ( ) USDA (1992) Volume of manure produced (ft 3 /d) c USDA (1992) (or m 3 /day) (0.04) ( ) ( ) Moisture (%) USDA (1992) Total solids (% w.b.) d USDA (1992) Volatile solids (% w.b.) d USDA (1992) C/N ratio USDA (1992) Total nitrogen (lb/ton) (or kg per ton) 10.4 (4.7) 12.3 (5.6) 26.3 (11.9) Barker and Walls (2002) NH 4 N (lb/ton) (or kg per ton) 1.9 (0.86) 7.5 (3.4) 6.7 (3.04) Barker and Walls (2002) Phosphorus (lb/ton) (or kg per ton) 5.1 (2.3) 9.3 (4.22) 16.3 (7.4) Barker and Walls (2002) Potassium (lb/ton) (or kg per ton) 8.2 (3.7) 8.8 (4) 11.7 (5.3) Barker and Walls (2002) Potential biogas production (ft 3 /d) 3 (or m 3 /day) 50 (1.42) 7.8 (0.22) 0.4 (0.011) Hazeltine and Bull (1999) Methane content (%) Information and Advisory Service on Appropriate Technology (1996) a (lb vs/ft 3 d) represents pounds of volatile solids per cubic feet per day. b (lb/d/1000) represents pounds per day per 1000 pounds live weight. c (ft 3 /d) represents cubic feet per day. d (% w.b.) represents percentage of the total wet weight. addition, the carbon/nitrogen (i.e., C:No43) and carbon/ phosphorus (i.e., C:Po187) ratios of the digester feedstock affect bacteria growth (Burke, 2001). The amount of biogas produced also depends on the type of animal manure fed into the digester as illustrated in Table 1. In addition, the type of digester used depends on the manure collection method and total solids content of the raw manure. For example, a complete mix digester is recommended for typical swine operations in Nova Scotia, with scrape collection (i.e., %TS of 3 8%) or managed pull plug (i.e., %TS of 3 6%) systems (USEPA, 2005). However, for swine operations with a flush manure collection system, which tend to generate manure slurry with high water content, a covered lagoon digester, is recommended over a complete mix digester (Nelson and Lamb, 2002). Feeding the digester regularly optimizes bacterial digestion and minimizes biomass decomposition before entering the digester (Nelson and Lamb, 2002). A loading rate of lbs (or g) of volatile solids per cubic feet per day is optimal (Engler et al., 1999) Representative swine and dairy farms For swine operations, farrow-to-finish systems are the most common in Nova Scotia (Hoeg, 2005), while free stall systems are the most common for dairy operations (Van Roestel, 2005). A Nova Scotia average swine farm consists of 289 sows (Nova Scotia Department of Agriculture and Fisheries, 2004b), compared to an average dairy farm with 73 milking cows (Nova Scotia Department of Agriculture and Fisheries, 2004c). Furthermore, swine operations typically use pull plug manure collection systems (Hoeg, 2005). In contrast, a typical dairy farm uses scrape and parlor wash manure collection systems. For both swine and dairy operations, a manure treatment/storage tank was assumed. It was also assumed that a solid/liquid separator was a part of the anaerobic digestion system for the dairy farms studied, where solids are separated prior to the waste entering the anaerobic lagoon (USEPA, 2005). By comparison, the anaerobic system for swine operations did not include solid separation due to the very low solids content of the manure.

