By Sarthak Takyar
Despite the high potential in India, financial issues have slowed down the pace of construction of compressed biogas (CBG) projects. Since the launch of the Sustainable Alternative Towards Affordable Transportation (SATAT) initiative, investor sentiment has been slow because of lack of familiarity with the sector, which delayed financial closure. There are other factors apart from financing constraints that have slowed down project implementation. These include the lack of long-term feedstock availability at reasonable prices, low incentives compared to high capex needs, lack of low-cost financing and issues in marketing solid and liquid fermented organic manure. Primarily, project viability and bankability concerns have slowed CBG project uptake.
Policy initiatives and incentives
To solve project viability and bankability concerns, the government has launched a slew of financial incentives to encourage the development of CBG projects. These include grants, subsidies and tax credits, which can help offset the costs of building and operating a CBG facility. These incentives are provided under the SATAT scheme (fixed price for CBG procurement), the National Bioenergy Programme (waste to energy) (Rs 40 million for a new bio-CNG plant with a capacity of 4,800 kg per day and Rs 30 million for existing bio-CNG plants with the same capacity); and Galvanising Organic Bio-Agro Resources Dhan scheme (financial aid of Rs 5 million per district for projects under the programme, including bio-CNG projects). In addition, certain states provide incentives in the form of subsidies, tax credits and indirect incentives, which include subsidised/free electricity and land to farmers.
A key policy incentive for the CBG sector is the provision of loans to entrepreneurs for setting up CBG plants, which are covered under priority sector lending by the RBI (CBG projects fall under agriculture infrastructure as per RBI guidelines). Major banks, including Canara Bank, State Bank of India (SBI), Punjab National Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Union Bank of India, Indian Bank, Punjab and Sind Bank, and UCO Bank, have developed exclusive loan products/schemes for financing CBG projects. Key details of SBI’s offerings have been outlined in the table.
In addition, under the Crop Residue Management Scheme, the central government provides a 50 per cent subsidy for the procurement of crop residue management vehicles and equipment. To promote organic fertilisers, fermented organic manure (FOM), liquid FOM and phosphate-rich organic manure are included under Fertiliser Control Order standards. In addition, there is mandatory offtake of FOM and other organic and bio fertilisers with chemical fertilisers as a “basket approach”, with a ratio of three to four bags of compost with six to seven bags of fertilisers. Market development assistance of Rs 1,500 per metric tonne (mt) is provided on the sale of these types of FOM in packed or loose form by CBG manufacturers as well as fertiliser marketing companies.
Apart from the usual equity and debt financing that is available for bio-CNG projects, these projects have opportunities to generate income from an innovative financing mechanism – carbon credits. These credits can be earned by reducing greenhouse gas emissions by producing and utilising bio-CNG. These credits entail the removal of 1 mt of carbon dioxide equivalent from the atmosphere and can be traded as a commodity. This earning potential can offer bio-CNG plants an extra source of income.
Project viability and bankability
According to SBI Capital Markets Limited (SBI Caps), the approximate project internal rate of return for 25 years is 5-7 per cent for a 50 tonne per day (TPD) agri-residue-based CBG project with a CBG output of 6 TPD, which costs Rs 400 million-Rs 450 million. The average debt service coverage ratio (DSCR) for this scale of project is 1-1.2. When the project size and CBG output doubles to 100 TPD and 12 TPD respectively, the indicative project cost increases to Rs 600 million-Rs 700 million. At this scale, the project’s approximate internal rate of return (IRR) and average DSCR increase to 13-16 per cent and 1.5-1.8 respectively. When the project size and CBG output are again doubled to 200 TPD and 24 TPD, respectively, the indicative project cost increases to Rs 1,100 million-Rs 1,200 million. At this scale, the approximate project IRR and average DSCR increases to 19-21 per cent and 1.9-2.2 respectively. Therefore, with a gradual increase in plant capacity, economies and streamlining of the supply chain, project returns become more viable. These calculations are based on certain assumptions. One, the CBG procurement rate is assumed to be Rs 62.86 per kg (corresponding to the CNG sale price of Rs 80-Rs 85 per kg); two, the debt-equity ratio is assumed to be 70:30; three, loan tenor is assumed to be 15 years (construction period: 1.5 years, moratorium: one year and repayment period: 12.5 years); and four, the indicative project cost is post adjustment of central finance assistance.
CBG projects generally have long gestation periods, which impact their project viability and bankability. Critical factors affecting CBG project viability are feedstock arrangement, making it key to ensure a sustainable long-term feedstock arrangement; economies of scale (projects currently being implemented are small in size); mature technology (technology is evolving and its large-scale implementation is yet to be seen); offtake of products, with long-term offtake arrangements with oil marketing companies (OMCs) being preferred; and lastly, offtake of by-products, which is important to ensure timely offtake and appropriate pricing.
The bankability of CBG projects hinges on whether a long-term offtake agreement has been signed or not. Going forward, for greater uptake of CBG projects, it is crucial to ensure that these projects get financed even if there is no offtake guarantee. According to SBI Caps, to accelerate the transition towards a stage where no offtake guarantee will be needed, several considerations need to be made. One, two to three large capacity projects should be successfully implemented with consistent operations. Two, partnerships can be made with foreign/domestic technical contractors to guarantee quality CBG output and obtain operational efficiencies throughout the CBG value chain. Three, feedstock collection and segregation should be standardised through a mechanism to match biomass demand with the enormous existing supply to ensure consistent CBG output. Four, streamlining CBG operations and achieving higher economies of scale will be key in establishing long-term commercial viability for lenders. Five, there should be sharing of project information related to implementation/operation to facilitate the evaluation and monitoring of upcoming/operational projects. Six, with the maturity of the CBG ecosystem, awareness about best practices must be promoted among stakeholders to boost CBG’s true potential in India.
According to the 17th report of the Standing Committee on Petroleum and Natural Gas titled “Review of Implementation of CBG (SATAT)”, banks and financial institutions are sceptical about CBG projects due to thin margins and perceived risks. This needs to be addressed going forward. To this end, low-cost funding at lower collateral is imperative for the expeditious development of this sector. Risk-sharing facilities and credit guarantee schemes should be introduced to improve the availability of finance at lower interest rates and lower collateral.
In addition, the support of state governments is required to ensure the availability of feedstock at an assured price on a long-term basis. They should provide subsidies on biomass aggregation equipment, notify biomass clusters for CBG plants and engage farmer producer organisations/custom hiring centres, etc., for the aggregation and storage of biomass in the catchment areas of CBG plants and provide them incentives on operative expenses of biomass equipment.
In sum, with the launch of various financial incentives by the government, supported by economies of scale, improvements in technology and streamlining of supply chains, the overall CBG sector can mature faster and bolster lenders’ confidence on the bankability of these projects.
