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Introduction

India is the fourth largest energy consumer [1i] in the world, after the United States, China, and Russia. Despite a slowing global economy, India’s energy demand continues to rise. As vehicle ownership expands, petroleum demand in the transport sector is expected to grow in the coming years. While India’s domestic energy resource base is substantial, the country relies on imports for a considerable amount of its energy use.

According to the International Energy Agency (IEA), hydrocarbons account for the majority of India’s energy use. Together, coal and oil represent about two-thirds of total energy use. Natural gas now accounts for a seven percentage share, which is expected to grow with the discovery of new gas deposits.

Figure 1: Energy consumptionii

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2011. EIA estimates that India produced approximately 1.8 Tcf of natural gas in 2010, a 63 percentage increase over 2008 production levels. The bulk of India’s natural gas production comes from the western offshore regions, especially the Mumbai High complex, though fields in the Krishna-Godavari (KG) are increasingly important.

Despite the steady increase in India’s natural gas production, demand has outstripped supply and the country has been a net importer of natural gas since 2004. India’s net imports reached an estimated 429 billion cubic feet (Bcf) in 2010.

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Potential of Biogas/bio CNG

As per Ministry of New and Renewable Energy India(MNRE) data, the total biogas potential, in terms of electrical Power, is estimated at 1281 megawatt electrical (MWe). The major industries generating biogas are Distillery, Sugar, and Starch. These three, together, account for 3/4th of the total biogas potential of India. The other major industries are Pulp and paper, Milk processing, Slaughter house, and Poultry.

bio -CNG is the purified form of Biogas where all the unwanted gases are removed to produce up to ninety five percentage pure methane gas. bio - CNG is exactly similar to the commercially available natural gas in its composition and energy potential -Calorific Value (CV: ~52000 KJ/Kg). As it is generated from biomass, it is considered a renewable source of energy and thus, attracts all the commercial benefits applicable to other renewable sources of energy.

bio -CNG can directly replace every utility of LPG and CNG in India. It has the potential to be the future of renewable fuel because of the abundance of biomass in India. bio CNG production will also ease the burden of NG/LPG import for India. It is estimated that bio -CNG can replace 2/3rd of India’s NG import which is currently pegged at 429 billion cubic feet.

Table 1 : Cost of fuel in India (* Based on Production cost estimation)

Fuel Calorific Value (KJ/Kg) Tariff/ Rate/ Cost in Rs. Cost of Energy (KJ/Rs.)

CNG 52000 Rs. 42/Kg 1238 bio - CNG 52000 Rs. 35*/Kg 1485 LPG (Commercial) 46000 Rs. 65.7/Kg 700

Petrol 48000 Rs. 65.5/Ltr 550 Diesel 44800 Rs. 41.3/Ltr 900

Figure 2: Calorific Value (Energy Potential)

bio -CNG production is very cost effective making it one of the cheapest fuels in India. Commercial LPG is the costliest fuel and thus, replacement of commercial LPG with bio CNG makes for a profitable business model.

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Biogas based power generation projects have existed in India for a long time. The concept of bio CNG is fairly new in India. bio-CNG is expected to become a formidable alternative to power vehicles and LPG in Industries.

Biogas to Energy projects alternatives

Biogas is a mixture of primarily 2 gases with the composition of 55-60% CH4 and remaining CO2 with traces of H2S and moisture. Biogas is a fuel gas with a calorific value of ~ 22,000 KJ/Kg. The biogas projects can be broadly classified into 2 categories:

- Biogas to Electric Power

- Biogas to Bio CNG

Figure 3: Alternatives

Financial Analyses

Global studies have conclusively proved the financial superiority of bio CNG projects over the power generation projects. In some cases, the profitability of bio CNG has been shown to be 5 times more.

Biogas

H2S removal Power Generation

H2S & CO2 Removal

95% Methane gas (bio-CNG)

Replacement for LPG

Used as Automobile fuel

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As a matter of convenience, we can do a simple back of the envelope calculation and validate the same (refer table 2)

Table 2: Value

Power bio CNG 1 cum of biogas equivalent 2.1 KWh 0.45 kgs Rate of Sale (Net) Rs. 5 / KWh Rs. 50/Kg Value Rs. 10.5 Rs. 22.5

The value of the product generated from 1 cum of biogas is more than twice for bio CNG. The revenue realization in this case is more than double. Even with a slightly higher operating cost and comparable capital cost, bio CNG is clearly a more profitable alternative.

Project Assumptions

Currently, there are no large scale bio CNG projects in regular operation in India. The sample project is for an industrial scale plant in this assumption; the biogas generation cost is not included. The capital cost only includes H2S and CO2 scrubber along with High Pressure compressor (250 bar) and cylinder cascades.

