This work sets out to determine the extent to which the economic value of power generation from landfill gas differs from the market value of the CO2 equivalent landfill gas. To achieve this purpose, a cost-benefit model has been created in order to identify the different costs and revenues associated with a landfill operational site. Three different scenarios have been analysed: small, medium and large landfill sites, all of them based in the UK.
The economic analysis performed indicated that for small sites (Capacity of 1MW), landfill gas to energy projects were not profitable. On average, the Net
Present Value (NPV) of small sites was less than zero. This factor indicated that the initial investment would not be recovered in a long period and therefore, the revenues achieved from the implementation of LFG collection and combustion were not enough for the operators to invest in these infrastructures.
The analysis done suggested that large and medium site projects were viable (NPV>0). This was even the case with Renewable Obligation Certificates [ROCs], however, for smaller projects more optimistic revenues and cost of capital were required in order to achieve viability. Keywords: landfill gas; cost-benefit model; renewable energy; carbon credits; shadow price of carbon.
The rationale behind the research led to the development of a cost-benefit model that can be used as a method to evaluate the costs and benefits arising from the operation of a landfill gas collection and combustion system. In addition to the economic analysis, the proposed model allows us to determine the positive environmental effects of recovering landfill gas by obtaining the amount of CO2 emissions avoided.
Figure 1 provides an overview of the model. It is divided in two different stages, in accordance with the two different appraisals of the project. On one hand, the model aimed to analyse the feasibility and profitability of a landfill gas infrastructure. On the other hand, the model demonstrates the environmental benefits of the collection of landfill gas.
The data used to demonstrate the main objectives of the study was extracted from reliable sources, as it was given by one company that operates different landfill sites around the UK, and compared with the Waste Management Paper data accessible (Department of the Environment, 1995). A total of nine data sets were used. Each data set consisted of the main capital and operational costs of different British landfill sites. Three sets corresponded to three small sites, e.g. their power generation capacity was approximately 1 MW. Three other data sets referred to three medium sites (Power Generation Capacity of 3 MW), and the remaining corresponded to three different large sites, e.g. power generation capacity of about 8 MW.
Some additional data was also needed, such as the average price of electricity or the price of ROCs, LECs and Triad. This information was extracted from the data available from reliable government reports and trustworthy websites. Regarding the price of ROCs, LECs and Triad, industry experts’ advice was required, as well as consultation of documents such as OFGEM’s report (2010).
Results and discussion
Cost and revenue structures typical of landfill gas to energy projects.
In general terms, capital costs represent by far the major source of costs needed to implement landfill gas collection and combustion systems. For the larger sites (~8 MW of capacity) evaluated, the average capital cost needed was £3,151,426.67. This represents £393,928.334 per MW achieved. In the case of the medium sites considered (~3 MW of capacity), the capital costs associated were £2,306,100 or £768,700 per MW. The capital costs associated with the smallest sites considered (~1 MW) were on average £1,758,240.67 per MW obtained (see Table 1).
It is important to highlight the big hurdle associated with the initial inversion in small sites. The distribution of capital costs associated with the three scenarios is provided in Figure 2. Within the capital expenditure, the installation of the gas system and compound is the major influence. Within this part the operations of pipework connection, gas mains, knockout pot and condensate pumping system installation, together with health and safety issues and quality assurance are included.
Considering a ten year economic horizon for the project, the total operational expenditure for the different sites is recapitulated in Table 2.
On average, for the three different scenarios considered, the distribution of operational cost is provided in Figure 3. The costs of depreciations together with the maintenance (plant, gas field and engines) costs represented the majority of the operational expenditure for all landfill types with a weight of 31% and 30% respectively of the total cost.
As noted previously, landfill gas to energy projects have two main sources of revenue: that derived from selling the electricity generated due to the recovery of landfill gas, and the Renewable Obligations and other carbon credits associated with that output.
Considering an annual inflation of 3%, for both the price of ROCs and LECs and estimating the future average price of selling the electricity, the revenues achieved on a year by year basis were calculated and are summarised in Table 3.