4 4600 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Analytical framework and methods The growing complexity of primary production and increasing agribusiness knowledge and information exchange, along with the multiple dimensions of possible outcomes of modern agricultural production, are increasing the demands on farmers decision-making capabilities and choices. Decision support systems can cost-effectively assist decision makers to make better decisions by integrating information, adjusting production, and enhancing management. Economic analysis using decision support tools can provide timely and useful information to address questions confronting farmers, investors, policy makers, and resource managers (Yiridoe et al., 2006). AgSTAR FarmWare is a decision support tool that was developed jointly by the US Environmental Protection Agency (USEPA), the US Department of Energy (USDE), and the US Department of Agriculture (USDA) (USEPA, 2005), which is used extensively to assist US producers and other investors with various economic and environmental questions associated with on-farm biogas energy production. Analysts that have used the AgSTAR FarmWare Table 2 Parameter values used in adapting AgSTAR FarmWare 2.0 to Nova Scotia conditions Parameter AgSTAR default value used (a) Climatic Parameters Rec. min. lagoon HRT (days) 55.0 Rec. max. lagoon loading (lb vs/1000 ft 3 ) (or kg vs/m 3 ) 6.3 (0.1) 25-yr 24-hr storm (inches of rain) (or cm) 4.5 (11.4) Annual runoff (paved) (%) 20 Annual runoff (unpaved) (%) 50 Annual evaporation (inches) (or cm) 20 (50.8) (b)financial and farm operating parameters Parameter Description AgSTAR default value This study Source Project lifetime (yr) Moser and Mattocks (2004) Loan rate (%) 12 6 Moser and Mattocks (2004) Loan period (yr) Moser and Mattocks (2004) Down payment (%) Moser and Mattocks (2004) Project discount rate (%) Treasury Board Secretariat (1976) Marginal tax rate (%) Moser and Mattocks (2004) Depreciation method SYD DBB Moser and Mattocks (2004) Inflation over project lifetime (%) 5 5 AgSTAR FarmWare 2.0 System downtime (%) AgSTAR FarmWare 2.0 Boiler efficiencies (%) AgSTAR FarmWare 2.0 Confinement time (hr) AgSTAR FarmWare 2.0 Energy offset (%) AgSTAR FarmWare 2.0 Electricity offset value ($/kwh) None Assumed Electricity sale value ($/kwh) None Assumed Thermal offset value ($/gal) (or $/L 1 ) None 3.39 (12.8) Roberts (2005) Energy growth rate (%) None 5 Assumed (c) Energy prices Energy type Energy price Source Electricity ($/kwh) Assumed Propane ($/gal or $/L) 3.39 (0.8949) Roberts (2005) Oil ($/gal or $/L) 3.14 (0.8309) Roberts (2005) (d) On-farm energy usage Farm type Farm size Electricity usage (kwh/yr) Heat energy usage (kwh/yr) Swine , , , ,000 12,000 Dairy ,000 n.a. a ,000 n.a ,000 n.a ,000 n.a. a n.a. implies that electricity was used for both power and heat.

5 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) decision aid to understand the economic, environmental and policy implications of biogas energy production for various production systems in the US include Garrison and Richard (2001), Jewell et al. (1997), Martin (2005), Moser et al. (1998), and Stowell and Henry (2003). In this study, the AgSTAR FarmWare decision support tool was adapted for Nova Scotia farming conditions and then used for the economic analysis Calibration/evaluation of AgSTAR FarmWare 2.0 AgSTAR FarmWare 2.0 is a Microsoft s Windowsbased decision support tool with step-by-step interview templates for entering farm-specific data and other information, including farm, climatic, energy use, investment and financial data and assumptions. Default program data such as characteristics of the representative farm considered (e.g., number of animals, livestock weight, litter size, and manure production) can be modified to more accurately reflect specific farm conditions Parameterization of AgSTAR FarmWare 2.0 Key parameters that were modified for Nova Scotia conditions include climate data, farm location, digester type, energy prices and usage, and financial and tax variables, along with key operating assumptions (Table 2). The climatic conditions (especially temperature and precipitation regimes) under which anaerobic digestion is assumed to occur was considered a critical factor in adapting AgSTAR FarmWare for Nova Scotia conditions. To adapt location and climate information for the study area, AgSTAR FarmWare information for Hancock County, Maine was modified for Nova Scotia. The choice of Hancock County was based on factors such as latitude and longitude coordinates, proximity to the Atlantic seaboard, and average temperature and precipitation characteristics. As with Nova Scotia, the state of Maine lies within the 40th and 50th parallels, is contiguous to Atlantic Canada and the North Atlantic Ocean, and is affected by similar average temperature and precipitation patterns as Nova Scotia (Brown et al., 2006; Wake et al., 2006). Further details of the analysis conducted to determine the relevant FarmWare county selected, including comparison with similar representative data for Nova Scotia (i.e., climatic, soil, and other characteristics) are described elsewhere (Brown et al., 2006), and are not repeated here. AgSTAR FarmWare 2.0 default values assumed, along with key parameters modified for the study area, are summarized in Table 2. Digester options available in FarmWare include covered lagoon, plug flow, fixed film, and complete mix. Given the temperature and other climatic conditions in Nova Scotia, a complete mix digester was assumed. A complete mix digester with a gas-tight cover is the most expensive among the available alternatives, and may be installed above or below ground, where manure feedstock can be stored in a heated reinforced concrete or steel tank. Farm financial, tax, and operating information were adjusted to more accurately reflect Nova Scotia farm conditions (see Table 2), using actual data (also, see Moser and Mattocks, 2004). Energy prices used in the analysis were based on 2005 Nova Scotia prices (Nova Scotia Department of Agriculture and Fisheries, 2005). Energy use data were obtained from personal interviews conducted in September 2005 with actual swine and dairy producers in Nova Scotia and from published studies (e.g., Ernst et al., 2000; House and Hilborn, 2005; Martin et al., 2003; Moser and Mattocks, 2004; Nelson and Lamb, 2002; Peebles and Reinemann, 1994; Wright and Inglis, 2003; Yang and Gan, 1998). Parameters were assigned to farm size categories, as appropriate, based on the number of sows (for swine operations) and the number of milk cows (for dairy operations) assumed to be managed Economic decision criteria Criteria commonly used for assessing the economic feasibility of alternative investment