Co-author Morgan M. Gerard
Food waste is a major problem in the US. Studies show that around 40% of all food produced in the US gets wasted at some point in the food chain. According to the EPA, food waste is the second largest category of municipal solid waste sent to landfills, accounting for 18% of their waste stream. Left to decompose in landfills, food waste creates methane gas, a lethal greenhouse gas that contributes to climate change and global warming. EPA has found that, pound for pound, the comparative impact of methane gas on climate change is more than 25 times greater than carbon dioxide.
Universities are not immune from contributing to the organic waste problem. University meal programs serve buffet-style food to students and don’t want to run the risk of running out of food. The average college student generates 142 pounds of food waste a year, and campuses as a whole throw out a total of 22 million pounds of uneaten food annually. Universities thus are a major contributor of food waste to landfills. Tackling the food waste problem has become increasingly important to colleges. Food waste is one of the least recovered recyclable materials in the US. College programs such as composting, tray-less dining and the Food Recovery Network, where uneaten food is delivered to feed the needy, only begin to solve the problem. Universities are increasingly considering anaerobic digestion as a solution as they expand their green initiatives.
Anaerobic digester systems provide a means for schools to recycle campus waste while satisfying multiple goals of reducing their carbon footprint, lowering their energy costs, reducing use of fossil fuels, capturing an important source of renewable energy, and creating campus laboratories for educating students on socially responsible behavior.
What is Biodigestion?
A biodigester is basically a large, fully enclosed tank into which you collect organic waste. Anaerobic means the absence of oxygen. If you lock anaerobic microbial organisms in a sealed environment without oxygen, but with plenty of food and other organic waste, the microbes produce methane-rich gas through their digestive process. Essentially, it’s the natural process of decomposition technologically revved up to optimal speed and efficiency. The trapped methane gas is then cleaned and used to generate electricity and steam for heating and cooling via a combined heating and power (CHP) or cogeneration system. The biogas also can be directly used to produce steam in boilers for hot water and heating. Leftover organic solid waste can be used as fertilizer, a soil enhancer or be further composted.
Anaerobic digestion is seen as a holistic, albeit more technically complex solution to food waste than University recycling and composting programs. When properly structured, installing a biodigester can also be a money-maker for the University by reducing electric, heating, waste disposal and operating expenses.
Food for Thought
Biodigestion is not entirely new to campuses. A number of Universities have been at the vanguard of installing biodigestion systems as part of their sustainability missions. In 2011, the University of Wisconsin Oshkosh built the first commercial anaerobic biogas system in the United States. The 370 KW facility converts 10,000 tons of organic waste per year to generate approximately 8 percent of the University’s electricity needs. Michigan State University has developed a $5.1 million biodigester that converts around 10,000 tons annually of organic waste through an approximately 350 KW system that powers ten campus buildings. University of California Davis entered into a third party off balance sheet project finance arrangement to build an $8.6 million biodigester that converts 18,000 tons of organic trash annually into 5.6 million kilowatt-hours to satisfy 4% of the campus’ electricity needs.
Project Financing for Biodigester Projects
Deciding to construct a biodigestion facility involves undertaking a variety of risks, including construction cost overruns, delays, performance risk, technology problems and operating cost overruns. Financial risk is a major consideration. Construction of infrastructure projects requires review and consideration of balance sheet and credit issues. Undertaking large capital expenditures can run afoul of bond indentures and also affect a University’s credit rating. Sustainability programs often find their proposed projects competing with other capital projects. This is frequently an uphill fight as, unlike student housing, library and classroom buildings, owning and operating energy projects is not a core business of the University.
One structuring option that can minimize risks and overcome these political issues is to develop the project through a third party owned, off balance sheet project financing arrangement. Under a project finance structure, the University signs a long term power purchase and waste disposal agreement, or enters into a lease arrangement, with a third party developer that will guarantee the university savings off its energy and waste disposal costs. In exchange, the project sponsor agrees to take on project risks including construction cost overruns, delay damages, under-performance of the facility, and operating and maintenance costs. These risks are not inconsiderable, as biodigester performance depends upon a consistent, stable quality of organic waste and bio-gas production. Importantly, a project finance structure allows a biodigester project to be built and financed off-balance sheet to the University. This allows the University to avoid incurring new debt obligations, using up its balance sheet, violating bond coverage ratios and otherwise running afoul of its bond indentures. It also allows the University to allocate project risks to a third party while guaranteeing savings to the University of energy, waste disposal, operating and maintenance expenses.
An additional benefit of a project finance structure is that it allows a private party to use depreciation and other tax benefits not available to not-for-profit Universities, thereby reducing the overall capital costs of the projects. The resulting savings can be used to fund other sustainability projects, provide scholarships, hire additional professors, or for other worthy undertakings.
Best Practices for Implementing a Biodigester Project
As discussed, a biodigester project can be a complex, risky and costly undertaking. To maximize the value of the project while minimizing its costs and risks, a University first should undertake a preliminary economic, design and engineering study to understand the financial and environmental feasibility of the project, and to ensure it is designed and built to optimize its value to the school. Consideration next should be given to funding and financing issues to understand the project’s budgetary and balance sheet impact on the school, and to justify not just its environmental value, but its economic value to the Administration. Grants and state and federal governmental funding are often available for sustainability and renewable energy projects. Where funding options are limited, or to ensure a project’s long-term benefits to the school, third party project financing structures should be considered either separately or in conjunction with grant money, that can limit both financial and project risks and utilize available tax benefits. Project financing often is the optimal vehicle for allocating risks to parties that are best able to manage those risks. In short, if properly structured to optimize its value and minimize its risks, a biodigester project can be both an economic and environmental proposition for a University.