Economic Evaluation of Energy Alternatives for Dairy Farmers

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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

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Many Opportunities

• Electricity use
• Milk and cow cooling
• Water heating and parlor cleaning
• Parlor washing
• Vacuum pumps
• Lighting
• 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?

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Dairy Farm Energy Audits
Sources NYSERDA, Dairy Farm Energy Audit
Summary, July 2003 and WI DATCP Dairy Farm
Energy Management Handbook.
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Energy costs
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Diesel fuel use, gallons/acre

• Chisel Plow 1.1
• Tandem Disk 0.6
• Drill planting 0.5
• No-till planter 0.35
• Sprayer 0.1
• Corn silage harvester 3.6
• Baler 0.45
• Source NRCS-USDA on line at http//ecat.sc.egov.u
  sda.gov/

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Profitability

• Little existing information
• Poor evaluation of profitability typically
  simple payback
• Most studies suggest that profitability is farm
  and technology specific
• Type of technology being considered
• Size of farm
• Existing farm technology

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NY 2003 Dairy Farm Energy Audit Years to
Payback1
1Simple payback Investment/annual savings
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Conclusions

• It Depends -- No silver bullets
• Some changes were profitable on some farms
• Need to evaluate your energy use
• Third party audit
• Self audit with online tools
• Start with the largest cost items
• Run your numbers
• Consider likely changes in energy prices

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Electricity Prices
Source US Dept of Energy, Energy Information
Administration
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World Oil Prices (Reference Case)
High Price
2005 dollars per barrel
Reference
Low Price
Projections
History
GEOFF BENSON, ARE, NCSU
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Costs to consider

• Investment
• ?Annual ownership cost
• Depreciation
• Interest on investment
• Property tax
• Insurance
• Operating costs
• Energy use
• Repairs and maintenance
• Labor

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Investment Cost

• If the current system works
• The past investment is a sunk (non-recoverable)
  cost
• If current equipment has market value, this is
  its 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 obsolescence

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Interest on Investment

• Simple 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 Expenses

• Energy
• Quantity used per year
• Cost per unit
• Total cost per year
• Repairs and maintenance
• Labor

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Evaluation

• Compare 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
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Example
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Risk

• Oil-based energy prices are volatile making
  profit projections risky
• Tools
• Years to recover investment
• Sensitivity analysis
• Contingency planning
• More

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Summary

• Many options, little information on profitability
• Start 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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Summary

• Evaluate the profitability of the new technology
• Determine current use and cost
• Project future use and cost
• Compare 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 [phone]
• Fax [phone]
• E-mail geoff_benson_at_ncsu.edu
• Web page
• http//www.ag-econ.ncsu.edu/ faculty/benson/bens
  on.html