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Economic viability

For calculation of economical benefits of a biogas plant and comparison of different alternative designs it is often advisable to calculate payback period for each alternative. For this calculation the cost of biogas plant is divided by yearly income from the plant.
Example 12. Farmers biogas plant with digester volume of 15 m3 is 311 000 som (see Table 24), and yearly income from its operation, as we have calculated in previous examples, only from increase in crop yields and substitution of other fuels by biogas will amount to 279 000 som. Payback period of such plant will constitute 14 months of continuous operation.

Credit financing
Although payback period of a biogas plant working in mesophilic temperature range is less than a year, rural population of Kyrgyzstan experiences problems with acquiring money for initial cost of plant construction. Therefore loan financing should be considered as an option.
For calculating payback period of biogas plant financed with a 12-months loan with 20% interest overall amount that will have to be paid back to bank should be calculated. For our example of 15 m3 plant that costs 311 000 som, this amount will be equal to 389 000 som. Now payback period of a plant has increased and amounts to approximately 17 months.

Difference between theory and practice
Although from the above examples it can be seen that payback period of a biogas plant rarely exceeds 1 year it is necessary t remember that practical results can differ from theoretically planned outcomes for many reasons. For example, construction and startup of the plant may take longer than expected and plant will start operating already after sowing period, delaying expected crop yield increase and related income. Therefore it would be more rational to count on a payback period of 2-3 years depending on available credit terms and conditions. In such cases and in cases when biogas plant is operating in psychophilic temperature range it is possible to apply the method of minimal annual income for calculating economic viability of a biogas plant.

This method consists determining annual benefits that should be received from a biogas plant every year of its useful life for a certain predetermined payback period. For application of annuities method it is necessary to determine the following parameters:
• payback period;
• yearly costs;
• initial biogas plant cost;
• interest rate.

Payback period (Т)
Payback period is determined according to the loan term or your plans. You can also conduct payback analysis of several projects and choose the most suitable.

Annual costs (C)
The current annual costs are made up of the expenses incurred for:
• maintenance and repair,
• plant operation,
• inspection fees. etc..
• system attendance.
Most such items can only be estimated, whereby around 4 % of the investment volume is generally accepted as rule-of-thumb quota for maintenance and repair. Operating costs are largely attributable to the depletion of consumables (such as desulfurizer cleaning agents) and to outside energy requirements, e.g. electricity for running agitators and mixers. Inspection fees usually arise in connection with pressurized biogas systems.
Expenses in connection with system attendance by the owner-operator himself or by his employees should usually be taken into account, whereby the hourly wage and time expenditure are subject to wide variance. It is also necessary to take into account the cost of substitution of biogas plant parts if their useful time is shorter than the useful life of the plant itself.

Total investment volume (TI)
The total investment volume includes the capital outlay for:
the digester, including agitating, mixing and heating equipment,
• gas storage and safety provisions,
• gas usage, including integration into existing systems,
• linkage between the biogas system and the farm estate, i.e. Iiquid-manure and gas lines, structural alterations on stabling structures, etc,
• planning, construction supervision, licensing fees, etc.

Interest rate (IR)
The assumed interest rate must be determined with due regard to specific individual conditions. In this context, the assumed interest rate is defined as a real interest rate, i.e. after adjustment for inflation. Accordingly, the assumed interest rate is equal to the current mean debt interest rate demanded by the bank for the loan capital, when the entire project is financed with borrowed money. Since, however, most projects involve a certain degree of mixed financing, the assumed interest rate will take on a value located somewhere between the debt interest rate and the credit-interest rate, depending on the case situation.
In the Kyrgyz Republic debt interest rate varies from 17 to 40% per year and inflation in 2005 has amounted to 5% [27].
Example 13. Calculation of minimal annual income for biogas plant operated under mesophilic temperature.
Farmer has taken out a loan for 3 years for construction of biogas plant with digester volume of 15 m3 with heating system, automated agitation and feeding systems. The cost of such plant is 311 000 som. Loan interest rate amounts to 25% per year with yearly payments.
We assume: payback period (Т) = 3 years,
Annual costs (C) = 4% from TI = 12 440 som,
Total investment volume (TI) = 311 000 som,
Interest rate (IR) = 25% + 5% inflation = 30% = 0,3.

