Transcript No Slide Title

Economic Evaluation of
Energy Alternatives for Dairy
Farmers
GEOFF BENSON, PhD
Extension Economist
Dept of Agricultural and Resource
Economics
North Carolina State University
Many Opportunities
Electricity use
Milk and cow cooling
Water heating and parlor cleaning
Parlor washing
Vacuum pumps
Lighting
Renewable fuels – biodiesel, solar,
wind
Tillage operations
GEOFF BENSON, ARE, NCSU
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Key Questions




What types of energy do you use
now?
What do you spend on each of them?
What do you expect to spend in
future?
If you invest in an alternative energy
technology, what will it cost ?
Investment & ownership costs
 Operating expenses


What will you save?
GEOFF BENSON, ARE, NCSU
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Dairy Farm Energy Audits
New York:
Electricity use –
Freestall Farms
Wisconsin:
All Energy
Use
Milk Cooling
27%
25%
Lighting
26%
18%
Ventilation
22%
19%
Vacuum Pumps
17%
17%
Water heating
4%
18%
Other
4%
6%
Item
Sources: NYSERDA, Dairy Farm Energy Audit Summary, July 2003 and WI DATCP
Dairy Farm Energy Management Handbook.
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Energy costs
Per Cow
Per Cwt.
% of Milk
Price
$141
$0.43
2.8%
$39 to $64
$0.19 to $0.33
--
2005 Cornell Business
Summary: Fuel
$123
$0.53
3.3%
2005 Cornell Business
Summary: Utilities
$90
$0.39
2.4%
2005 Cornell Business
Summary: Total cost
$3,121
$13.57
--
Item
Wisconsin: 2006 Fuel
Cost
NY 2003 Audit Electricity
priced a $0.08/kWh
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Diesel fuel use, gallons/acre
Chisel Plow = 1.1
Tandem Disk = 0.6
Drill planting = 0.5
No-till planter = 0.35
Sprayer = 0.1
Corn silage harvester = 3.6
Baler = 0.45
Source: NRCS-USDA on line at http://ecat.sc.egov.usda.gov/
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Profitability
Little existing information
Poor evaluation of profitability –
typically simple payback
Most studies suggest that
profitability is farm and
technology specific
Type of technology being
considered
Size of farm
Existing farm technology
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NY 2003 Dairy Farm Energy Audit:
Years to Payback1
Average
Payback
Shortest
Longest
Variable Speed Drive on
Vacuum Pump – 7 farms
4.5
0.6
10
Plate Milk Pre-cooler – 8
Farms
3.7
1.3
6.9
Energy Efficient lighting –
10 farms
4.9
2.0
10
Item
1Simple
payback = Investment/annual savings
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Conclusions
“It Depends” -- No silver bullets
Some changes were profitable on
some farms
Need to evaluate your energy use
Third party audit
Self audit with online tools
Start with the largest cost items
Run your numbers
Consider likely changes in energy
prices
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Electricity Prices
Commercial Rates, 2004 - 2030
cents per kWh, 2005 prices
9.0
8.8
8.6
8.4
8.2
8.0
7.8
7.6
7.4
2004
2008
2012
2016
2020
2024
Source: US Dept of Energy, Energy Information Administration
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2028
World Oil Prices (Reference Case)
100
High Price
2005 dollars per barrel
80
60
Reference
40
Low Price
20
History
0
1980
1990
Projections
2000 2005 2010
2020
2030
Source: US Dept. of Energy, Annual Energy Outlook, Modeling, and Data Conference: March 28, 2007
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Costs to consider
Investment
Annual ownership cost
Depreciation
Interest on investment
Property tax
Insurance
Operating costs
Energy use
Repairs and maintenance
Labor
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Investment Cost
If the current system works
The past investment is a “sunk”
(non-recoverable) cost
If current equipment has market
value, this is it’s “investment” cost if
you keep it and use it, plus any
needed renovation or upgrades
If the current system is broke,
include the replacement
investment costs in your
comparisons
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Annual Depreciation Charge
Simple average annual
depreciation charge formula =
[New Cost - Salvage Value]
Years of life
Depreciation charges are affected
by intensity of use, age and
obsolescence
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Interest on Investment
Simple average annual interest
charge formula =
[New Cost + Salvage] X Interest rate
2
The interest rate may be the loan rate
if financed or the interest earnings
you give up if you use your own
money
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Annual Operating Expenses
Energy
Quantity used per year
Cost per unit
Total cost per year
Repairs and maintenance
Labor
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Evaluation
Compare the relevant annual
costs of the existing system
with the full cost of the new
technology, including
investment costs and
operating costs
More complex tools exist,
including rate of return on
investment & net present value
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Run your numbers
Existing
System
Item
1. Purpose, type of energy
2. Investment, net, $
3. Annual ownership costs, $
4. Annual operating
expenses, $
5. Annual revenue
6. Total annual cost, net, $
7. Annual Cost Difference
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Proposed New
Technology
Example
Existing
System
Item
1. Purpose, type of energy
2. Investment, $
3. Annual ownership costs, $
4. Annual operating
expenses, $
5. Revenue
6. Total annual cost, $
7. Annual Cost Difference
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Proposed New
Technology
Electric,
Resize, update
Vacuum pump
motor
0
$1,200
0
5-yr life, 8%
interest = $288
4,600kwh*0.08
= $368
2,865kwh*0.08
= $229
0
0
$368
$517
-$149
Risk
Oil-based energy prices are
volatile making profit
projections risky
Tools
Years to recover investment
Sensitivity analysis
Contingency planning
More
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Summary
Many options, little information on
profitability
Start with an assessment of your
farm operation and determine
where to use your time and
energy to best advantage
Evaluate your energy use and
pick the highest cost uses to
investigate
Develop the technical specs and
costs of alternative technology
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Summary
Evaluate the profitability of the
new technology
Determine current use and cost
Project future use and cost
Compare annual ownership and
operating expenses of the current
system and the alternatives under
consideration
Continue to monitor the situation
– energy prices and technology
are changing!
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Geoff Benson
Phone: (919) 515-5184
Fax: (919) 515-6268
E-mail: [email protected]
Web page:
http://www.ag-econ.ncsu.edu/
faculty/benson/benson.html
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