opportunities include NPV, IRR, PP, and benefit cost ratio (B/C). In this study, NPV, IRR, and PP criteria, which are the decision criteria available in AgSTAR FarmWare 2.0, were used. Previous studies that used these three criteria to assess the economics of on-farm anaerobic digestion include Fischer et al. (1981), Lazarus and Rudstrom (2003), Moser et al. (1998), and Moser and Mattocks (2004). Under the NPV criterion, an investment is feasible if the sum of the discounted benefits exceed the sum of the discounted costs or if NPV40. However, because NPV incorporates the time value of money into the analysis, it changes with discount rate (r). Consequently, a range of discount rates were used to test the robustness of the base results. In a sense, the IRR estimates the cost of capital that can be sustained over the life of the investment (Higham, 1998). An investment is economically feasible if the IRR is greater than a given social discount rate. Although the PP decision criterion is simple to calculate, it does not consider the payoffs for the entire life of the project. On the other hand, investors may be interested in the time frame within which investment outlays can be recovered. All three decision criteria were used in the economic analysis because they consider different attributes of economic feasibility. Thus, consistent results from the multiple decision criteria increase confidence in the viability of the investment opportunity Costs and benefits investigated Costs associated with biogas energy recovery can be divided into fixed, operating, and other costs (Table 3). By comparison, Metha (2002) classifies the benefits associated with biogas recovery from anaerobic digestion into monetary benefits, and environmental and other

6 4602 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Table 3 Major costs and benefits associated with on-farm anaerobic digestion Cost category Description (a) Major costs associated with anaerobic digestion Fixed costs Digester Engine/generator set Storage tank(s) Mix tank Piping to and from digester Engineering Construction labor Interest Financing costs Tax Grid hook-up Variable costs Other costs Acquisition of substrate and other raw materials Water for mixing the materials Energy to run the digester Plant operation Plant maintenance Storage of slurry Disposal of slurry Biogas distribution Biogas utilization Ammonium lost through volatilization Sulfur dioxide and nitrogen oxide emissions Potential health risks associated with exposure to the biogas (b) Major benefits associated with anaerobic digestion Benefit category Description Market (monetary) benefits Environmental and non-market benefits Electricity production Heat and hot water production Various effluent uses Recycled water On-farm fuel replacement Value, added amenities Improved fertilization properties Lower water content of effluent Reduced weed seed germination Reduced pathogenic organisms Reduced odors Greenhouse gas emission reduction (e.g., CH 4 ) Decreased potential for water contamination Reduced legal considerations non-market benefits. Accounting for all major costs and benefits is important for a complete assessment of the economic feasibility of biogas energy generation, including avoided costs and environmental benefits (Goodrich and Schmidt, 2002). Yet, estimating economic values for non-market benefits is complicated because the value of waste heat, for example, depends on how it is used on the farm. In addition, estimates of the value of livestock odor reduction are particularly difficult to determine. Similarly, the value of cleaner water that may be reused for flushing barns is unlikely to be in demand off the farm. Thus, the value of such water, which may be estimated as the value of water demand and any effluent disposal costs avoided, varies significantly across farms. Consequently, the results reported in this study derive from one phase of a larger research initiative, namely: consideration of key monetary benefits of on-farm biogas energy recovery. The costs and benefits analyzed reflect the key energy and non-energy benefits that motivate farmers to establish and operate anaerobic digesters (Moser et al., 1998). Capital and operating cost categories investigated include digester, utilization, separator, mix tank, gas handling, and labor and service. Specific costs such as for excavation, soil test, mixer, boiler, tank block, gas filter, electrician, and backhoe were modified for Nova Scotia farming and market conditions. For example, labor costs were based on wage rates for 2005 Labor Market Survey data for Nova Scotia (Human Resources Development Canada, 2005). The key energy benefits of anaerobic digestion arise from burning the methane gas in a generator to generate electrical energy, along with recovering waste heat. The economic value of electrical energy produced depends on the electricity offset and electricity sale values. Similarly, the value of heat recovered is based on its thermal offset value. Revenue from electricity production was estimated as the amount of electrical energy produced from anaerobic digestion, multiplied by the unit price of electricity ($/ kwh), depending on whether the electrical energy was assumed to be used on-farm or sold to a local utility company. In Nova Scotia, current retail price per kwh of electricity purchased from the local utility differs from the price the local utility is willing to pay for electricity produced from alternative (i.e., renewable) sources. It was assumed that the electricity produced was used on-farm to offset electricity costs, and any excess electricity (beyond the needs of the farm) was sold to the local utility company. Electricity currently sells at CND$ per kwh for the first 200 kwh, and CND$ for each additional kwh (Johnson, 2005). The electricity rate used in this study was calculated by assuming that 75% of the electricity used for the farm size ranges studied was from the lower price range, yielding a weighted average electricity rate of $0.062/kWh. As noted earlier, waste heat from anaerobic digestion of livestock manure could be used to heat water for space heating the digester, barn and other outbuildings, thereby offsetting heating cost on the farm (Gebremedhin et al., 2004; Mehta, 2002). Estimates of values for waste heat recovery reflected farm type and size (Table 2), which were obtained from interviews with local farmers. Offset farm heating costs were determined by multiplying the amount of propane or oil used on-farm by price, as appropriate. The majority of farmers interviewed (especially dairy) reported using electricity for both power and heating purposes, while others used oil or propane. Prices of heating fuel used are summarized in Table 2.

