Cow Power

May 03, 2006
Five Star Dairy in Elk Mound, Wisconsin had a problem. With 900 Holstein dairy cows in its herd and a plan to add more animals, the dairy needed a better way to manage the 120 pounds of manure produced by each cow daily. In the past, the farm would dump the dung into an uncovered lagoon, letting the solids sink to the bottom and utilizing the liquid waste that rose to the top as fertilizer, making for a nasty, smelly mess. At the same time, Dairyland Power Cooperative, serving four Midwestern states, wanted to increase its energy generating capacity and boost the amount of renewable energy in its portfolio.

Enter Environmental Power Corporation (AMEX:EPG). EPG installed a 750,000 gallon anaerobic digester system at Five Star Dairy last summer, turning the farm's agricultural waste into methane gas for electricity generation. The goal is to produce approximately 64,000mm BTUs of biogas and 775 kw electricity per year. The farm, which can use some of this energy for its own needs, hopes to reduce its liquid petroleum gas requirements by 90%. It also expects to virtually eliminate odors, kill weed seeds in the manure that would otherwise require chemical herbicides, and create environmentally sound compost, fertilizer and bedding material for the animals. Best of all, the biogas produced in the digester is infinitely renewable. Even when the sun doesn't shine or the wind doesn't blow, there will always be plenty of manure.

Harnessing the Power of Poop

Although EPG is composed of two operating subsidiaries, Buzzard Power (which runs an 83 megawatt waste-coal power plant) and Microgy Co-generation Systems, the company's new management team is refocusing the company on Microgy. Through Microgy, EPG holds the exclusive North American technology license from Xergi, a Danish company, for its highly efficient anaerobic digester technology that has already been implemented at 30 sites in Denmark and other European countries.

Microgy/Xergi's process uses special bacteria to digest manure - supplemented with a fatty substrate such as food, agricultural or other animal wastes - during a month-long process in a heated, stirred, multi-thousand gallon reaction vessel. This process is remarkably dependable - the digester kept working this February as temperatures dipped to -35 degrees!

Biogas is produced during the reaction and treated solids are separated from liquids, resulting in a soft, dry, comparatively odorless material used as animal bedding, compost or as fuel to be burned directly. The remaining reduced-volume, nutrient-rich, lower-odor liquid can be safely applied to land as a fertilizer. The biogas can be burned directly to power the farm; it can generate electricity to be sold into the local electric utility grid; or it can be further cleaned and compressed and sold into a nearby natural gas pipeline.

As the manure is transformed into useful byproducts, the Microgy digester simultaneously reduces the serious environmental impacts of conventional large-scale manure management, including:

- the noxious odor of the lagoons;
- the atmospheric release of smog precursors and asthma-inducing particulate matter;
- the release of methane, which is a more potent greenhouse gas than carbon dioxide;
- the land and water degradation caused by disposal of the lagoon waste; and
- overabundant liquid waste.

Anaerobic digestion tackles these problems by capturing many of the air pollutants. The digestion also mineralizes the nutrients remaining in the liquid fertilizer, turning them into a form that is easier for plants to absorb and so reducing the risk of nutrient runoff contaminating nearby water bodies.

Enormous Potential

Because Microgy's business model is to design, build, own and operate systems, the company can capture the value of the energy produced. Farmers can solve their environmental problems and save money on conventional fuel. Power companies can buy energy from Microgy that is certified as green and qualifies as the renewable energy they need to comply with green energy generation laws now in force in approximately half of the states in the U.S.

The market for both Microgy's waste treatment and energy generation capabilities could be huge. According to company estimates, there are over 1,200 dairy farms in the U.S. alone with more than 1000 cows - some with more than 20,000 cows - with total biogas production potential of 170 million BTUs annually.

While the company has focused on the dairy market first, there are others that can benefit from this technology as well, such as beef and swine farms. In March, the company announced its first project at a Swift & Co.meat processing plant, to install three to four digesters at a facility in Nebraska. And in January, the company signed a Memorandum of Understanding with California's Pacific Gas & Electric Company (PG&E) that will allow future EPG projects in California to sell their biogas into nearby PG&E natural gas pipelines.

Naysayers Contend No Dung Deal

Anaerobic digestion as a method of manure management has not persuaded all environmental analysts. A March 2006 editorial in The New York Times disparaged environmental claims of digester biogas as hogwash. The expensive systems, the paper claimed, require government subsidies, don't produce much energy, don't mitigate pollution very effectively and mostly benefit factory farms rather than traditional small-scale farms.

Kam Tejwani, EPG's President and CEO, counters that 80% of manure comes from 20% of farms and that these farms have been rapidly consolidating over the past 10-15 years. "We see this trend as an opportunity to focus our resources and provide as much renewable energy to our nation as possible."

Other critics claim that digester systems might be too technologically challenging for farmers. In response, Tejwani points out that Microgy - not the farmers - runs the systems so farmers can concentrate on what they do best. He adds,"Microgy's advanced, European technology is more efficient, providing four to five times the energy output of traditional digesters."

Convincing the critics will be difficult until the company has a longer track record. So far, EPG has completed three single-digester systems in the U.S., pilot projects in Wisconsin, including Five Star Dairy. Construction of Huckabay Ridge in Texas, the first multi-digester project, is slated for completion in the second half of 2006. Project costs will vary with scale: the single digester Wisconsin plants cost approximately three times as much per digester as the eight-digester Huckabay Ridge, which is estimated to cost a total of $8.8 million, shared with project partner South-Tex Treaters, which has a 40% interest in the project.

The financial returns from projects will vary with natural gas and electricity prices. For example, company estimates for revenue from Huckabay Ridge in its first year of operation vary from approximately $2 million to almost $10 million, depending on the price of natural gas.

We think the future smells sweet for a company that can close the circle of manure, methane, megawatts, and money.