I thought I would document my thought process on a biofuel-based product that I recently conceived of. This is the sort of economic analysis I use when I evaluate alternatives (for my take on alternatives in general, please see The Energy Bogeyman) and I thought some of my reader(s) might be interested…
Recently my lovely wife and I were taking a walk along the country roads near our retirement house (well, it wasn’t supposed to wait for our retirement, but events overtook our plans) past some of the apple orchards that surround the area. The ground under the trees are carpeted with apples that are now in advanced stages of decay and putting off a rather powerful perfume of fermented sweetness. I got to thinking as we were walking that surely it should be practical to collect all those apples and turn them into ethanol for fuel (once an apple has touched the ground it is no longer considered safe for human consumption, though many people argue that with the typical sterilization involved in processing there is no inherent danger in such contact). Apples are high in sugar, the raw materials are free for the picking up (presuming, naturally, the orchard owner is OK with such activity), how could it not be a huge money maker? I started out by making some assumptions (pulling numbers out of my butt) and figured that there would be approximately 25 apples per square foot under the trees. I presumed that ‘under the trees’ meant about 1/4 of the land surface (the trees themselves look like they take up no more than half the land), so each acre would have about 270K apples. If we assume each apple is on average 100 grams, that translates to 27,000,000 grams per acre and if each apple has 11 grams of sugar then the total amount of sugar is 2,970,000 grams. Looking at the biochemistry it appears that each molecule of sugar is converted into two molecules of ethanol and if sugar’s molecular weight is 171 and ethanol’s is 46, then the proportion of sugar that is turned into ethanol should be 53% ((46+46)/171). Thus, it should be possible to get around 1,574,100 grams of ethanol or, with the density of ethanol being 0.79 grams per cubic centimeter, around 1,243,539 cc’s or 1,243 liters or around 330 gallons of ethanol per acre. I found that several years ago (didn’t find any more recent numbers) that fuel ethanol’s wholesale price was in the range of $2 per gallon, for gross revenue of $660 per acre.
Using some reported figures I found for Virginia apple growing I estimated that there are around 3,000 acres under production between Shenandoah county (where our house is) and neighboring Rockingham county, so there is potential revenue of $1,980,000 per year, based on these admittedly made up numbers. I started to get second thoughts about this project at this point, because I was suspicious that the operating costs would eat up way too much of that potential, but decided to continue with my analysis for a while. I figured a substantial cost would be the capital to obtain the fermentation tanks because I estimate that the volume of mashed apples per acre to be 7,200 gallons and in general polyethylene tanks run about a buck a gallon (stainless steel way more than that!), so while conventional tanks don’t automatically eliminate the idea, cheaper tanks go directly toward the bottom line. As for amount of ethanol from each gallon of apple mash, I estimate that with 10% of the apple mash being sugar (11 grams of sugar per apple with each apple weighing 100 grams) and converting 50% of the sugar to ethanol, each gallon of mash produces only 5% of its volume in ethanol. Upon research it seems that yeast will convert all the sugar to ethanol in approximately a week and I figured that the harvest season would be about 8 weeks, so each fermenting vessel would get used 8 times per year, or would produce around 40% of its volume in ethanol (or, at $2 per gallon, about 80 cents per vessel gallon). Now clearly the fermenting vessels will be reusable, potentially indefinitely, so obtaining the vessels will be a capital cost and something that must be obtained from investors somewhere. I figured that since the fermenting vessel is just a big water tight box, I could build something much like our pool project we are currently working on, so thought of a wooden framed box lined with pond liner would be about the least expensive way to go. According to my quickie calculations, the material costs for a 145K gallon container (approximately 14×14, 100 ft long) are about $21K. I guestimate labor would run around $9K, so a total cost of around $30K per vessel. Each vessel would have the potential to produce 6,800 gallons of ethanol per batch or almost 55K gallons per season (with 8 batches) or, at $2 per gallon, around $110K per year. Give the capital cost of $30K, the return on capital looks like it ought to be promising, so worthy of continued analysis.
It would take around 20 such vessels to handle the processing of the estimated 3K acres of apples (we are, of course, presuming that the numbers I pulled out of my butt have some close relationship with reality, but with spreadsheets it is simple to update with real (or less unreal) numbers if the initial guestimates make it worth continued investigation) for an initial capital investment in the vessels of $600K. Of course, the vessels need to be put somewhere, but you could easily fit that many on a couple of acres and that amount of land can probably be had for less than $100K (clearly the land could be leased as well, thus reducing capital costs), so we are up to $700K initial investment. Some sort of machine would need to be produced to harvest the downed apples and based on some earlier research I did on a oil-from-grass project (if anyone is interested, please let me know, it seems practical to get an ROI of over 20%, potentially over 50%) I figured it would take one man on one machine to handle the 3K acres in the two counties in question over 2 months. I figured a prototype mower to be on the order of $250K, so I will assume this is a bit more expensive and call it $400K. Labor to do the apple collection is probably on the order of $30 per hour (fully loaded) so 40 hours times 8 weeks works out to a measly $10K, so clearly labor for apple collection isn’t going to be a show stopper. Someone is going to have to monitor the fermenting process and that someone needs to be educated in the art of fermenting, so I will assume that person will cost twice as much per hour and I doubt that person could be hired for only 8 weeks out of the year, so will figure a full-time cost for this person to be about $130K per year. There will probably need to be some additional laborers from time to time, so lets toss on another $40k for part-time labor and another $40K for operating expenses in general (total wild assed guess again). So at this point here is what we have:
Capital costs (for our putative 3K acres):
Fermenting vessels: $600K
Land: $100K
Harvester: $400K
Total: $1.1 million
Annual operating costs:
Harvesting: $10K
Fermenting: $130K
Labor: $40K
Operations: $40K
Total: $220K
Time for a quick check on the situation to see if it is worth continuing this analysis… If we are assuming we can get gross revenues of $660 per acre and there are 3K acres we could access then potentially get revenue of almost $2 million. With operating costs of $220K our net profits would be around $1.75 million for a return on capital of 160%. So far, this is looking like a really promising project, so lets continue the analysis.
