Veg Gel

Biogas energy plants: The emergence of a new asset class for private investors
MSRE Thesis February 2009 Author: Drs. B.J.P. van Veggel
Graduation committee: Dr. N. Kok Drs. R.M. Weisz RA
Biogasenergyplants:Theemergenceofanewassetclassforprivateinvestors
Preface and acknowledgments This thesis concludes my studies at the Amsterdam School of Real Estate. I have enjoyed the different courses that where part of this educational journey as it has provided me with both new insights and interesting business relations. The concluding thesis has been a tough nut to crack in a time where I: switched jobs by starting a new company, renovated my house and got married. It has proven to be a tough lesson in getting my priorities aligned. For the fact that I succeeded to deliver this thesis on time, I need to thank Robert Weisz who motivated me to simply start. Furthermore, my fresh wife and close relatives for supporting me. And off course Nils Kok who has allowed me to explore some new (real estate) grounds and added quality to this thesis by providing me with his practical advice. The renewable energy market, and biogas in particular, has attracted my attention in recent years. I believe that the growing concern about global warming and scarcity of resources will be among the main challenges for my generation. I claim that investments in renewable energy need to be profitable in order to be durable and to distinguish itself from charity. The combination of profitability and doing the right thing will attract the money needed to solve the major environmental and political issues that lie ahead. A friend introduced me to the possibilities to invest in biogas plants in South East Asia and my conditioned mind automatically made a link to real estate. To further explore this feeling I decided to dedicate the MSRE-thesis to biogas plants. This thesis presents an insight into the differences and similarities to traditional real estate and how (real estate) investors should approach this relatively new asset class.
B.J.P.vanVeggel,AmsterdamSchoolofRealEstate2009
Abstract The market of renewable energy presents investment opportunities in new asset types. This research paper deals with the question how real estate investors should approach the fastgrowing market of biogas-plants in South East Asia and how these assets could add to ordinary real estate as an investment opportunity and part of a portfolio. Biogas investments are in several ways similar to the generally perceived real estate- and infrastructure investment characteristics. What is unique is that a biogas plant creates value-addition to existing (farm)land. Biogas can increase the value of property by highlighting a pre-existing but underutilized and under-marketed product (= agricultural waste). Driven by cost and regulatory issues, efficient energy consumption is becoming a bigger issue for real estate developments. It seems probable that more and more, real estate deals will incorporate energy valuations and utilization of real estate waste streams into their pricing. Biogas technology could play a role in making buildings more efficient in the future. A biogas investment decision model is presented so that investors have a possibility to not only understand, but also interact when it comes to investment decisions in biogas.
Content
Chapter1:Introduction........................................................................................................................... 7 1.1Motivation ................................................................................................................................. 7 1.2Subject ....................................................................................................................................... 8 1.3Scope ......................................................................................................................................... 8 1.4Centralresearchquestion ......................................................................................................... 9 1.4.1Subquestions: ........................................................................................................................ 9 1.5Methodology ............................................................................................................................. 9 Chapter2:Renewableenergy ............................................................................................................... 11 2.1Introduction............................................................................................................................. 11 2.2CleanDevelopmentMechanism(CDM) .................................................................................. 12 2.3ThesustainableMarket ........................................................................................................... 12 2.3.1Generaloverview.................................................................................................................. 12 2.3.2Privateinvestments .............................................................................................................. 14 2.3.3SouthEastAsia ..................................................................................................................... 14 2.4Shortintroductiontobiogas/biomass..................................................................................... 15 2.5Conclusion ............................................................................................................................... 17 Chapter3:RealestateInvestments ...................................................................................................... 19 3.1Introduction............................................................................................................................. 19 3.2RiskReturn .............................................................................................................................. 19 3.2.1Risk........................................................................................................................................ 20 3.2.2Return ................................................................................................................................... 20 3.3Realestatecharacteristics ....................................................................................................... 21 3.4Diversification .......................................................................................................................... 23 3.5Infrastructure........................................................................................................................... 24 3.6InfrastructureCharacteristics .................................................................................................. 25
B.J.P.vanVeggel,AmsterdamSchoolofRealEstate2009 4
