Thursday, 6 September 2012

Financial Analyses of Biogas to Bio CNG projects in India; Projections based case study analyses
Dhawal Parate
Green Brick Eco Solutions, New Delhi



Introduction

India is the fourth largest energy consumer[1] in the world, after the United States, China, and Russia. Despite a slowing global economy, India’s energy demand continues to rise. As vehicle ownership expands, petroleum demand in the transport sector is expected to grow in the coming years. While India’s domestic energy resource base is substantial, the country relies on imports for a considerable amount of its energy use.
According to the International Energy Agency (IEA), hydrocarbons account for the majority of India’s energy use. Together, coal and oil represent about two-thirds of total energy use. Natural gas now accounts for a seven percent share, which is expected to grow with the discovery of new gas deposits.



Fig 1: Total Energy consumption of India[2]

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2011. EIA estimates that India produced approximately 1.8 Tcf of natural gas in 2010, a 63 percent increase over 2008 production levels. The bulk of India’s natural gas production comes from the western offshore regions, especially the Mumbai High complex, though fields in the Krishna-Godavari (KG) are increasingly important.
Despite the steady increase in India’s natural gas production, demand has outstripped supply and the country has been a net importer of natural gas since 2004. India’s net imports reached an estimated 429 billion cubic feet (Bcf) in 2010.

Potential of Biogas/Bio CNG

As per MNRE data, the total biogas potential, in terms of electrical Power, is estimated at 1281 MWe. The major industries generating biogas are Distillery, Sugar, and Starch. These three, together, account for 3/4th of the total biogas potential of India.  The other major industries are Pulp and paper, Milk processing, Slaughter house, and Poultry.
Bio CNG is the purified form of Biogas where all the unwanted gases are removed to produce >95% pure methane gas. Bio CNG is exactly similar to the commercially available natural gas (CV: ~52000 KJ/Kg) in its composition and energy potential. As it is generated from biomass, it is considered a renewable source of energy and thus, attracts all the commercial benefits applicable to other renewable sources of energy.
Bio CNG can directly replace every utility of LPG and CNG in India. It has the potential to be the future of renewable fuel because of the abundance of biomass in India. Bio CNG production will also ease the burden of NG/LPG import for India. It is estimated that Bio CNG can replace 2/3rd of India’s NG import which is currently pegged at 429 billion cubic feet.

Table 1: Cost of Energy of Fuels in India
Fuel
Calorific Value (KJ/Kg)
Tariff/ Rate/ Cost
Cost of Energy (KJ/Rs.)
CNG
52000
Rs. 42/Kg
1238
Bio CNG
52000
Rs. 35*/Kg
1485
LPG (Commercial)
46000
Rs. 65.7/Kg
700
Petrol
48000
Rs. 65.5/Ltr
550
Diesel
44800
Rs. 41.3/Ltr
900
* Based on Cost of Production estimation

Bio CNG production is very cost effective making it one of the cheapest fuels in India. Commercial LPG is the costliest fuel and thus, replacement of commercial LPG with Bio CNG makes for a profitable business model.

Biogas to Energy projects alternatives

Biogas is a mixture of primarily 2 gases with the composition of 55-60% CH4 and remaining CO2 with traces of H2S and moisture. Biogas is a fuel gas with a calorific value of ~ 22,000 KJ/Kg. The biogas projects can be broadly classified into 2 categories:
-          Biogas to Electric Power
-          Biogas to Bio CNG
In the power project, biogas is first cleaned of H2S and moisture and is then fed into a power generating unit for conversion to electricity. There is no need to remove CO2, but removal of H2S becomes important due to the corrosive nature of the gas. In the case of Bio CNG production, biogas is cleaned of H2S and CO2 to produce 95% methane gas. The bio CNG produced is then compressed and bottled for transportation to the utility site.
Biogas based power generation projects have existed in India for a long time. Most of the biogas generating industries in India are using this gas for power generation only. The concept of Bio CNG is fairly new in India. It has started to gain momentum and it is expected to become a formidable alternative to power generation.

Financial Analyses

Global studies have conclusively proved the financial superiority of bio CNG projects over the power generation projects. In some cases, the profitability of Bio CNG has been shown to be 5 times more. As a matter of convenience, we can do a simple back of the envelope calculation and validate the same (refer table 2)

Table 2: Biogas equivalency with Power and Bio CNG

Power
Bio CNG
1 cum of Biogas equivalent
2.1 KWh
0.45 kgs
Rate of Sale (Net)
Rs 5 / KWh
Rs 50/Kg
Value
Rs 10.5
Rs. 22.5
* Based on best known industry data

The value of the product generated from 1 cum of biogas is more than twice for Bio CNG. The revenue realization in this case is more than double. Even with a slightly higher operating cost and comparable capital cost, Bio CNG is clearly a more profitable alternative.
For the sake of this report, we shall further limit the financial analyses to the case of a Bio CNG project only.

Project Assumptions

Currently, there are no large scale bio CNG projects in regular operation in India. A few plants are under commissioning but it will take a few months before reliable data can be generated. The unavailability of actual data limits this study to a projections case. The base case estimations and values have been taken for the financial analyses in this report.
The sample project is for an industrial scale plant.  It is assumed that the biogas digesters already exist in the industry. Biogas is being directly purchased from the industry and hence, the only output from the project is Bio CNG. Thus, in this assumption, the biogas generation cost is not included. The capital cost only includes H2S and CO2 scrubber along with HP compressor (250 bar) and cylinder cascades.

