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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 - PowerPoint PPT Presentation
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Economic Evaluation of Energy Alternatives for Dairy
Farmers
GEOFF BENSON, PhDExtension Economist
Dept of Agricultural and Resource EconomicsNorth Carolina State
University
Many OpportunitiesElectricity use
Milk and cow coolingWater heating and parlor cleaningParlor washingVacuum pumpsLighting
Renewable fuels – biodiesel, solar, wind
Tillage operations
GEOFF BENSON, ARE, NCSU 2
GEOFF BENSON, ARE, NCSU 3
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?
Dairy Farm Energy Audits
ItemNew 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%
GEOFF BENSON, ARE, NCSU 4
Sources: NYSERDA, Dairy Farm Energy Audit Summary, July 2003 and WI DATCP Dairy Farm Energy Management Handbook.
Energy costs
ItemPer Cow Per Cwt.
% of Milk Price
Wisconsin: 2006 Fuel Cost $141 $0.43 2.8%
NY 2003 Audit Electricity priced a $0.08/kWh $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 --
GEOFF BENSON, ARE, NCSU 5
Diesel fuel use, gallons/acreChisel Plow = 1.1Tandem Disk = 0.6Drill planting = 0.5No-till planter = 0.35Sprayer = 0.1Corn silage harvester = 3.6Baler = 0.45Source: NRCS-USDA on line at http://ecat.sc.egov.usda.gov/
GEOFF BENSON, ARE, NCSU 6
ProfitabilityLittle existing informationPoor evaluation of profitability –
typically simple paybackMost studies suggest that
profitability is farm and technology specificType of technology being
consideredSize of farmExisting farm technology
GEOFF BENSON, ARE, NCSU 7
NY 2003 Dairy Farm Energy Audit: Years to Payback1
ItemAverage 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
GEOFF BENSON, ARE, NCSU 8
1Simple payback = Investment/annual savings
Conclusions“It Depends” -- No silver bulletsSome changes were profitable on
some farmsNeed to evaluate your energy use
Third party auditSelf audit with online tools
Start with the largest cost itemsRun your numbersConsider likely changes in energy
pricesGEOFF BENSON, ARE, NCSU 9
Electricity Prices
GEOFF BENSON, ARE, NCSU 10
Source: US Dept of Energy, Energy Information Administration
Source: US Dept. of Energy, Annual Energy Outlook, Modeling, and Data Conference: March 28, 2007
11
ProjectionsHistory
Reference
Low Price
High Price
World Oil Prices (Reference Case)2
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GEOFF BENSON, ARE, NCSU
Costs to considerInvestmentAnnual ownership cost
DepreciationInterest on investment Property taxInsurance
Operating costs Energy use Repairs and maintenance Labor
GEOFF BENSON, ARE, NCSU 12
Investment CostIf 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
GEOFF BENSON, ARE, NCSU 13
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
obsolescenceGEOFF BENSON, ARE, NCSU 14
Interest on InvestmentSimple 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
GEOFF BENSON, ARE, NCSU 15
Annual Operating ExpensesEnergy
Quantity used per yearCost per unitTotal cost per year
Repairs and maintenanceLabor
GEOFF BENSON, ARE, NCSU 16
EvaluationCompare 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
GEOFF BENSON, ARE, NCSU 17
Run your numbers
ItemExisting System
Proposed New Technology
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
GEOFF BENSON, ARE, NCSU 18
Example
ItemExisting System
Proposed New Technology
1. Purpose, type of energyElectric,
Vacuum pumpResize, update
motor
2. Investment, $ 0 $1,200
3. Annual ownership costs, $ 05-yr life, 8%
interest = $288
4. Annual operating expenses, $
4,600kwh*0.08 = $368
2,865kwh*0.08 = $229
5. Revenue 0 0
6. Total annual cost, $ $368 $517
7. Annual Cost Difference -$149
GEOFF BENSON, ARE, NCSU 19
RiskOil-based energy prices are
volatile making profit projections risky
ToolsYears to recover investmentSensitivity analysisContingency planningMore
GEOFF BENSON, ARE, NCSU 20
SummaryMany options, little information
on profitabilityStart 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
GEOFF BENSON, ARE, NCSU 21
SummaryEvaluate the profitability of the
new technologyDetermine current use and costProject future use and costCompare 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!
GEOFF BENSON, ARE, NCSU 22
GEOFF BENSON, ARE, NCSU 23
Geoff Benson
Phone: (919) 515-5184Fax: (919) 515-6268E-mail: [email protected] page:
http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html