3.7ComparisonRealEstateandInfrastructure ............................................................................ 26 3.8Marketforinfrastructureinvestments.................................................................................... 27 3.9Conclusion ............................................................................................................................... 28 Chapter4:Biogasinvestments.............................................................................................................. 29 4.1Introduction............................................................................................................................. 29 4.2Biogas:theprocess .................................................................................................................. 29 4.3Biogasinvestmentcharacteristics ........................................................................................... 30 4.4FundingofprivateinvestmentsinCDMcountries............................................................... 33 4.5MarketforbiogasinvestmentsinThailand ............................................................................. 34 4.6Differencesbiogas,realestateandtraditionalinfrastructure ................................................ 37 4.7Conclusion ............................................................................................................................... 38 Chapter5:BiogasInvestmentmodel .................................................................................................... 39 5.1Introduction............................................................................................................................. 39 5.2ModelTheoryandstructure.................................................................................................... 39 5.3SWOTAnalysis ......................................................................................................................... 41 5.4Thebiogasinvestmentdecisionmodel ................................................................................... 45 5.5Conclusion ............................................................................................................................... 51 Chapter6:Casestudy:KWTEbiogasplantinThailand ......................................................................... 52 6.1Introduction............................................................................................................................. 52 6.2Applyingthebiogasinvestmentmodel ................................................................................... 52 6.3Conclusion ............................................................................................................................... 56 Chapter7:Evaluationandrecommendations ...................................................................................... 57 7.1Evaluation ................................................................................................................................ 57 7.2Futureandrecommendations ................................................................................................. 57 Appendix1............................................................................................................................................. 59 Appendix2............................................................................................................................................. 60
Appendix3............................................................................................................................................. 61 Bibliography........................................................................................................................................... 62 Endnotes................................................................................................................................................ 63
Chapter1:Introduction
1.1 Motivation
The terms: Sustainability, green thinking and renewable energy are fashionable all over the world these days. Companies are claiming to be green and consumers expect products to be clean and sustainable. In real estate, things are no different; Developers are marketing green projects and new technologies make self-energy-providing buildings possible. Nowadays, the energy-efficiency of buildings play a role in the worlds quest for less consumption and against global warming. A lot of research is focusing on how to realize these green buildings in a financially feasible way. Balancing sustainability and financial returns has become a major factor in real estate. Energy consumption, oil dependence and cost of energy are also factors which influence current society in an increasing way. Whether it are: political, ideological or financial aspects that drive the energy market; renewable energy have become the magic words. Political turmoil in the Middle East and (parts of) South America has made people around the world more aware of the importance of energy undependability. The regions which possess large amounts of fossil fuels, are in a lot of cases: politically unstable, considered anti-western or at war. Massconsumption of oil and gas have made the Western world vulnerable and the awareness that the West should provide in its own energy demand is growing fast. The recent gas-dispute between Russia and Ukraine has only made this clearer. Discussions about building new nuclear power plants are arising and new ways of power generation are being researched. Already, renewable energy is an important component for diversification of the overall energy mix, and is now a fundamental requirement for any nations energy portfolio. The drivers for renewable energys ascendance are long and likely to be enduring: short-term national and international policy environments are supportive; there is growing interest from consumers, lawmakers and the capital markets; the technology in many sectors is well developed; the world is experiencing accelerating energy demand; many governments have concerns about energy security and trade balances; and changes to long term energy prices mean that some renewable energy technologies are becoming costcompetitive with traditional energy in some markets, even without regulatory support. The economic turndown through the credit crisis could affect the willingness of governments to invest in new technologies. On the other hand, many believe that it could speed up the emergence of cleaner energy. Car manufacturers are being obliged to build cleaner cars in return for financial support in these difficult times. As a matter of fact, the credit crises could trigger a global shift to cleaner and renewable energy.
There are several forms of renewable energy, but what they have in common is that you need certain assets to produce the energy. Whether we are talking about windmills, solar panels or a biogas-plant, an investment has to be made with a certain return as a result. This thesis does neither focus on green buildings or green energy as a whole, but investigates the real estate that produces green energy. This real estate is becoming a major asset-class in certain parts of the world for investors. The rental value of a biogas-plant consists of other components than rent. It is composed out of electricity sales and carbon credits. On the cost side there are typical real estate costs like: management-, depreciation and development costs. (Local) legislation is also an important factor. Investments in renewable energy generators are becoming broadly incorporated and could become a logical part of an investors asset allocation. Biogas in particular can be of interest to real estate investors due to its small size and private ownership. The key point of this thesis isnt that biogas plants and real estate are identical, but that mechanisms for review of their investments can provide insight and sharper analysis to investment decisions.
