Anaerobic digesters (ADs) are perceived to be a win–win renewable energy strategy
that enhances both environmental quality and economic returns. In a farm-based AD,
manure from a confined feeding operation moves from a storage facility into AD tanks
containing anaerobic bacteria that breaks down organic material in the absence of oxygen
and produce biogas and digestate. The biogas is approximately 60% methane and 30–40%
carbon dioxide (Leggett et al 2006). It is treated by removing excess moisture and hydrogen
sulfide and then either sent to a cogenerator where it is used to produce heat, which is
used on the facility, or electricity, which is sold to an electrical grid. The digestate that
is produced is sent to liquid/solid separator, which produces compost or nutrient-rich
value added products. Despite being technically feasible with positive environmental
benefits, questions remain around the financial feasibility of ADs particularly when risk
is considered.
The net present value (NPV) criterion has been used by Lazarus and Rudstrom
(2007), Bishop and Shumway (2009), Wang et al (2011), and Anderson et al (2013) to
examine scenarios under which an AD investment should be undertaken. Future annual
revenue and expenses are predicted, discounted, and compared to the current investment
cost with adjustments for risk through simulation of alternative parameters or increasing
the discount rate. These studies tend to find ADs are not financially feasible unless
government support is provided either through capital grants or subsidized rates for the
power generated. Despite such government aid, the adoption of ADs in Ontario is limited,
which may be due to the nature of the capital investment; ADs involve large financial
commitments with uncertain returns as both income and costs are not known at the time
of installation. An analytical approach other than NPV may be required to understand
the adoption decision of a renewable energy initiative, such as an AD.
The problem with the NPV approach is that it does not properly account for strategic
opportunities presented by the investment (Schwartz and Trigeorgis 2001). NPV assumes
that either the investment is reversible or that the decision to invest in a project must be
made immediately or never at all. In reality, most capital projects are irreversible with the
level of returns depending on when the investment is made and the future opportunities
made available through the investment. An irreversible investment is similar to a financial
call option providing the investor with the right to an asset that potentially has value
in the future for a price or investment today (Dixit and Pindyck 2001). This option
might not be used or it may be irreversibly exercised. The value of the investment is the
NPV plus the value of future growth opportunities. Projects that create options, such
as investments in research and development, create potentially significant returns and
would be valued significantly more than NPV would suggest. In contrast, projects that
reduce flexibility by exercising options and committing resources to irreversible uses,
such as building a specific plant, are valued less than is suggested by NPV (Dixit and