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  Vacuum pumps  Lighting Renewable fuels – biodiesel, solar, wind Tillage operations GEOFF BENSON, ARE, NCSU2

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 Item New York: Electricity use – Freestall Farms Wisconsin: All Energy Use Milk Cooling27%25% Lighting26%18% Ventilation22%19% Vacuum Pumps17% Water heating4%18% Other4%6% GEOFF BENSON, ARE, NCSU4 Sources: NYSERDA, Dairy Farm Energy Audit Summary, July 2003 and WI DATCP Dairy Farm Energy Management Handbook.

Energy costs Item Per CowPer Cwt. % of Milk Price Wisconsin: 2006 Fuel Cost$141$ % NY 2003 Audit Electricity priced a $0.08/kWh$39 to $64$0.19 to $ Cornell Business Summary: Fuel$123$ % 2005 Cornell Business Summary: Utilities $90$ % 2005 Cornell Business Summary: Total cost$3,121$ GEOFF BENSON, ARE, NCSU5

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 GEOFF BENSON, ARE, NCSU6

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, NCSU7

NY 2003 Dairy Farm Energy Audit: Years to Payback 1 Item Average PaybackShortestLongest Variable Speed Drive on Vacuum Pump – 7 farms Plate Milk Pre-cooler – 8 Farms Energy Efficient lighting – 10 farms GEOFF BENSON, ARE, NCSU8 1 Simple payback = Investment/annual savings

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, NCSU9

Electricity Prices GEOFF BENSON, ARE, NCSU10 Source: US Dept of Energy, Energy Information Administration

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

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, NCSU12

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, NCSU13

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, NCSU14

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, NCSU15

Annual Operating Expenses Energy  Quantity used per year  Cost per unit  Total cost per year Repairs and maintenance Labor GEOFF BENSON, ARE, NCSU16

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, NCSU17

Run your numbers Item Existing 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, NCSU18

Example Item Existing System Proposed New Technology 1. Purpose, type of energy Electric, Vacuum pump Resize, update motor 2. Investment, $0$1, Annual ownership costs, $0 5-yr life, 8% interest = $ Annual operating expenses, $ 4,600kwh*0.08 = $368 2,865kwh*0.08 = $ Revenue00 6. Total annual cost, $$368$ Annual Cost Difference-$149 GEOFF BENSON, ARE, NCSU19

Risk Oil-based energy prices are volatile making profit projections risky Tools  Years to recover investment  Sensitivity analysis  Contingency planning  More GEOFF BENSON, ARE, NCSU20

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, NCSU21

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, NCSU22

GEOFF BENSON, ARE, NCSU23 Geoff Benson Phone: (919) Fax: (919) Web page: faculty/benson/benson.html