1.2 Subject
This research paper deals with the question how real estate investors should approach the fast-growing market of biogas-plants in South East Asia and how these assets could add to ordinary real estate as an investment opportunity and part of a portfolio.
1.3 Scope
The market of renewable energy is huge and broad. In order to accomplish a thorough and in-depth thesis, the scope of this thesis is narrowed down to certain (geographical) areas of the market. After explaining and analyzing the overall picture, the research will be focusing on biogas-plants. Biogas plants are characterized as private small sized developments and use (agricultural)waste to produce electricity. The examples and lessons learned in this market can be used as a blueprint for other areas. When giving examples and identifying drivers and threats, this study will geographically focus on South East Asia and Thailand in particular because of significant potential and current interest in Biogas solutions in this area.
1.4 Central research question

How should real estate investors determine the attractiveness of investments in biogas-plants? An analytical study will answer this question by identifying the components and drivers of the biogas market. The drivers and market environment will then be compared to investing in real estate as we know it. Understanding the key investment considerations for biogas-plants such as: technology, politics, financing, supply, project management, construction and revenues are critical to identify the alterations from other real estate segments. To answer the central question, a set of sub questions have to be addressed:
1.4.1 Sub questions:
How is the market of renewable energy developing and biogas specifically? What are (according to literature) the main characteristics of real estate and infrastructure investments? What are the (investment) characteristics of biogas energy plants (in Thailand) and what are the differences with traditional real estate and infrastructure? Why/how could renewable energy generators become of interest as a new asset class in the portfolio of (real estate) investors? After answering the questions above at the end of the various Chapters, the central question will be answered by introducing a decision model for investments in biogas-plants.
1.5 Methodology
Most of the questions above will be addressed through an extensive literature study. This study is needed to clearly address the full playing field of this thesis. As this research is aiming to analyze and combine the biogas market and real estate investment considerations, analysis of this literature is the main component of the study.
The translation of real estate investment criteria into the market of biogas energy plants is something new and requires an analytical approach. Existing empirical research will be addressed in the literature study, but will not be conducted in this thesis. The lack of reliable data in this relative new market adds to that decision.
The figure below indicates the top-down approach of this thesis:
The top-down approach allows us to narrow down the different fields that are relevant for answering the general research question. We start by looking at the renewable energy market as a whole. The reader will get an idea about how this fast growing global market works and its currents status. The same broad overview will be given for real estate and investors; What features are characteristic for real estate and what is important to know about investors in general? The next level will narrow down these 3 fields. Biogas is the sector within the renewable energy mix which will be addressed and the related carbon credit market is also explained. The same is done for infrastructure, which is a specific sector within real estate as a whole and of which energy plants are a part. The investors are narrowed down to private investors who differ from institutional investors. Finally, these 3 fields are combined and narrowed down to private investors investing in biogas plants in Thailand.
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Chapter2:Renewableenergy
2.1 Introduction
Recent years have sparked new interest in the potential return on investment from the renewable energy markets. The implementation of the Kyoto Protocol in an environment of sustained high oil prices and global concerns over energy security, combined with growing public drive towards the use of renewable energy, has motivated investor interest in recent years. An increasing number of private equity- and venture capital investment companies are focusing on the sector, and a growing base of institutional investors have set aside allocations in such companies as part of their alternative asset strategies. Several drivers can be identified to explain the grown interest in renewable energy. Key clean energy market drivers include: Environmental quality Climate change issue Clean Development Mechanism (to be explained in next paragraph) Energy access and security Untapped agro-industrial resources Government regulations/incentives Favorable local debt finance Commercial returns
The same drivers exist to support high growth rates for the renewable energy sector in emerging markets. There is no question that growth in energy demand, fears of the environmental impact of fossil fuels and growing cost pressures are set to see the governments of emerging markets also commit to the development of renewable energy generation capacity. It is clear that the renewable energy sector in emerging markets is still a nascent yet evolving sector and the right combination of country, technology and asset class is still required to generate significant returns. However, it is precisely this type of environment that allows for investment strategies in clean energy projects and local developers, which identify the most attractive country, sector and type of investment to yield favorable returns and help catalyze the renewable energy market for future growth. Investment in the sustainable energy sectors must however continue to grow strongly if targets for greenhouse gas reductions, renewables and efficiency increases are to be met.