7 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Policy instruments and incentive programs In Canada, both the federal and provincial governments jointly share responsibility regarding political jurisdiction and decision-making on issues affecting the energy sector. In practice, although energy policy formulation and implementation primarily rests with individual provinces, the federal government has important regulatory roles in energy matters, especially regarding inter-provincial and international matters. Individual provinces also design their energy policies within a national framework. Consequently, the policy instruments and incentive programs investigated reflect this shared responsibility. In general, policy schemes to encourage green or renewable energy production include mandating minimum levels of renewable energy use, green energy support programs (funded from renewable energy surcharges), and consumers voluntary purchase of renewable energy at premium prices. Federal and provincial government environmental stewardship and green energy policy and incentive programs available to Nova Scotia farmers who invest in on-farm biogas energy production include Action Plan 2000, Class 43.1 Accelerated Capital Cost Allowance, Canadian Renewable and Conservation Expense (CRCE), Renewable Energy Deployment Initiative REDI), and the Nova Scotia Farm Investment Fund (NSFIF). Details of these programs and their relevance to green energy production are described in Brown et al. (2006). The impact of the Action Plan 2000, Class 43.1 Accelerated Capital Cost Allowance, and CRCE programs on on-farm biogas recovery from anaerobic digestion were not investigated, either because there is currently no funding for investors under the program, or due to complications in identifying eligible (from ineligible) costs under the program, and/or limitations of the AgSTAR FarmWare decision support system in allowing for such analysis. Funding for designing and installing a biogas facility is currently possible through the federal Department of Natural Resources Renewable Energy Deployment Initiative (REDI). REDI is intended to stimulate demand for renewable energy systems for space and water heating and cooling (Natural Resources Canada, 2003). A biogas energy facility can receive 25% of the purchase and installation costs of a qualifying system, up to a maximum of $80,000 (Natural Resources Canada, 2003). Thus, an on-farm biogas energy system is eligible if the farmer uses a portion of the energy produced for heating or cooling (Natural Resources Canada, 2003). To qualify for this incentive program, it was assumed that the farmer uses waste heat to meet temperature control requirements of the digester and distributes any excess hot water to space heat farm buildings. The NSFIF supports sustainable growth in Nova Scotia farm businesses by providing funding for projects that enhance economic viability, farm and food safety, and environmental stewardship (NSDAF, 2005). On-farm biogas energy recovery systems fall under the alternative energy category of agri-environmental initiatives. The NSFIF also covers costs associated with manure storage, farm wastewater treatment, manure composting, and prevention of nuisance odors (NSDAF, 2005), associated with generating on-farm biogas energy from anaerobic digestion. Such projects are eligible for up to 50% financial assistance, for a maximum of $10,000 per year, up to an equivalent of two years if completed within the year of project approval (NSDAF, 2005). To investigate the implications of public policy and incentive programs on on-farm biogas energy generation, three scenarios were considered: (i) low-interest loans for capital expenditure; (ii) cost-share programs subsidizing a portion of the capital costs; and (iii) green energy credits (i.e., cash payments per kwh green energy generated). The policy options were investigated individually and then jointly since, in practice, farmers can participate in combinations of eligible programs. Thus, the policy instruments considered could assist policy makers in understanding what mechanisms could be used to facilitate financing of alternative fuel/energy capital projects. The three scenarios investigated include (Table 4): (i) Scenario 1: The effect of low-interest loans for capital expenditure on the economic feasibility of on-farm biogas energy production was investigated by varying interest rates, at 0%, 1%, 2%, 3%, 