Once we have fermented the apples and produced the ethanol there is the ‘tiny’ problem of separating the 5% ethanol from the 95% apple mash. The conventional approach is to distill the ethanol by boiling the mash, something that, according to my research, costs almost half the energy present in the final ethanol product. As such, it would seem to me that if you are basically throwing away half of your final product in order to produce it, you are now looking at revenues of $1 million. Remove operating costs and you get an operating profit of $780K for a return on capital of 70%. Seventy percent is still a very nice return, particularly when most investors are happy to get 20% (the long-term average of the stock market is 10-14%), so it would seem that even if we can’t develop a better way to extract the ethanol (there seem to be several with a lot of promise according to some reading I have done), this is still worth pursuing.
We also need to store the finished ethanol for some period until it can be sold. If we presume we have to store all that we produce for at least some period, we need to store about a million gallons. If we presume we are going to use the exact same means of storing as we do the fermenting (I am not sure, at this point, if the pond liner I would use for the fermenting would resist the full-strength ethanol), then we need 7 more vessels/tanks at an additional capital cost of $210K.
It is necessary to deal with the left over mash somehow. Simply dumping it into the waterways, while almost certainly illegal, is also a huge negative impact to the environment. It is necessary to treat it somehow prior to being released. Taking a cost of sewage treatment off the ‘net of $8 per 1,000 gallons we get a cost of around $170K to treat the waste.
There are some things I haven’t consider cost-wise, such as taxes, insurance, yeast, etc. Taxes, of course, only apply to net profits, so it is hard to set a solid value on that. Traditionally taxes are assumed to be 40% of profits, but since profits are so easy to manipulate and further there are all sorts of tax breaks that could be had (particularly in the area of biofuels), taxes might be substantially lower, possibly even as low as just a few percent. Insurance, I have no idea whatsoever, though clearly it will have to be factored in. Yeast, I presume, is not a significant issue and is probably in the range of a few hundred dollars a year. If anyone thinks of anything I missed (particularly large, expensive things), please let me know.
So, in final analysis, we have this:
Capital costs (for our putative 3K acres):
Fermenting vessels: $600K
Storage vessels: $210K
Land: $100K
Harvester: $400K
Total: $1.31 million
Annual operating costs:
Harvesting: $10K
Fermenting: $130K
Labor: $40K
Operations: $40K
Waste treatment: $170K
Total: $390K
Revenue @$2/gal: $1 million (note that we are using half our ethanol to distill)
Net profit: $610K
Net return on capital: 46%
So, to conclude: it seems that, as long as we can assume our raw material is free (indeed, it seems it is worth paying some small price for the raw materials), it is a worthwhile idea to consider pursuing. Clearly long-term agreements need to be made with the orchard owners so it is possible to amortize the cost of the capital investment and even more clearly it is necessary to test the assumptions built in here to see if they pan out, but it looks like it is worth doing on a percentage basis. The second thing to consider is the total amount of return in dollars. While $600K sounds like a lot, if you borrowed the $1.3 million at 10% for 10 years the annual payment would be around $200K leaving $400K. While that is a nice chunk of change for an individual, it isn’t a whole lot for a company and when you figure the growth has a pretty hard cap (meaning there are only the 3K acres of apple orchards), there isn’t much prospect of getting more. However, it might be quite practical to decrease the cost of separating the ethanol from the mash, so if we assume we can recover 80% of the ethanol energy equivalent (meaning whatever we use to get the ethanol costs us about 20% of the value of the ethanol, or in our example, about $400K) our revenues jump up to $2 million, but our costs also increase by $400K. Still, our net profit nearly doubles to $1.2 million and thus our return on capital jumps to over 100%. Now, while the growth is still quite limited, a company that is consistently bringing in over a million dollars a year has enough going for it to be worth pursuing. Add in further that the major expense of waste treatment could likely be decreased substantially since the input is a well defined product and thus should be simpler to process (no solids to remove, for instance), it would seem that through economies of scale and advances down the learning curve it is practical to consider initial improvements in the processing to the point where the income could be quite dependable. That said, it is a small niche, which both helps and hurts. It helps because there are likely to be few people interested in competing, it hurts because it is often difficult to get the attention of investors when the potential is so small.
I started this article because my preliminary calculations were showing such a tiny return as to not make it worth considering. I thought it might be interesting to show how such obvious ideas had serious flaws and in doing so I exposed my own flaws in my preliminary calculations and have now convinced myself that this is indeed worth pursuing. Of course, there are several hurdles to overcome, but if I continue to believe I have the potential to produce a million dollars a year in a few years, then I am almost obligated to investigate it seriously.
UPDATE:
http://sol-biotech.com/wordpress/2012/01/14/biofuels-are-hard/