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2.2 Clean Development Mechanism (CDM)

Investments in renewable energy are stimulated by: The Clean Development Mechanism (CDM). This is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. These emission reductions are known as carbon credits, but are officially called Certified Emission Reductions or CERs and 1 CER represents 1 tonne of CO2 and represents a value to industries that need to offset their own carbon emissions. i CERs are the most widely used carbon trading instruments worldwide and are traded between developed and emerging countries. The market for trading greenhouse gases is growing rapidly, the global annual trade doubling to $64 billion in 2007, according to World Bank figures. Environmental concerns have started this phenomenon but carbon trading has now become a real financial market with similar characteristics as any stock- or bond market. The private sector is investing most of the money coming into the market and carbon funds now total $11,8 billion. ii To get an idea: 1 CER traded for approximately 15,62 in December 2008. Carbon rights represent an important aspect in this thesis. They represent a possible revenue from Biogas investments. From a real estate point of view, it can be seen as an additional (revenue related) rent. Certification and trading levels of CERs influence the assets performance, value and thus attractiveness.
2.3 The sustainable Market 2.3.1 General overview

The drivers mentioned in this Chapters introduction have contributed to the fact that money is finding its way to renewable energy. Public awareness about global warming (An Inconvenient Truth), but also political and economic uncertainty about the availability of fossil fuels are adding to this process. Political turmoil has made countries more determined to become self providing when it comes to energy and the recent high oil prices in 2008 have added an economic incentive to search for alternative fuels. Whatever the grounds (ideology, power or fear), the sustainable market is believed to be one of the fastest growing markets for the coming years. As a consequence, investors and entrepreneurs are interested to be a part of this growth and new ventures are initiated worldwide. While this industry is growing and becoming more mature, so is its (financial) marketplace.
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Sustainable energy companies are now commonly accepted at capital markets. The emergence of funds dedicated to renewable energy investments has added to that acceptance. On the debt side of investments, the market is also growing: specialist financing has also opened up with the development of innovative financing structures. Over $148 billion in new funding entered the sustainable energy sector globally in 2007, up 60% from 2006, even as a credit crunch began to influence financial markets. Wind energy again attracted the most investment ($50.2 billion in 2007), but solar power grew most rapidly attracting some $28.6 billion of new capital and growing at an average annual rate of 254% since 2004, driven by the advent of larger project financings. Most of the new money flowed into Europe, followed by the USA. The total 2007 sustainable energy transaction volume was $204.9 billion, of which $98.2 billion went into new renewable energy generation, $50.1 billion went into technology development and manufacturing scale-up, and $56.6 billion changed hands through mergers and acquisitions. With 31 gigawatts of new installed generation, sustainable energy accounted for 23% of new power capacity added globally in 2007, about 10 times that of nuclear iii .
Figure 2.1 Breakdown global sustainable energy
According to the latest reports investment flows have broadened and diversified, making the overall picture one of greater breadth, depth and scale in sustainable energy. This broadness is both identified in types of investors, sectors and geography. Renewable capacity is shifting away from Europe and towards China and the United States. Despite the financial crisis, environmental issues are continuing to be high on political agendas and governmental policies are still critical for growth of the market. At the Bali talks in December 2007, which were attended by representatives from 180 countries, a roadmap for future discussions towards strengthened international action on climate change was set out with a target for agreeing a way forward by the end of 2009. iv
Figure 2.2 Global investment in sustainable energy by region 2006
2.3.2 Private investments

An increasing interest from private investors is noticeable although it is not evenly distributed between regions and sectors. Asset financing (debt) or equity providing through venture capital and private equity firms are growing at high rates. The drivers for investors to be in the sustainable market are not always only commercial. An increasing number of companies and investors have incorporated green investments as a company policy and way of life. This introduces an interesting aspect to investment decisions which is difficult to quantify. The fact that some profits on sustainable energy investments are dependant of governmental support makes this market even more distinct from other asset classes. This should be taken into consideration as subsidies present a dependability and possibly a downside risk if there is a chance of cancellation in the future. According to some: green is becoming investors' favorite color. Once solely the province of funds specializing in socially responsible investment, now institutions from private equity to pension funds are putting their money into renewable energy and other green technology companies and projects. Investors are also aiming for smaller companies. vi
2.3.3 South East Asia

An increasing number of private equity investment companies are focusing on the renewable energy sector, and a growing base of institutional investors have set aside allocations in such companies as part of their alternative asset strategies. With its vast agricultural and agro-industrial industries, South East Asia is a prime target for the development of renewable energy power generation projects underpinned by robust economic growth and continued strong growth in power demand. In addition, South East Asian countries are
increasingly opening their power sectors to promote private investment and providing government incentives for renewable energy production.
