Economic Assessment of Short-Rotation Forestry and Switchgrass Plantations for Energy Production in Central Canada

PATRICK Girouard

Resource Efficient Agricultural Production (REAP)-Canada,

Sainte-Anne-de-Bellevue, Que. H9X 3V9.

JOHN C. HENNING

^a Due to tree height, fertilizer application was assumed to have occurred only during the second year of a cycle Nonetheless, fertilization every year, or every other year, is probably a better strategy when possible. For the purpose of the study, nitrogen rate was estimated based on a trade-off between tree requirements over a 4-year cycle and environmental concerns.

The economics of SRF willows and switchgrass was investigated for harvest cycles of 4 years and I year, respectively. Estimates for establishment and other preharvest costs were obtained from REAP-Canada quasi-commercial plots (3 sites of 5 ha). Harvesting costs were estimated entirely from secondary data. Transportation costs for a 40-km haul were also included in the analysis.

A biomass final supply price was determined using a budgeting approach and was developed on a Microsoft Excel spreadsheet. Full cost budgeting was used; that is, all cash and non-cash costs were considered, including a return to the farmer's land, labor, and management. The final supply price represents the market revenue necessary to cover all these costs. Annual land rent was estimated as 5% of the land purchase value; labor was charged at $10/hour; and management was estimated as 3% of the purchase value of land and equipment. The analysis did not include government subsidies and tried to provide a fair return to farmers for the use of marginal farm land.

Results and Discussion

Establishment Costs

Total establishment costs per hectare were estimated at $976 (Fig. 1) and $220 (Fig. 2) for SRF willow and switchgrass, respectively. Thus during the first year, a farmer must invest approximately 4 times more money to establish SRF willow than switchgrass. Nonetheless, when establishment costs are amortized over the plantation life, the cost differential narrows due to the longer life cycle assumed for the tree plantations. For instance, if a stand of SRF willow is assumed to have a life cycle of 20 years and a stand of switchgrass 10 years, annual establishment costs are $78 and $28 per hectare, respectively, using a 5% real rate of interest. The main factors making SRF establishment more expensive are cutting and planting costs: $528 and $288 per hectare, respectively, compared with $42 for switchgrass seed and $25 for its planting.

Figure 2. Breakdown of establishment costs for 1 ha of switchgrass. Total cost is $220.

Figure 3. Final supply price of SRF willow and switchgrass grown in monoculture plantations in eastern Canada. Note: Harvest costs are assumed constant per hectare, whatever the yield achieved.

For both crops, harvest and transportation of the biomass represent approximately 50% of the total cost (Figs. 4 and 5). Improvements in harvesting technology and in transportation logistics thus have the potential to substantially reduce biomass production costs. Costs related to managing the plantatiions and leasing the land were estimated to be of equal importance to transportation. Establishment costs, which in the case of SRF are substantial, do not represent a major share of final cost since they are spread over the life of the plantation. Although a significant reduction in establishment costs will mitigate the cash-requirement problem in the first year, it will likely not reduce total biomass costs as much as decreases in harvesting and transportation will.

Figure 4. Cost breakdown for 1 ha of switchgrass. Total cost is $433 (10-year life span 10 odMg/(ha-yr)). Adapted from Tayara (1995).

Figure 5. Cost breakdown for 1 ha of SRF willow. Total cost is $2746 (4-year harvest cycle; 10 odMg/(ha-yr)). Adapted from Girouard (1995).

The relationship between yield, land quality, and cost needs more research. Yield is a major cost driver in both SRF willow and switchgrass plantations, as is (to a lesser extent) land cost. In the absence of direct subsidies, it is very likely that energy crops will only attract low quality land. Although land cost will be minimized on marginal land, yields will also be lower, and the net effect may be an increase in the average cost per tonne of the biomass compared with using better quality land. The net effect will likely be different for different crops.

The specific relationship existing between yield and harvesting costs also needs to be better defined. Most studies in the past, including this one, have assumed that harvesting costs per unit area are constant, regardless of yield. More recent studies, for example Walsh (1995), have increased harvesting costs after a given yield level is achieved. The main impact of this change in methodology will be that production costs will not drop as fast while yield is increasing, leading to a new lowest cost solution. The real issue is to define where biomass can be produced at the lowest cost ($/tonne), not to maximize yield at any cost.

Energy Market Opportunities

The attractiveness of switchgrass and SRF willow in monoculture plantations for potential energy markets can be summarized as follows:

Alcohol fuel production - Lower production costs and ease of use for farmer (no need for farmers to purchase new equipment) suggest that switchgrass is more promising than SRF willow for ethanol production. At present, an unsubsidized ethanol producer can pay no more than $30/odMg for the biomass and be profitable, which is only $8/odMg lower than the low end of the final supply price range established in this study. Improvements in production and processing economics, as well as implementation of economic instruments to limit greenhouse gas emissions could make ethanol produced from this crop a viable non-subzidized transportation energy option in the medium run.

Electricity generation - Based on conversations with energy experts, the cost of fossil fuels (natural gas, coal and heavy fuel oil) in central Canada for electricity production ranges between $2.50 and $4.00/GJ (gigajoule). In comparison, switchgrass and SRF willows could be delivered for between $2.17 and $2.91IGJ¹ and $3.2 and $4.82 /GJ², respectively. Thus, purely on a cost basis, switchgrass has potential for electricity generation; but differences in risk, conversion efficiency, and capital and maintenance costs associated with power plants using biomass versus fossil fuels must be estimated before making a final statement. If reductions in carbon dioxide emissions were credited to. the use of biomass, or if gasification technology would prove efficient on the scale of a commercial power plant, biomass feedstocks would become more competitive. Cogeneration (heat and power production) will probably be the entry point for biomass crops in the electricity-generation market, due to higher conversion efficiency obtained in these plants. Another opportunity may be co-firing with coal in existing boilers.

