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

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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?

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%

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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 --

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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/

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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

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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

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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

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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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Costs to considerInvestmentAnnual ownership cost

DepreciationInterest on investment Property taxInsurance

Operating costs Energy use Repairs and maintenance Labor

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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

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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

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

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Annual Operating ExpensesEnergy

Quantity used per yearCost per unitTotal cost per year

Repairs and maintenanceLabor

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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

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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

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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

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RiskOil-based energy prices are

volatile making profit projections risky

ToolsYears to recover investmentSensitivity analysisContingency planningMore

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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

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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!

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Geoff Benson

Phone: (919) 515-5184Fax: (919) 515-6268E-mail: geoff_benson@ncsu.eduWeb page:

http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html