2.4 Short introduction to biogas/biomass

Both Biogas and Biomass plants work in a similar way. The process will be more extensively explained in Chapter 4, but this paragraph provides a brief introduction. Biogas plants are usually built near agricultural or livestock industries in rural areas. The waste (water) of these industries provide feedstock for the biogas plant. The gas that is extracted from the waste can be used to produce heat or electricity through generators. Also, the polluted wastewater is cleaned in the process which benefits both the industry as the residents surrounding it. Electricity is either sold back to the neighboring industry (at a discount) or/and sold back to the power grid. Biomass has a similar process but uses rice husk or wood as feedstock and a burning process produces the gas.
Figure 2.3 Biomass in practice
Small sized plants like these, provide electricity, heat, motive power, and water pumping for tens of millions of people in rural areas of developing countries, serving agriculture, small industry, homes, schools, and community needs. Twenty-five million households cook and light their homes with biogas. vii Many rural areas are not connected to the general electricity grid, so not only environmental or commercial considerations are of interest, but also the simple necessity for power in remote areas make these plants important. The main revenue stream of the projects comes from sales of electricity and/or heat generated by the production of energy from biogas produced from a wastewater facility. Revenue can be generated in terms of electricity through sales to: the grid, the host or a third party where electricity can be sold across the street to a nearby factory, thereby creating a mini grid of sorts. Because of the nature of power purchase agreements (PPAs) and feedstock supply agreements (FSAs) the price is agreed upon
early with all these potential purchasers and suppliers and thus is more secure than the vagaries of the market which landlords are often faced with. Additional revenues could come from sales of carbon credits through the Clean Development Mechanism (CDM). Biogas power systems typically have lower capital costs per MegaWatt (MW) than Biomass. The operating and maintenance costs are significantly lower, feedstock is typically obtained at no cost, and a higher number of carbon credits are generated. Biogas investments are considered more accessible than biomass for outside investors.
Biogas sponsors are typically either: the owners of the facilities that generate the waste by-product from which the biogas is captured (e.g. alcohol, ethanol, cassava, etc. processing); Specialized build-own-operate-transfer (BOOT) companies that own and operate the biogas plant for a period of typically 10 years before transfer to the facility owner. This ensures that there is a captive, reliable supply of input waste material to capture and obtain the biogas as well as a long-term bulk buyer for the electricity that is generated.
Biomass (rice husk, bagasse, oil palm wastes, etc.) projects are typically owned by either: a single rice miller; or a special purpose company owned by a group of rice millers. This is usually the case as the rice millers generate and control the fuel supply of rice husk, and often are the largest industry and consumers of electricity in their area of location. This structure is similar for the sugar and palm oil industries.
Biogas is not to be confused with bio-oil or palm oil plantations which are a basic source of income for many of the world's rural poor in South East Asia. Palm oil, like other vegetable oils, can be used to create biodiesel for internal combustion engines. Biodiesel has been promoted as a form of biomass that can be used as a renewable energy source to reduce net emissions of carbon dioxide into the atmosphere. Therefore, biodiesel is seen as a way to decrease the impact of the greenhouse effect and as a way of diversifying energy supplies to assist national energy security plans. Scientists have found that biodiesel made from palm oil grown on sustainable non-forest land and from established plantations can effectively reduce greenhouse gas emissions. viii However, organizations like Greenpeace have concluded that the biodiesel extracted from new palm oil plantations may not be a genuine counter to global warming. ix If forests are cleared for palm plantations, and the wood is not used for bio energy but burned, it may take decades before biodiesel
from palm oil reduces as much carbon dioxide as the pristine forests originally sequestered in the form of carbon. Furthermore, the production of biodiesel interferes with food production as available agricultural land will not solely be used for food production anymore. This fact differentiates biogas from bio diesel (through palm oil production). Where palm oil production leads to deforestation and environmental problems, biogas is produced from something that is already there: agricultural waste. The waste water used in the biogas process presents a win-win situation because it reduces costs for the factory, generates additional income, and ensures compliance with local laws. All three benefits are mutually reinforcing. This thesis will therefore focus on Biogas installations. The BOOT companies are the real estate developers and investors of the Biogas industry. Not only is a biogas plant an asset which generates revenues, but from a real estate point of view it also creates value-addition to existing farmland. Biogas can increase the value of property by highlighting a preexisting but underutilized and under-marketed product (= agricultural waste).
