Anaerobic Digestion returns compare favourably vs. Wind & Solar, but returns are likely to be volatile

Nov 03, 2013 No Comments by

Current UK government feed in tariff support for Solar, Wind and Anaerobic Digestion (AD) means that all three technologies offer potentially attractive returns to developers. This article compares the attractiveness of each technology by reviewing differences in governmental support, capital costs and the business model.

All three technologies generate revenue from sale of electricity to the grid. Wind turbines currently offer the highest FiT support for plant sizes between 0.1MW and 1MW, as shown below:

Source: Ofgem FiT rates for Wind, Solar and Anaerobic Digestion in December 2013.

The total electrical output of each technology is dependent on the capacity factor, known as the time each technology is generating electricity. The capacity factor of AD is markedly higher than for solar and wind. Typical capacity factors for a 500kW plant are shown below:

  • Wind turbine: 25% (sites vary from 15% for poor sites, to 40% for very windy sites)
  • Solar: 25% (15% to 35%)
  • Anaerobic Digestion: 95% (90% to 98%)

These capacity factors translate into annual revenues of £50k for Solar, £248k for wind and £780k for Anaerobic Digestion from a 500kW plant. However, AD differs from wind and solar, as the energy source isn’t always free. A 500kW plant running on energy crops requires around 10,000 tonnes of organic material, costing around £30/t at current UK rates. This reduces the yearly cash flows by ~£300k to about £480k.

The cost of each technology also varies. Typical costs for a 500kW plant are:

  • Wind Turbine:    ~£1.5m
  • Solar:        ~£0.75m
  • AD:        ~£2.3m

Assuming ongoing operational expenditure of £40k for solar, £60k for wind and £80k for AD this translates into the following internal rates of return for a 500kW plant:

  • Wind Turbine:    14%
  • Solar:        1%
  • AD:        19%

On the surface, this makes AD the most attractive technology under the current FiT regime. As of April 2014, the FiT regime will be updated, potentially reducing the income generated from each technology. Over the past 4 years, solar FiTs have fallen the most, whilst AD and Wind have held up reasonably well, as shown below:

Source: Ofgem FiT rates for Wind, Solar and Anaerobic Digestion as of 3rd November 2013.

AD returns are also subject to the additional risk that feedstock prices may fluctuate, and significantly affect future returns. For example, a £20/t increase in the cost of feedstock will reduce the internal rate of return by 10%. AD plants also cost more per kW of installed capacity. Both of these reasons make AD much more risky for plant operators when compared with solar and wind.

In summary, anaerobic digestion (AD) potentially offers the better returns than wind and solar. However, the cost of AD feedstock makes it more difficult to predict future AD returns, and may result in volatile returns over sa 20 year period.

Government and Energy Policy, Thinking Grids

About the author

The owner of Thinking Grids is a published author in smart grid topics ranging from smart monitoring and advanced computational techniques for distribution networks, power quality and stability. He's particularly interested in the business benefits of Smart Grid technology, and the overlap between information technology and electrical engineering.
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