It’s interesting to note the uncertainty and variability of both sources of revenue over a project’s life, especially with the price of electricity tending to follow movements in the price of fuels and, more recently the cost of carbon emissions under the EU Emissions Trading Scheme (EU ETS).
In the case of carbon credits, their value will be associated with the volume of renewable energy generated in relation to the size of the RO.
The oscillations in the price of electricity, following the movements of petrol and other fossil fuel prices, means a contradiction due to the nature of a renewable source of energy. The incongruity rests in the fact that renewable energies are conceived as substitutes to fossil fuels, but they are indirectly reliant on them.
In general terms, the variable nature of the revenue stream may influence the perceived risk for potential investors. By contrast, the cost structure of these projects is reasonably stable, with financing the high, upfront capital costs the largest part of the cost base, suffering a slight increase due to the normal inflation of materials, wages or oil costs. See Figures 4, 5 and 6.
In order to calculate the revenues achieved, firstly it is necessary to calculate the number of hours per year that the site is operative. By definition, landfill gas to energy projects produce landfill gas 24 hours per day, 365 days per year. In practice, each year there are downtime hours that need to be considered in order to be precise with the calculations. This is the main reason why, as shown in Figures 4, 5 and 6, the revenue curve presents several oscillations.
An economic analysis was conducted to investigate the viability of the investment on landfill gas to energy infrastructures. The main criterion for assessing the attractiveness of potential investments is the expected project Net Present Value (NPV) and the Internal Rate of Return (IRR).
Assuming a cost of capital of 12%, and based on the accumulated cash flows for each scenario considered, the NPV, IRR and Payback were calculated and tabulated in Table 4.
When examining the accumulated cash flows depicted in Figures 7, 8 and 9, the smallest sites exhibited the largest problems.
When interpreting the results, the smallest landfill sites considered the NPV was less than zero. This negative value implies that the project is not viable, and therefore the investor’s hurdle rate would not be met. Hence, it can be stated that for sites of 1 or less than 1 MW of capacity the implementation of landfill gas to energy infrastructures is not viable. Investors would start to recover their investment seven years after the initial inversion. This fact implies severe risks that make these projects unattractive for operators.
The negative NPV value shown and low internal rate of return reflected from the model calculation reflects the costs incurred as a direct result of the infrastructure costs for gas collection. Operational landfill sites incorporate these costs within their planned infrastructure costs, for the landfill site itself rather than the power generation. Therefore operating landfill sites have a much higher internal rate of return. In contrast closed landfill sites would face these higher costs and thus be commercially unattractive without additional incentives.
In the medium-sized landfill sites, the NPV was greater than zero, meaning investors would be compensated for their risks and receive enough returns to make project investment viable. However, the cost of capital considered for this study was conservative (12%). Therefore, although the investment in medium sites could be considered viable, it may not be sufficiently attractive for the operators to invest.
Regarding the larger sites, the NPV was much greater than zero, so a potential investor would earn more than their required rate of return. As a result it can be stated that for sites of 8 or more MW of capacity, landfill gas to energy infrastructures are fully viable and attractive for investors.
The major environmental impact of landfill disposal is the release to the atmosphere of landfill gas. Landfill gas is mainly composed of methane and carbon dioxide. Methane has a Global Warming Potential (GWP) 21 times greater than CO2, which means that every tonne of methane released into the atmosphere is equivalent to 21 tonnes of CO2, which is the major cause of greenhouse effect and global warming.
An environmental analysis has been developed by using the LFG Generation equation, built up by the USEPA, 2008, to calculate the landfill gas generated and consequently the amount of CH4 recovered that would otherwise be released into the atmosphere.
It has been considered that the landfill sites studied had received waste for 15 years from their opening, while landfill gas will be released from the disposed waste for 50 years more. Therefore, landfills were analysed within a temporal horizon of 65 years.