2.5 Conclusion
How is the market of renewable energy developing and biogas specifically? Renewable energy has become of interest for various reasons like: political turmoil in the Middle East, concerns about the environment and lack of fossil fuels in the future. This has sparked investments in renewable and sustainable energy sources and has attracted public and private money. The growth
rates of 25% of new installed capacity in 2006, indicate that the market is developing fast and is still expected to mature further in the coming years. The Clean Development Mechanism (CDM), which is a result of the Kyoto protocol, has made renewable energy (and Biogas in particular) of economic interest to emerging markets. It allows these countries to generate revenues through off-setting CO2 emissions from developed countries. Biogas is a proven technology that has existed for a number of years and international investors have started to invest in the development of these renewable power plants in South East Asia in recent years.
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Chapter3:RealestateInvestments
3.1 Introduction
Investing is a way to maintain or increase capital. It focuses on maximizing return with minimum risk. Minimizing risk is partly achieved by not putting all your eggs in one basket (diversification) and real estate is one of the possible asset classes in which an investor can put his money. The list of definitions of investments is long and Jaffe and Sirmans define it as: certain sacrifices for uncertain benefits x This chapter will explore the definitions and uses of real estate as an investment. The real estate sector has become a substantial part of asset allocation for investors and subsequently the market for real estate investments has become more transparent and professional over recent years. Assets have become more diversified and infrastructure is a specific example of this and includes properties like power plants. Later in this chapter, we will focus on this particular field, which has recently become of bigger interest to investors. Biogas plants could be considered an addition to this asset group, so it is important to summarize its features in relation to real estate as a whole and biogas. Before summarizing the characterization of real estate in literature, we will focus on the crucial aspects of risk and return in decision making. Furthermore, the mix of investments is determined by portfolio-strategies which theory will also be discussed in this chapter.
3.2 Risk-Return
Investors, institutional and private, have numerous possibilities to allocate their money. Bonds, stocks, art, at the bank or under their beds. All of these decisions are based on risk-return requirements of a specific investor. Institutional investors like pension funds and insurance companies are focused on asset liability management (ALM). In making their investment decisions they will consider if their portfolio is able to produce a return which will match their future liabilities (e.g. pension payments). The risk involved is naturally an important factor in assessing attractiveness of a specific investment. Private investors have become more professional over the years and their risk-return ambitions are less tangible. For them, liabilities are generally not the driving aspect of investment decisions, Whereas regular risk-return and asset allocation considerations are. Considering the scale and relative immaturity of biogas investments in SE Asia, this thesis will mainly focus on private investors (funds/individuals).
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3.2.1 Risk
The quantifiable likelihood of loss or less-than-expected returns. xi . Volatility of returns is a way to quantify risk and risk can be divided into systematic and specific risk. Systemic risk can be explained as market risk which cannot be reduced by for example diversification, hedging or insurance. Specific or unsystematic risk is the part which investors can reduce by their actions and many types of risks exist. A few examples: currency risk, liquidity risk, inflation risk, interest rate risk, prepayment risk, business risk, counterparty risk.
3.2.2 Return
The return of an investment occurs under influence of the risks involved. Putting your money in the bank (used to be) a low risk allocation of your money, but the return which you get is consequently relatively low. The risk and return will determine the performance of an investment. Returns can consist of different parts. For (commercial) real estate returns consist of two parts: Direct return: (Rental) income -/- asset related costs Indirect return: Capital gains
The income part is the money that comes in on a contractual basis. It is the rent that is being paid. Retail rents can be related to the revenue of tenants. Capital gains are the appreciation (or depreciation) of the real estate itself. By determining the value of real estate at certain points in time, capital gains (or losses) occur. The value is either estimated by brokers or realized at sale. The market yield and value of a property gives an indication of the risk involved. Return is the total income over a certain period in relation to the invested capital (Keeris 2001) There are several ways to measure return like: Discounted Cash Flow (DCF) methods or the initial yield. The Internal Rate of Return (IRR) is a broadly accepted way of doing it and is defined as: The discount rate at which the present value of future cash flows equals the current market price of the investment or opportunity. xii The examples which will be used in this thesis are IRR based.