4%, and 5%. In addition, sensitivity of higher interest rates (of 9 and 12%) on the base results (where discount rate, r, was set at 6%) was investigated to test the robustness of the base results. Table 4 Policy scenarios and incentive programs Scenario Policy scheme Actual values assessed Notes for incorporating scenarios in AgSTAR FarmWare 2.0 Scenario 1 Low-interest loans (%) 0, 1, 2, 3, 4, and 5 Loan rates are entered into the program using the Project Factors option Scenario 2 Cost-share program for capital costs (%) 20, 25, 30, 40, and 50 Cost-share amounts are entered into the program using the Set Cost Fraction option Scenario 3 Green energy credits ($/kw) 0.01, 0.02, and 0.03 Energy credits are entered into the program using the Tax Deduction and Other Incentives option

8 4604 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) (ii) Scenario 2: The effect of cost-share programs was investigated for the various farm types and sizes, using cost-share amounts of 20%, 25%, 30%, 40%, and 50%. Such public financial incentives are assumed to offset capital expenditure associated with installing an anaerobic digester system. The cost-share proportions investigated include percentages available through existing REDI and NSFIF programs. (iii) Scenario 3: A green energy credit is a financial incentive paid per unit of renewable energy produced. Willingness-to-pay surveys in Canada and the US tend to overstate the actual premiums consumers are willing to pay in real green energy markets (Roe et al., 2001; Rowlands et al., 2000). The range of energy credits analyzed in this study were based on actual renewable energy surcharges proposed by the Conservation Council of Ontario (Winter, 2002), and are considered conservative rates. The impact of green energy credits on the economic viability of biogas recovery and utilization was investigated at three levels: $0.01/kWh, $0.02/kWh, and $0.03/kWh. 4. Results and discussions Results of the base analysis incorporating the key assumptions summarized in Table 2 are presented first, followed by results of the policy and program scenarios. The policy scenario analysis includes selected single and multiple policy options Base analysis Cost-efficiencies were found for dairy operations, and more so for swine production, due to economies of scale in energy production from on-farm anaerobic digestion (Table 5). For swine farms, average total cost of the anaerobic digester system decreased from $948 per sow for a 200-sow operation to $558 per sow as farm size increased to 800 sows. By comparison, average total cost per cow decreased from $2591 per cow for a 50-cow dairy farm, to $571 per cow when the farmer was assumed to manage 500 cows. The higher cost-efficiencies for swine than for dairy translated into a slightly higher proportionate increase in Table 5 Economic feasibility of biogas recovery from anaerobic digestions- base analysis Item Parameter Swine farm size a (number of sows) Dairy farm size a (number of cows) Number of animals on farm (swine/dairy) System installation costs Nursery/cows-dry Growers/heifers Finishers/calves Boars/bulls Total animals Mix tank ($) 25,259 31,019 35,834 40,216 16,688 17,848 20,249 23,185 Digester ($) 91, , , ,9 23,708 30,656 47,537 72,046 Gen. bldg ($) 40,259 61,644 83, ,756 30,704 41,909 75, ,658 Engineering ($) 32,470 32,470 32,470 32,470 32,470 32,470 32,470 32,470 Total costs ($) 189, , , , , , , ,359 On-farm Electricity (kwh) 335, , , , , , , ,000 Energy usage Propane/oil (L) ,059 45, Energy Methane (m 3 ) Production Electricity generated 119, , , ,421 64, , , ,802 (kwh) Annual Electricity ($) ,092 22,212 29,219 4,012 7,887 19,364 23,436 Savings Propane/oil ($) ,450 36, Total energy savings ($) 12,314 21,192 49,662 65, ,364 23,436 Daily manure and Manure (L) ,219 22,964 30, , Water entering Water (L) c 41,571 84, , , system Decision criteria NPV ($) (53,178) (69,280) 13,716 36,353 (56,457) (54,064) (44,649) (101,651) IRR (%) o0 o o0 o0 o0 o0 PP (yr) Selling electricity $0.06/kWh b NA NA NA NA NA NA NA o0 10 a Farm size refers to the number of productive animals (i.e., sows for swine operations and milking cows for dairy operations). b There was excess electricity produced for the 500 cow level and the effect of selling the excess electricity to the local utility company at $0.06/kWh is included. c Water entering the anaerobic digester for dairy is zero because it was assumed that a solid liquids separator was used.