It is important to note that the controlling landfill gas in a small site would be a CO2 saving equivalent to planting 3.8 million acres of forest or would mean planting 3.8 million acres of forest or removing the annual emissions from 2.6 million vehicles. In the same manner for a medium site, the amount of biogas recovered is equivalent to 11 million acres of forest planted or avoiding the emissions of 8 million vehicles. In the case of larger sites, environmental benefits arising would be equivalent to planting 19 million acres of forest or removing the CO2 emissions of 13,000,000 cars.
The results of the environmental analysis suggested that the most important environmental benefit is avoiding the use of higher-emitting energy resources like coal, wood or oil. This may help to reduce greenhouse gas emissions such as CO2, sulphur dioxide and of course methane from landfill gas. Also, the recovery of landfill gas can produce significant short-term results because methane, a major component of it, has a short atmospheric lifetime. Conclusions
In this piece of work, environmental and economic assessment of landfill gas to energy projects was performed in order to determine the existent gap between the economic value of landfill gas energy and the real price of avoiding CO2 emissions. For that purpose, a cost-benefit model was developed to analyse the economic feasibility of these projects, identifying both the main sources of revenues and the different costs associated with the construction and operation of a landfill site.
Evidence from reviewing existing research suggests that the high capital costs needed represent the first hurdle for potential investors. In terms of pricing the infrastructure of the projects, it is important to mention the elevated initial inversion required, and the difficulties of a short-term recovery from this inversion.
The operational and maintenance costs are also high and may increase year by year due to the inflation in the cost of materials or salaries, for example.
The benefits of LFG collection and combustion systems are derived from selling electricity to the grid, plus the carbon credits gained due to the renewable nature of this energy source. The uncertainty and variability of both sources of revenue represents a second hurdle for investors, as discussed earlier.
The economic analysis performed is consistent with earlier findings that large (≈8 MW) and medium-sized (≈3 MW) projects are economically feasible.
Considering as the main indicators of viability the Net Present Value and the Internal Rate of Return, the analysis suggests that for a medium-sized landfill site the investment is viable although the benefits achieved are not enough attractive from an investor’s point of view. For larger sites, the NPV and IRR indicate feasibility and attractiveness for investors.
The sensitivity analysis performed indicates that the price of carbon credits most significantly influences a project’s economics. According to the results of this analysis, the current price for ROCs and LECs is not sufficient for smaller schemes.
As a general conclusion, it is important to highlight the benefits of the implementation of new environmentally friendly policies, not only in the UK but also in a European framework, helping to reduce the use of fossil fuels and encouraging useful initiatives such as the carbon credits scheme.
However, introducing LFG utilisation to small sites still implies many economic, technological and regulatory limitations and uncertainties. To solve these constraints, the creation of LFG utilisation’s policy and national support mechanism need to be created. Therefore, sufficient subsidies, long-term stability and fair access to the electricity market must be guaranteed for smaller undeveloped schemes.
Dr Phil Longhurst
Dr Phil Longhurst is a Senior Lecturer in Waste Strategy and Deputy-Head of Cranfield’s Centre for Energy and Resource Technology. His research interests are on resource management and in reducing waste from the resource consumption cycle. Work within the centre includes research for key clients such as DIUS, BERR, the waste companies and water utilities, the UK research councils, Environment Agency and all scales of industry.
His research primarily focuses on resource efficiency, material flow, impact reduction from waste operations, amenity impact and modelling. His PhD focused on Innovation and Technology Assessment at Cranfield University and he has a degree in Design and Technology.
Dr Longhurst’s most recent outputs include a risk assessment of materials to land for WRAP, a consortia project to analyse risk and uncertainty in waste technology investments for the GLA, ALG and RDAs; and a landfill gas reduction programme in collaboration with the Environment Agency. He is currently leading a work package within a programme of research on energy from waste for the Energy Technologies Institute – ETI.
School of Applied Sciences, Cranfield University, Bedfordshire, MK43 0AL T: 01234 754953 E: [email protected] www.osedirectory.com/environmental.php
Published: 10th Mar 2011 in AWE International