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Economic Evaluation of Energy Alternatives for Dairy Farmers

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

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Economic Evaluation of Energy Alternatives for Dairy Farmers

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  1. Economic Evaluation of Energy Alternatives for Dairy Farmers GEOFF BENSON, PhD Extension Economist Dept of Agricultural and Resource Economics North Carolina State University

  2. 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 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? GEOFF BENSON, ARE, NCSU

  4. Dairy Farm Energy Audits Sources: NYSERDA, Dairy Farm Energy Audit Summary, July 2003 and WI DATCP Dairy Farm Energy Management Handbook. GEOFF BENSON, ARE, NCSU

  5. Energy costs GEOFF BENSON, ARE, NCSU

  6. 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.usda.gov/ GEOFF BENSON, ARE, NCSU

  7. 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 GEOFF BENSON, ARE, NCSU

  8. NY 2003 Dairy Farm Energy Audit: Years to Payback1 1Simple payback = Investment/annual savings GEOFF BENSON, ARE, NCSU

  9. 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 GEOFF BENSON, ARE, NCSU

  10. Electricity Prices Source: US Dept of Energy, Energy Information Administration GEOFF BENSON, ARE, NCSU

  11. World Oil Prices(Reference Case) High Price 2005 dollars per barrel Reference Low Price History Projections Source: US Dept. of Energy, Annual Energy Outlook, Modeling, and Data Conference: March 28, 2007 GEOFF BENSON, ARE, NCSU

  12. Costs to consider • Investment Annual ownership cost • Depreciation • Interest on investment • Property tax • Insurance • Operating costs • Energy use • Repairs and maintenance • Labor GEOFF BENSON, ARE, NCSU

  13. Investment Cost • If 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

  14. 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 GEOFF BENSON, ARE, NCSU

  15. 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 GEOFF BENSON, ARE, NCSU

  16. Annual Operating Expenses • Energy • Quantity used per year • Cost per unit • Total cost per year • Repairs and maintenance • Labor GEOFF BENSON, ARE, NCSU

  17. 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 GEOFF BENSON, ARE, NCSU

  18. Run your numbers GEOFF BENSON, ARE, NCSU

  19. Example GEOFF BENSON, ARE, NCSU

  20. Risk • Oil-based energy prices are volatile making profit projections risky • Tools • Years to recover investment • Sensitivity analysis • Contingency planning • More GEOFF BENSON, ARE, NCSU

  21. 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 GEOFF BENSON, ARE, NCSU

  22. 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! GEOFF BENSON, ARE, NCSU

  23. Geoff Benson • Phone: (919) 515-5184 • Fax: (919) 515-6268 • E-mail: geoff_benson@ncsu.edu • Web page: http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html GEOFF BENSON, ARE, NCSU

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