9 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) electrical energy generated from biogas recovery as swine farm size increased compared to dairy. For example, a four-fold increase in the number of sows (from 200 to 800) increased biogas electrical energy generated by a factor of In contrast, the proportionate increase in biogas energy for electricity was the same for the dairy farm size ranges studied. In general, the base analysis results suggest that biogas energy production is not economically feasible for all the farm sizes studied. The only exception was for the 600- and 800-sow farms where NPV 4 0, the associated IRR are greater than the assumed social discount rate of 10%, and the payback periods are shorter than the assumed project life (Table 5). By comparison, NPV and IRR were negative for all the dairy farm sizes studied, while the corresponding payback periods ranged from 14 to 43 years (compared to an assumed project life of 15 years). The results for the dairy farms probably stem from the particular (smaller) farm size ranges considered for Nova Scotia conditions, and the associated manure volumes for those size ranges. In addition, Nova Scotia swine systems tend to be in confinement all-year-round thereby generating consistent manure volumes, while volume fluctuations occur when dairy are moved from confinement to pasture. In summary, on-farm anaerobic digestion was not economically feasible for the small size livestock farms, but appears to be financially viable for mid- size swine operations. Further analysis was conducted to investigate the effect of incentive programs on the economic feasibility of on-farm biogas energy production Effect of single policy schemes Alternative interest rates on loans: As expected, lower interest rates (r ranging from 0 to 5%) improved the actual values of all three economic decision criteria investigated (Table 6). However, overall, a low interest rate policy did not affect the farm size at which biogas energy production was economically feasible, beyond the base results. An interesting finding relates to the dramatic effect on revenue from excess electricity sales for the 500-cow dairy operation. NPV increased by $67,574, from $66,933 assuming Table 6 Effect of alternative low interest rates on economic feasibility analysis Interest rate (%) Decision criteria Swine farm size (number of sows) Dairy farm size (number of cows) a 12 NPV ($) (81,927) (111,487) (41,312) (31,316) (76,113) (76,651) (75,226) (144,942) (77,368) IRR (%) o0 o0 o0 o0 o0 o0 o0 o0 o0 9 NPV ($) (66,915) (89,448) (12,579) 4018 (65,849) (64,857) (59,260) (122,337) (54,763) IRR (%) o0 o o0 o0 o0 o0 o0 6 (base analysis) NPV ($) (53,178) (69,280) 13,716 36,353 (56,457) (54,064) (44,649) (101,651) (34,077) IRR (%) o0 o o0 o0 o0 o0 o0 5 NPV ($) (48,910) (63,014) 21,885 46,399 (53,538) (50,711) (40,110) (95,224) (27,650) IRR (%) o0 o o0 o0 o0 o0 o0 4 NPV ($) (44,806) (56,989) 29,740 56,058 (50,733) (47,487) (35,745) (89,045) (21,471) IRR (%) o0 o o0 o0 o0 o0 o0 3 NPV ($) (40,871) (51,213) 37,271 65,319 (48,042) (44,396) (31,560) (83,120) (15,546) IRR (%) o0 o o0 o0 o0 o0 2 2 NPV ($) (37,110) (45,691) 44,471 74,172 (45,471) (41,441) (27,560) (77,456) (9882) IRR (%) o0 o o0 o0 o0 o0 6 1 NPV ($) (33,526) (40,428) 51,331 82,609 (43,020) (38,625) (23,748) (72,059) (4485) IRR (%) o0 o o0 o0 o0 o0 8 0 NPV ($) (30,122) (35,431) 57,847 90,622 (40,693) (35,951) (20,127) (66,933) 641 IRR (%) o0 o o0 o0 o0 o0 o0 a There was excess electricity produced and the results show the effect of selling it to the local utility company at $0.06/kWh.