¹ Switchgrass biomass selling for $38-5I/odMg; 17.5 GJ/odMg.

²SRF biomass selling for $63-95/odMg; 19.5 GJ/odMg.

Heat production - Biomass combustion systems have to compete primarily with three conventional energy sources: heating oil, natural gas, and electricity. Based on Statistics Canada/ Natural Resources Canada (1994), these three forms of energy were delivered to household consumers for $5.33- $22.83/GJ (Table 2).

SRF willow and switchgrass biomass would easily compete with conventional energy sources but for the higher initial capital cost of biomass-based heating systems. The larger initial capital investment often makes biomass a less attractive energy option, although in some cases it is the most cost-effective over the life span of the biomass combustion unit. The use of the biomass crops on-site would further reduce biomass cost by 12% to 18% (Table 2).

Table 2. Cost of energy from residential-delivered conventional sources versus from biomass energy crops.

^aHeating oil, natural gas, electricity: average price for 1989 to 1993. Source: Statistics Canada/Natural Resources Canada (1994).

^bPrices include provincial and federal sales tax.

^cImplicit price: these prices have been derived by dividing gas utility revenue by the sales volume for a given month. Since metering and billing practices differ between utilities these implied prices must be used with caution. Prices exclude taxes.

^dResidential rates for monthly consumption of 1000 kW-h.

^eDoes not account for the effect of moisture on conversion efficiency.

^fDoes not include costs related to a 40-km haul.

A potential entry point for biomass combustion systems is to replace propane heating systems on farm complexes. For instance, a greenhouse owner in eastern Ontario is now converting from propane to woodchips (from forest residues) as a heating source to benefit from substantial fuel cost savings. Propane costs 25¢/L (approximately $9.79/GJ) and the owner anticipates reductions in his annual fuel bill of approximately two-thirds (or $12 000). With savings such as these, the payback period of the combustion unit will be fairly short (probably in the order of 3 years). SRF willow and switchgrass -biomass would also seem to be a promising fuel option in this case. Some greenhouse owners in the Maritimes are also moving away from propane to woodchips (Flann 1994). Research undertaken by REAP-Canada, with support from the Eastern Ontario Model Forest, will provide data to construct a more detailed picture of the potential of biomass heating systems in central Canada.

Based on the research conducted by REAP-Canada during the last 3 years, switchgrass appears to be a more promising biomass crop than SRF willows due to lower production costs, better adaptation to marginal sites (except poorly drained soils), and farmer acceptance (no need for farmers to purchase new equipment). In the short term, the most viable energy markets for biomass crops in central Canada appear to be, in order, heat production, ethanol production, and electricity generation. Accordingly, as long as biomass crops will not be entitled to. direct production subsidies, as conventional cash crops, the greatest potential for biomass crops will remain on land unused by conventional agriculture.

A way to commercialize the SRF willow concept would be to use these plantations as biofilters to reduce the problem of urban sewage sludge disposal. Irrigation of SRF willow plantations with sewage sludge would provide nutrients to the trees at minimal cost as well as moisture to boost tree growth above levels that could be obtained under rainfed conditions. The biomass so produced could be used to heat municipal buildings, schools, and other structures. Another potential way to commercialize the SRF concept would be as an on-farm heat source since there would be an elimination of transportation costs. In this case, the trees could be grown in monoculture plantations or in a windbreak system, which would also protect cash crops on the farm.

Finally, with the expected growth in the world demand for paper and paper products in the coming years, Canadian papermills are looking for new sources of fiber. The potential of SRF willow and non-wood biomass should be considered because, among other things, they could be grown near the mills (cost advantage over the natural forest) and would be more responsive to changes in industrial fiber needs (because of shorter harvest cycles and higher productivities than the natural forest). In fact, papermaking may offer the best commercial implementation opportunities for biomass crops in the short- and mediumterms. From this perspective, the aim of future research should be to develop biomass-supply systems for a variety of industrial markets, not only for energy production.

Flann, 1. 1994. Woodchip combustion in eastern Canada. Report prepared for REAP-Canada and the Eastern Ontario Model Forest. 29 p. Available through REAP-Canada.

Girouard, P. 1995. On-farm evaluation of short-rotation forestry: economics of willow plantations and windbreaks in central Canada. M.Sc. thesis. Dep. Agric. Econ., McGill University. 189 p.

Samson, R.; Girouard, P.; Omielan, J.; Quinn, J. 1994. Technology evaluation and development of short rotation forestry for energy production. Annual Report 1993-94. Resource Efficient Agricultural Production (REAP)-Canada. Report written under the Federal Panel on Energy R & D (PERD) for Natural Resources Canada and Agriculture Canada. ) DSS contract 23440-2-9493/01-SQ. 107 p.

Statistics Canada; Natural Resources Canada. 1994. Energy statistics handbook. Catalogue 57-60 1. Nov. 1994.

Tayara, A. 1995. Evaluation of switchgrass as an energy feedstock: economic feasibility and carbon dioxide accounting. M.Sc. thesis. Dep. Agric. Econ., McGill University. 125 p.

Walsh, M. 1995. Feedstock supply analysis. Preliminary Report, US Dep. Energy, Oak Ridge Natl. Lab. Oak Ridge. Tenn.

This work has been made possible due to financial support from Natural Resources Canada and Agriculture and AgriFood Canada through the Federal Panel on Energy R&D (PERD), the FCAR agency in Quebec and the Blair Fellowship endowment of McGill University.