This post is a part of BioBiz’s Bio-CNG Perspectives.
BioBiz, a division of EAI, is a leading market intelligence & strategic consulting firm for the Indian bio-based sectors.
This blog post uses the terms bio-CNG and renewable natural gas (RNG) interchangeably.
Bio-CNG or bio-compressed natural gas, also known as sustainable natural gas or biomethane, is a biogas which has been upgraded to a quality similar to fossil natural gas and having a methane concentration of 90% or greater. As the gas is derived from natural and renewable sources, it is also termed renewable natural gas (RNG).
Introduction
Any business becomes viable and successful if it is feasible on three aspects – technology, policy and economics. This holds good for RNG also. In the case of RNG, while the anaerobic digestion technology is stable and there is a policy (SATAT initiative) to drive the market, economics remains unclear for many project developers owing to the still emerging nature of the segment with innovations across the value chain.
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This blog post provides details on the economic feasibility of a RNG project and the factors which attribute to the success of a plant.
Economic feasibility of RNG projects
Like it is for any business, the economic viability of the bio-CNG business is dependent on two main aspects:
- Total cost of production per unit
- Revenue that can be achieved per unit of bio-CNG produced
Let’s review each of the above two to understand how they stand:
1. Total cost of production per unit
This can be further split into the following components:
- Feedstock cost
- Logistics cost
- Conversion cost
- Financing cost
a. Feedstock cost
Depending on the feedstock used, it can either cost nothing (for food waste picked up from restaurants or corporates), could mean a moderate fee (for feedstock such as press mud) or cost quite a bit (agricultural waste such as cotton stalk). Given that we get a CNG yield in the range of only 4-8% by weight of feedstock, translated in terms of Rs/kg of CNG, feedstock cost could be anywhere between zero to Rs 20/kg of CNG. The reason for such a wide range is the wide range in the costs of different feedstock as mentioned earlier. A point to note here is the high sensitivity of the cost of CNG produced to feedstock cost – even a small increase in feedstock cost could add up to a significant cost per kg of CNG produced. Our simulations show that this has to be kept below Rs 10/kg of CNG for optimal returns.
b. Logistics cost
Logistics cost can vary significantly as well, depending on the distance travelled and the type of transport used. To illustrate, in terms of cost per ton km, using a small truck to carry feedstock only for a short distance (say, less than 5 km) could cost as much as five times as using a 20-ton truck to carry feedstock for a long distance (say about 100 km). Translated in terms of Rs/kg of CNG, depending on the transport used and distance travelled, logistics cost could fall in the range of Rs 2-10/kg of CNG. That’s quite a wide range too.
c. Conversion cost
Compared to the above two cost components, the conversion cost falls in a fairly narrow range. We estimate it to be in the range of Rs 12-15 per kg of CNG under reasonable assumptions for the types of technologies and processes used.
d. Financing cost
The cost of financing is, to a large extent, dependent on the upfront project cost for projects such as these. Given that, and also factoring government of India’s capital subsidy which works out to about 25% of total project cost, we estimate that the financing cost could translate to about Rs 5 per kg of CNG.
Adding up the costs, we get: A total unit cost of the product in the range Rs 20-45/kg of CNG. The lower value in the range is an ideal situation which is rare; the highest value in the range too happens only under highly sub-optimal conditions. Our analyses of the ground realities suggest that the total unit cost will be in the range of Rs 37-40/kg of CNG.
2. Revenues
The revenue per unit is dependent on whom the bio-CNG is sold to. The government of India has announced a price of Rs 46/kg of CNG (excluding GST) for sale of bio-CNG to OMCs (oil marketing companies – IOC, BPCL & HPCL). Selling bio-CNG to the private sector or self-retailing could fetch even higher prices, perhaps up to Rs 55/kg. It is also quite possible that the prices get tagged to the overall natural gas prices, which are expected to see an upward trend for the near and medium-term future.
3. Uncertainties & volatility in costs & revenues
Among cost components, the real component that is of concern is the cost of feedstock, as the rest of the components have low volatility and uncertainty. In the case of revenues, volatility in the overall revenue realized per unit can be expected over time given the historical trends in the pricing of such items. At the same time, given the overall price trends in the natural gas market and the fact that CNG could be a viable alternative to the much higher priced LPG for many industrial segments, the overall revenue realization per unit of CNG should hover around Rs 50/kg for the 2020-2025 period.
Given the estimates for revenues and production costs (Rs 46-50 vs. Rs 37-40/kg), the economic business case for bio-CNG indeed appears quite attractive. Plugging in these numbers into a detailed financial model shows us project IRRs and payback periods of about 13-15% & 4-5 years respectively – reasonably attractive returns for a 20-year project.
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