10 4606 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) excess electricity was not sold, to $641 when excess electricity was assumed to be sold at $0.06/kWh. Similarly IRR was 10% with the additional revenue from sale of excess electricity. Effect of cost-share programs: Under current REDI and NSFIF programs, the farmer can receive a percentage (20 50% was assumed) of the capital cost (i.e., construction and installation, including the mix tank, digester, storage tank, and separator). As with the low interest rate policy, although the cost-share program improved actual values of all three economic decision criteria, the farm size range over which biogas energy production was economically feasible did not change, for both dairy and swine (Table 7). However, the improvement in the decision criteria was more dramatic for the cost-share program than the low interest policy. For example, NPV (IRR) for an 800-sow farm increased from $36,353 (18%) to $90,622 (25%) under a low (i.e., zero) interest rate policy. By comparison, for the same size swine farm, NPV (IRR) increased from $36,353 (18%) to $119,622 (30%) assuming a cost-share program. Effect of green energy credits: Among the single policy schemes investigated, the green energy credit scheme generated the highest financial returns and improved the farm size ranges for which biogas energy production was economically feasible, especially for dairy farms (Table 7). The green energy credit scheme was the only single program that generated feasible prospects for dairy. Onfarm biogas energy production was feasible for mid-size operations (250 cows), with NPV of $4373 and IRR of 12% when the farmer was assumed to receive green energy credit of $0.02/kWh. In addition, when excess electricity was assumed to be sold (at $0.06/kWh) for the 500-cow dairy, on-farm anaerobic digestion was economically feasible for all three green energy credit rates considered Effect of multiple policy schemes Various combinations of the three policy scenarios were investigated, assuming that the farmer participated in two or three policy schemes simultaneously. The results are Table 7 Effect of cost-share and energy credit incentive programs on economics of biogas energy production Program Decision criterion Swine farm size (number of sows) Dairy farm size (number of cows) a (a) Cost share incentive program Cost-share (%) b 20 NPV ($) (40,569) (49,401) 40,405 69,699 (49,287) (46,020) (34,522) (88,561) (20,987) IRR (%) o0 o o0 o0 o0 o0 o0 PP (yr) NPV ($) (37,416) (44,431) 47,077 78,036 (47,495) (44,008) (31,990) (85,288) (17,714) IRR (%) o0 o o0 o0 o0 o0 o0 PP (yr) NPV ($) (34,264) (39,461) 53,750 86,373 (45,703) (41,997) (29,459) (82,016) (14,442) IRR (%) o0 o o0 o0 o0 o0 o0 PP (yr) NPV ($) (27,959) (29,521) 67, ,046 (42,118) (37,975) (24,395) (75,471) (7,897) IRR (%) o0 o o0 o0 o0 o0 5 PP (yr) NPV ($) (21,655) (19,582) 80, ,719 (38,533) (33,952) (19,332) (68,925) (1,351) IRR (%) o0 o o0 o0 o0 o0 9 PP (yr) (b) Energy credit incentives Credit level ($/kw) 0.01 NPV ($) (44,058) (50,766) 41,650 13,806 (51,535) (44,220) (20,138) (52,379) 15,195 IRR (%) o0 o o0 o0 o0 o NPV ($) (34,938) (32,251) 69, ,260 (46,612) (34,376) 4,373 (3,107) 64,467 IRR (%) o0 o o0 o NPV ($) (25,818) (13,736) 97, ,714 (41,690) (24,531) 28,885 46, ,739 IRR (%) o o0 o a Excess electricity $0.06/kWh. b Represents a cost-share scheme whereby a percentage of the capital cost is paid by an external party such as a provincial or federal government.

11 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Table 8 Effect of two simultaneous policy schemes on economic feasibility, swine and dairy Policy mix (IR, CS, EC) a Decision criterion Farm size (number of productive animals) (a) Swine Farms (sows) Low IR ¼ 5% NPV ($) (36,826) (43,964) 47,461 78,354 CS ¼ 20% IRR (%) o0 o PP (yr) IR ¼ 5% NPV ($) (39,790) (44,499) 49,819 83,853 EC ¼ $0.01/kW IRR (%) o0 o PP (yr) CS ¼ 20% NPV ($) (31,449) (30,886) 68, ,153 EC ¼ $0.01/kW IRR (%) o0 o PP (yr) Medium IR ¼ 3% NPV ($) (24,233) (24,980) 72, ,323 CS ¼ 30% IRR (%) o0 o PP (yr) IR ¼ 3% NPV ($) (22,632) (14,183) 93, ,227 EC ¼ $0.02/kW IRR (%) o PP (yr) CS ¼ 30% NPV ($) (16,024) (2,432) 109, ,280 EC ¼ $0.02/kW IRR (%) o PP (yr) High IR ¼ 0% NPV ($) (5702) 3, , ,202 CS ¼ 50% IRR (%) PP (yr) IR ¼ 0% NPV ($) (2762) 20, , ,983 EC ¼ $0.03/kW IRR (%) PP (yr) CS ¼ 50% NPV ($) , , ,081 EC ¼ $0.03/kW IRR (%) PP (yr) (b) Dairy farms (cows) b Low IR ¼ 5% NPV ($) (46,668) (43,002) (30,405) (82,680) (15,106) CS ¼ 20% IRR (%) o0 o0 o0 o0 o0 PP (yr) IR ¼ 5% NPV ($) (48,616) (40,867) (15,598) (45,952) 21,622 EC ¼ $0.01/kW IRR (%) o0 o0 o0 o0 18 PP (yr) CS ¼ 20% NPV ($) (44,365) (36,175) (10,011) (39,289) 28,285 EC ¼ $0.01/kW IRR (%) o0 o0 2 o0 21 PP (yr) Medium IR ¼ 3% NPV ($) (38,582) (33,780) (18,197) (65,846) 1,728 CS ¼ 30% IRR (%) o0 o0 o0 o0 11 PP (yr) IR ¼ 3% NPV ($) (38,198) (24,707) 17,462 15,425 82,999 EC ¼ $0.02/kW IRR (%) o0 o PP (yr) CS ¼ 30% NPV ($) (35,858) (22,308) 19,564 16,529 84,103 EC ¼ $0.02/kW IRR (%) o0 o PP (yr) High IR ¼ 0% NPV ($) (26,808) (20,371) (515) (41,582) 25,992 CS ¼ 50% IRR (%) o0 o0 10 o0 21 PP (yr) IR ¼ 0% NPV ($) (25,926) (6417) 53,406 80, ,458 EC ¼ $0.03/kW IRR (%) o PP (yr) CS ¼ 50% NPV ($) (23,767) (4419) 54,202 78, ,466 EC ¼ $0.03/kW IRR (%) o PP (yr) a IR represents the interest rate, CS represents the cost-share, and EC represents the energy credit amounts. b Excess electricity $0.06/kWh.