Table 3: Project Assumptions
Details
Value
Unit
Plant Capacity
500
Cum/hr
Project Cost
7.64
Cr
Equity Contribution
30
%
Debt
70
%
Interest
12
%
Net Bio CNG Sale cost
40
Rs/Kg
Cost of Biogas
4.8
Rs/Cum
IDC capitalized
Yes

PLF (stabilization period)
80
%
PLF (Stable)
90
%
Biogas methane content
60
%
Bio CNG methane content
95
%
Power Consumption per hour
300
KWh
Cost of Power
5.5
Rs/KWh
Avg. Transportation distance
15
Kms
Cost of transportation
20
Rs/Km
CER certificates
Applicable*

* Refer section Emission Reductions

Appropriate assumptions have been taken to account for the Administrative, Personnel, contingency, working capital, provision periods, escalations etc.
No Central Finance Assistance (CFA) has been considered in this financial projection. With the 12th five year plan yet to be notified, no reliable subsidy value is available for calculation.

Depreciation

As per Income Tax Act, 1961, Specified Air Pollution Control Equipments and Water Pollution Control Equipment are eligible for 100% depreciation on the cost of equipment in the 1st year itself.
Specified Air Pollution Control Equipment are:
-          Electrostatic Precipitation Systems
-          Felt – filter systems
-          Dust Collector systems;
-          Scrubber counter current/venture/packed bed/cyclonic scrubbers
-          Ash handling system and evacuation system

 Under the IT act, CNG conversion kits and the scrubber units for gas purification are eligible for 100% depreciation benefit. The classification of these equipments as air pollution units has to be scrutinized on case to case basis.

Return on Investment

The bio CNG project shows a very optimistic financial viability. The investor payback is around 2-3 years. This is understandable as the sale price of Bio CNG can be matched to commercial LPG prices. The interest on term loan has been taken at 12% which can be further decreased by taking debt from organizations such as IREDA. Furthermore, the terms of interest payment are further relaxed on the loan taken from IREDA making the project viability better. For eg: IREDA offers a better moratorium period compared to a private banking institution.

Table 4: Investment IRR values at different exit
Investment IRR

Value
IRR Exit in Year 5 @ Forward EBITDA 2x
81.0%
IRR Exit in Year 6 @ Forward EBITDA 1.5x
76.5%
IRR Exit in Year 9 @ Forward EBITDA 1x
74.6%

The project shows high cash flows resulting into faster payback. From table 5, the investor NPV is high. This has resulted from the 70:30 debt /equity ratio for the project. Higher debt will result in higher investor returns.

Table 5: NPV and payback values

for project
for investor
Year of Payback
4.0
2.0
NPV (Lakh)
334.5
643.81
WACC (compounded)
15.00%

Sensitivity Analyses

A sensitivity analysis has been conducted to understand the implications of cost fluctuations on the overall project profitability. This will also provide an insight into the future bargaining power of different stakeholders of the project.
The highest sensitivity is for the price of Bio CNG sale and the cost of raw material. Slight fluctuations in these parameters will have large impact on project profitability as compared to any other parameter. This essentially means that these costs have to be effectively controlled in the future. For a Bio CNG project developer, one of the biggest risks is the cost of raw material which is controlled by the biogas/biomass producer. The seller can escalate the cost at will. To mitigate this, the developer should consider involving the seller as an important stakeholder in the project. The other big risk is at the buyer end, where the prices of other fuels will govern the sale price of bio CNG. Conventional wisdom dictates that the cost of other non-renewable fuels will be on the rise in future and bio CNG will remain profitable. Thus, only some form of policy intervention, in terms of subsidies on fuel, can put pressure on pricing for Bio CNG. Investor should also lay emphasis on fixing long term contract for power purchase for the project, with periodic review, to mitigate arbitrary fluctuations in power cost

Fig 2: Sensitivity Analysis of Key parameters

Emission Reductions

Bio CNG project is eligible for CDM and will get CERs for reducing carbon emission. CDM calculation methodology for Bio CNG project is available on the website of UNFCCC. The baseline emissions of gasoline or LPG are considered to calculate the CER for Bio CNG project. Depending on the utility of Bio CNG, the CER calculation will vary. Value of CER generated has not been considered in the financial analyses of this report. Any CER benefit will further enhance the profitability of a Bio CNG project. REC is not applicable for Bio CNG bottling and sale project. It is only applicable for power generation.

Conclusion

Bio CNG projects are more financially attractive compared to biogas to power. It is expected that Bio CNG will become the more preferred alternative in the years to come. Despite being ineligible for RECs, Bio CNG projects have better viability. Sensitivity analyses show the critical price points for making this project viable. Any developer with a sufficient control over the gas and raw material prices will make substantial profits.Globally as well there is a lot of interest being shown in Indian Bio CNG projects. Various global investment firms are looking for strategic tie-ups with the India project developers and industries. This will lead to lot of fund infusion in this sector and accelerate the growth rate.

Note: The analysis has been done for a sample base case and as per the best available industry data. Independent financial analyses still needs to be done for each project

Dhawal Parate
Green Brick Eco Solutions Pvt. Ltd.



[1] Annual Energy Outlook 2011 - EIA
[2] Source: The International Energy Agency 

2 comments:

  1. Biogas is the alternative source of energy, it can be used for cooking, running a vehicle, heating, generating electricity.
    Institutional Biogas Plant in Bangalore

    ReplyDelete