Table 3: Project estimates

Details Value Unit Plant Capacity 500 Cum/hr Project Cost 7.64 Cr Equity Contribution 30 % Debt 70 % Interest 12 % Net bio CNG Sale cost 40 Rs/Kg Cost of biogas 4.8 Rs/Cum IDC capitalized Yes PLF (stabilization period) 80 % PLF (Stable) 90 % Biogas methane content 60 % bio CNG methane content 95 % Power Consumption per hour 300 KWh Cost of Power 5.5 Rs/KWh Avg. Transportation distance 15 Kms Cost of transportation 20 Rs/Km Appropriate assumptions have been taken to account for the Administrative, Personnel, contingency, working capital, provision periods, escalations etc.

No Central Finance Assistance (CFA) has been considered in this financial projection. With the 12th five year plan yet to be notified, no reliable subsidy value is available for calculation.

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Depreciation

As per Income Tax Act, 1961, Specified Air Pollution Control Equipment and Water Pollution Control Equipment are eligible for 100% depreciation in year 1.

Specified Air Pollution Control Equipment are:

- Electrostatic Precipitation Systems

- Felt – filter systems

- Dust Collector systems;

- Scrubber counters current/venture/packed bed/cyclonic scrubbers

- Ash handling system and evacuation system

Under the IT act, CNG conversion kits and the scrubber units for gas purification are eligible for 100% depreciation benefit. The classification of these equipment as air pollution units has to be scrutinized on case to case basis.

Return on Investment

The bio CNG project is financially viable. The investor payback is 4-5 years. The sale price of bio CNG can be matched to commercial LPG prices. The interest on term loan has been taken at 12% which can be further decreased by taking debt from organizations such as IREDA. Furthermore, the terms of interest payment are further relaxed on the loan taken from IREDA making the project viability better. For e.g.: IREDA offers a better moratorium period compared to a private banking institution.

Table 4: Investment IRR

Investment IRR Value IRR Exit in Year 5 @ Forward EBITDA 2x 81.0% IRR Exit in Year 6 @ Forward EBITDA 1.5x 76.5% IRR Exit in Year 9 @ Forward EBITDA 1x 74.6%

The project has cash flows resulting into faster payback. Refer table 5, the investor NPV is high. This has resulted from the 70:30 debt /equity ratio for the project. Higher debt will result in higher investor returns.

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Table 5: NPV and payback values

for project for investor Year of Payback 4.0 2.0 NPV (Lakh) 334.5 643.81 WACC (compounded) 15.00%

Sensitivity Analyses

A sensitivity analysis has been conducted to understand the implications of cost fluctuations on the overall project profitability. This will also provide an insight into the future bargaining power of different stakeholders of the project.

Figure 4: Sensitivity Analysis

The highest sensitivity is for the price of bio CNG sale and the cost of raw material. Minor fluctuations in cost of raw material will have major impact on project profitability. The seller can escalate the cost at will. To mitigate this, the developer should consider involving the seller as an important stakeholder in the project. The other big risk is at the buyer end, where the prices of other fuels will govern the sale price of bio CNG. Conventional wisdom dictates that the cost of other non-renewable fuels will be on the rise in future and bio CNG will remain profitable. Thus, only some form of policy intervention, in terms of subsidies on fuel, can put pressure on pricing for bio CNG. Investor should also lay emphasis on fixing long term contract for power/ CNG purchase for the project, with periodic review, to mitigate arbitrary fluctuations in power cost.

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Raw MaterialCost

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Emission Reductions

bio-CNG project is eligible for CDM and will get CERs for reducing carbon emission. CDM calculation methodology for bio -CNG project is available on the website of UNFCCC. The baseline emissions of gasoline or LPG are considered to calculate the CER for bio CNG project. Depending on the utility of bio CNG, the CER calculation will vary. Value of CER generated has not been considered in the financial analyses of this report. Any CER benefit will further enhance the profitability of a bio CNG project. REC is not applicable for bio CNG bottling and sale project. It is only applicable for power generation.

Conclusion

bio - CNG projects are more financially attractive compared to biogas to power. It is expected that bio -CNG will become the more preferred alternative in the years to come. Despite being ineligible for RECs, bio -CNG projects is viable. Sensitivity analyses show the critical price points for making this project viable. Any developer with a sufficient control over the raw material prices will make substantial profits. Globally as well there is a lot of interest being shown in Indian bio -CNG projects. Various global investment firms are looking for strategic tie-ups with the India’s project developers and industries. This will lead to lot of fund infusion in this sector and accelerate the growth rate.

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Appendix 1

i Annual Energy Outlook 2011 - EIA

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ii Source: The International Energy Agency

Appendix 2

Information collected and drafted by Dhawal Parate(Green Brick Eco Solutions Pvt. Ltd.)

Presented and Enhanced by Raju Nair ( Ramson&Ramson)