12 4608 ARTICLE IN PRESS B.B. Brown et al. / Energy Policy 35 (2007) Table 9 Effect of three simultaneous policy schemes on economic feasibility, swine and dairy farms Policy mix (IR, CS, EC) a Decision Criteria Farm size (number of productive animals) (a) Swine farms (sows) Low IR ¼ 5% NPV ($) (27,707) (25,449) 75, ,808 CS ¼ 20% IRR (%) o0 o EC ¼ $0.01/kW PP (yr) Medium IR ¼ 3% NPV ($) (5993) 12, , ,231 CS ¼ 30% IRR (%) EC ¼ $0.02/kW PP (yr) High IR ¼ 0% NPV ($) 21,657 58, , ,563 CS ¼ 50% IRR (%) EC ¼ $0.03/kW PP (yr) (b) Dairy Farms (cows) b Low IR ¼ 5% NPV ($) (41,746) (33,158) (5,894) (33,408) 34,166 CS ¼ 20% IRR (%) o0 o0 6 o0 22 EC ¼ $0.01/kW PP (yr) IR ¼ 3% NPV ($) (28,737) (14,091) 30,825 32, ,272 Medium CS ¼ 30% IRR (%) o0 o EC ¼ $0.02/kW PP (yr) IR ¼ 0% NPV ($) (12,041) , , ,809 High CS ¼ 50% IRR (%) o EC ¼ $0.03/kW PP (yr) a IR is the interest rate, CS is the cost share, and EC is the energy credit amounts. b Excess electricity $0.06/kWh. summarized in Table 8 (for two policy options) and Table 9 (for three policy options) Two policy schemes The effect of two policy options on the economic feasibility of biogas energy production was investigated further using three levels of financial support: low, medium, and high. A low financial support package represents a slightly reduced (i.e., 5%) interest rate (below r ¼ 6% in the base analysis), a low cost-share percentage (i.e., 20%), and a low energy credit ($0.01/kWh). In contrast, a high financial support package represents substantially reduced interest loan rate (i.e., 0%), a high cost-share percentage (i.e., 50%), and a high energy credit ($0.03/kWh) (Tables 8 and 9). As expected, values of all three decision criteria generally improved with the joint incentive programs (Table 8). As was found for the single policy schemes, the improvement was more dramatic for swine farms than for dairy. In addition, the farm size range for which on-farm anaerobic biogas energy production was feasible (with NPV4 0) improved over the base analysis. For example, NPV was positive for both small- and mid-size swine farms ( sows) under a high financial support package involving a high cost-share scheme (i.e., 50%) and high green energy credits ($0.03/kWh energy credit). Furthermore, NPV was positive under low and medium financial support packages for the 600-sow farm, with NPV increasing with better financial incentives (as expected). In summary, in contrast to the findings for swine farms, the effects of the dual (joint) incentive packages were less dramatic for dairy farms. In addition, a combined cost-share and green energy credit incentive scheme generated the most improvement in economic feasibility for both farm types, among the alternative two-policy combinations Three policy combinations Overall, compared to the two-policy combinations studied, participating in three incentive programs at the same time did not substantially improve economic feasibility for swine farms (Table 9). In other words, the greatest changes in financial feasibility for the simultaneous tri-policy packages were observed for dairy farms, and less so for swine farms. Second, and as reported in studies for the US, it appears that on-farm biogas energy production may not be financially viable without a threshold livestock size that can generate a minimum amount of feedstock for digestion, even for the small farms in Nova Scotia. For example, 50-dairy herd Nova Scotia farms, alone, can not generate the critical biomass required to make on-farm biogas energy production financially viable, regardless of the type and magnitude of financial support schemes that may be available to such farmers. 5. Summary and conclusions Growing political and economic pressures are prompting various stakeholders to more carefully evaluate