Adding Dollars to Dairy

The third-party ownership model offers dairy farmers a low-hassle, profitable manure management technique.
By Anna Simet | October 30, 2012

When Robert Joblin and his colleague Ted Sniegocki started up Cenergy USA in 2006, the company’s first project was to obtain financing for a dairy digester. Though successful in finding a lender, the project didn’t go forward for a number of reasons. The experience was still worthwhile, however, as Joblin says he came to two realizations, one was that very little was known about the anaerobic digester industry. “A lot more data needed to be collected,” he says. The second realization was that if a different business model were used and a different financing method were implemented to fund biodigester projects, the industry could reach greater success.

That approach was based on third-party ownership, a concept that the company has since built its business on. “We changed the entire economic structure [of digester business models],” Joblin says.

Today, Cenergy’s clients include Fortune 500 companies, utilities, public institutions and private investors, and its first successful project—developed as part of AgPower Partners with Dean Foods Company and London-based Camco Clean Energy at Big Sky Dairy near Gooding, Idaho,—recently received the Innovation Center for U. S. Dairy’s Sustainability Award for Outstanding Achievement in Energy. Cenergy is a partner in AgPower Group, which develops, owns and operates biomass projects, and recently completed development of the largest dairy digester project in the U.S., a 4.5 MW system on a 15,000-head dairy near Jerome, Idaho.

“One of the advantages of the way we have developed our business model is that we now have potential lenders who know it, understand it, and are willing to consider financing a project based on it,” Joblin says. The third-party owner model is designed to take the burden off of the dairy producer, but still provides them with benefits that make it worth their while. AgPower Group, which uses a DVO Inc. modified plug-flow digester technology, can make the development process much easier for a dairy farmer, who is usually unfamiliar with how the process works, and doesn’t have the time required to develop and operate a project. Additionally, an experienced third-party owner may have established a good reputation in the finance community, which is invaluable when it comes to funding a project.

“It doesn’t require investment by the dairy; nor does it require the dairy to guarantee the loan,” Joblin explains. “At the same time, they experience a drastic reduction in manure management costs, gain superior bedding for the animals, are helped with environmental compliance and make a little bit of cash flow from the project.” In turn, AgPower benefits from the sale of electricity, carbon credits and renewable energy certificates, if the state has a renewable portfolio standard.

Lauren Toretta, vice president of CH4 Biogas, says that initially, the potential owner of the project needs to achieve an understanding of the dairy’s current manure management system and needs, as well as their long-term engagement requirements in this type of project.  “Basically, these are components of an overall feasibility and profitability assessment,” she says. “Once that’s complete, assuming that it’s viable, the siting, permitting, design and construction begins.” CH4 Biogas recently completed a 1.4 MW biogas plant at 2,000-head Synergy Dairy in Wyoming County, N.Y., one of the leading dairy production regions in the U.S. It takes in about 425 tons of waste per day and is the largest on-farm anaerobic digestion project in the state.

The dairy’s involvement, once a company such as AgPower or CH4 is committed to the project, is quite simple:  continue business as usual with the same number of cows, provide manure to the digester and continue to take back liquid effluent, all without having to worry about operating the digester system. “We do the rest,” Joblin says.

Once operating, the AD systems are run by a combination of remote and on-site techniques. “Our biogas system is run and monitored by SCADA (supervisory control and data acquisition) for remote control and oversight, but there are two employees there who handle the daily operations on-site,” Toretta says. “We have additional remote support through our Danish partner who monitors SCADA, and provides problem solving and expertise to our on-the-ground team.” 

In AgPower’s case, it contracts a company to operate the project for them. Since starting its third-party biogas business model approach, lessons have been learned in the wake of finished projects. In Joblin’s case, he says there have been several.

Lessons Learned

For Joblin, the first lesson is that state regulations—California, for example—can make or break a project, no matter the need for the dairy or the economics of the project. But, no project is the same. “While we have tried to create a cookie-cutter structure, every project is different and will have its quirks,” he says. “That impacts the economics.”

Another take-away is that while a digester has benefits that make them worthwhile—including a little extra revenue for the farmer—sometimes expectations for revenue are unrealistic. “Many farmers mistakenly think our project will be a cash cow for their dairies, and that never happens,” Joblin says. With recent changes in government support—such as the loss of the ITC grant program and sharply reduced wholesale energy prices—Joblin says these kinds of projects can no longer be financed on power purchase agreements. “The potential post-digester revenues will make or break a project,” he explains. “[The industry] has to develop better markets for fiber, nutrient and coproducts such as algae and greenhouse operations.”

As for the coming year’s prospects, Joblin believes these projects will be harder to finance based on the dairy industry’s current struggles, and the need for potential third-party owners to know clients will be around for the long haul.  “We must be assured one way or another that the dairy will be in operation for as long as our project is,” he says. “Falling power prices may also add to the struggle.”

Overall, the core of third-party ownership project models requires one major factor for success, however. “Having a good partner, and a division of labor,” Toretta says. “It’s a very symbiotic relationship—we work closely with the farm and farmers, but each of us is able to focus on what we do best.  Our individual successes are linked, so our goals are aligned.”

Author: Anna Simet
Contributions Editor, Biomass Magazine
(701) 751-2756