Calculation of the minimal yearly income I:
I = TI * ( (IR*(IR + 1)Т) : ((IR + 1)Т – 1) ) + C
= 90 000 * ( (0,3*(0,3 + 1)3) : ((0,3 + 1)3 – 1) ) + 12 440 =
= 311 000 * 0,55 + 12 440
= 183 490 som.
Therefore farmer has to receive minimal yearly income of no less than 183 490 som to be able to operate the plant and pay back the 3-year loan. Whether he will be able to do that can be determined by calculating the sum of annual benefits.

Annual benefits (B)
Annual benefits consist of all monetary benefits from the biogas plant. Benefits can be received from:
• Power generation. Naturally, only the net energy gain can be counted, i.e. the process energy fraction
• (for agitators, pumps, heating, and any outside energy input) must be subtracted from the total gas yield. If the generated power is sold, the returns are included in the calculation. Any energy used to replace previous outside energy inputs counts as savings.
• Money savings from the substitution of digested sludge for chemical fertilizers.
• Money savings from the substitution of digested sludge for other fodder additives.
• Benefits attributable to the superior properties of digested sludge, i.e. increased yield.

Example 13 (continued). We have already calculated yearly benefits from a biogas plant with digester volume of 15 m3 in earlier examples and they have constituted 279 000 som. Therefore farmer can pay back the debt even if the biogas plant construction will be delayed or the plant will operate in a half-power mode or only for 6 months per year.

Annual profit (AP)
If annual profit received from the biogas plant is positive that construction of the plant can be considered profitable. If it is negative, than it is not viable to build a biogas plant.
Annual profit is calculated as a difference between annual benefits and minimal annual income AP = AB – I. In our example that would amount to:279 000 – 183 490 = 95 510 som, and construction of biogas plant is profitable.

Financing sources
The cost of constructing and operating a biogas plant often exceeds financial means of households and additional financing is needed. This financing can be sought in following sources:
• grants and lax credits from donor organizations;
• state financial support;
• bank or other financial organizations debt;
• internal resources of household or community that is building a biogas plant.
All these sources have to be considered for every individual case.

Grant financing
In Kyrgyz Republic, as in many other developing countries, grant financing is offered by the international donors if the proposed activity corresponds to their aims. Around half of all biogas plant built in the Kyrgyz Republic have been partially financed by the GEF/UNDP. The list of organizations that can be useful when donor aid for biogas plant construction can be found in Annex B.

Credit financing
When financing by credit the questions of liability and debt provisions should be clarified. The borrower should always be able to bear the possible risk or be immune to this risk by having state credit guarantees. The debt provisions should be worked out so that they conform to the development of cost and yield. Credit repayment terms are frequently much shorter than the lifetime of a project e.g. 5 years compared to 15 – 20 years.

Taxation [29]
Biogas plants can be used with the aim of producing biogas and fertilizer for use in own household
• using own substrate;
• using own and purchased substrate;
• using purchased substrate.
In this case production of biogas and biofertilizer will not be subject to taxation.

Taxable activities
In case when excess biogas and fertilizer are sold or produced for purpose of sale (using own or purchased substrate), or when biogas plant is used for digestion of commissioned substrate with later return of digestion products to the client (services) the owner of the biogas plant will have taxable income.

Table 25. Categories of taxpayers
Individual businessman Legal entities
Individual businessman undertaking commercial activities with registration as a farmer household Legal entities carrying out commercial activities as a farmer household
Individual businessman undertaking commercial activities without registration as a farmer household Legal entities carrying out commercial activities not as a farmer household
Small-scale enterprises Small-scale enterprises

Tax remissions
For farmers households the produce of biogas plants will not be liable to income taxation if the share of income from their sale is less than 25% from overall income.
Farmers households that pay land-tax (households that have a state act certifying their right to tenure the land or a temporary certification) will pay only land-tax and not the income tax if the share of income from sales of agricultural produce will be larger than 75% of the overall income.
For the rest of the taxpayer categories taxation will be carried out according to order, determined in the Tax Code of the Kyrgyz Republic.