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3.3 Real estate characteristics

For investors, real estate is an investment category. Either as an underlying asset (securitized real estate) or as a direct investment. Real estate itself is described in The American Heritage Dictionary of the English Language, Fourth Edition, as: Land, including all the natural resources and permanent buildings on it. This particular definition is quite interesting when we think about Biogas plants. The functioning of the plants is dependent on the resources which surround it. It is basically a product of its environment as we have seen in the previous chapter. Without a factory and its waste, the biogas plant is relatively worthless (apart from its hard assets). As Wheaton and DiPascale (1992) and Corgel et al (2000) have shown, real estate plays a big role in the worlds wealth. According to these authors 49% of the worlds- and 56% of US wealth consisted of real estate already in 1990. There are several tempting aspects for investors in real estate and the majority of these characteristics have contributed to the fact that real estate in general has become a standard asset class within most institutional and private investment portfolios. Investors have the choice between investing in indirect- or direct real estate. Both types of real estate are considered to have their own set of characteristics. Indirect real estate (advantages): High liquidity Good risk spread Low transaction costs No intensive management of assets required
Indirect real estate (disadvantages): Liquidity is often lower than expected Lack of control Fluctuating revenues More correlation with stocks and bonds than direct real estate, which diminishes the diversification advantages of investing in real estate.
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The characteristics of direct real estate are believed to be more or less the other way around. So: high transaction costs, low liquidity and intensive management. But, on the other hand, tempting revenues, a weapon against inflation and a good diversification from stocks and bonds, make direct real estate a serious investment product for both institutional as private investors. The current biogas investments in SE Asia are done in a direct way through specialized companies, but as the market grows and matures, investments may be institutionalized. The general investment characteristics of real estate will be addressed below xiii :
Stable and durable cash flows Real estate offers stable and long cash flows which allow investors to meet their short and long term asset and liability requirements. These long and stable cash flows are guaranteed by a mix of short and long lease contracts, land value and the likelihood of rental growth xiv .
Attractive returns Real estate also offers attractive returns over longer periods of time. As an example, the IPD has measured a nominal return in the United Kingdom of 12.9% over the period of 1971-2000. xv
Inflation protection (to a certain level) Several studies indicate that returns of real estate, as a rule, increase when inflation increases. xvi It must be noted that smoothing, as a result of valuation methodologies, leads to overestimation of real estate as an inflation hedge.
Moderate risk Real estate risk is perceived as moderate in comparison to stocks for example. The risk is measured in fluctuations of the returns and is expressed in terms of standard deviation. Research shows that the volatility of returns has been low. xvii
Diversification benefits Real estate provides diversification opportunities. This will be discussed in the next paragraph.
Investing in real estate also presents disadvantages. Some of these disadvantages are described by Van Gool, Brounen, Jager and Weisz and regard:
high transaction costs; high uniform price;

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The characteristics above apply to real estate as a whole but different types of real estate have their own features. Real estate is generally divided into commercial (office, retail, logistics and leisure) and residential real estate. lack of transparency; management intensive; less reliable risk analysis; illiquidity; difficulty determining the value of assets in comparison to stocks and bonds.
3.4 Diversification
Real estate can provide diversification benefits to a portfolio, either with other assets or between types of real estate. The Modern Portfolio Theory (MPT) by Markowitz (1952) xviii suggests that investments should be allocated over different asset classes in order to minimize a portfolios unsystematic risk. An investor wants to maximize his return for a given level of risk or minimize risk for a given level of return. In a mean-variance context, an investor is able to create an optimal portfolio by considering how each asset co-moves with other assets in the portfolio. This degree of co-movement is called correlation (Elton and Gruber, 1997) xix and needs to be reduced in order to remove unsystematic risk and create a diversification effect. When you apply this theory, a properly diversified portfolio would only contain systematic risk or market risk and is considered to be efficient. It should be noted that one efficient portfolio is not clearly better than any other efficient portfolio. The investors risk-return preference function determines which portfolio is selected. Real estate has, according several authors, significant diversification benefits and helps to create well-diversified portfolios. Previous literature on real estate as an asset class regarding portfolio and diversification benefits is rich and extensive. It has been proven that real estate has a clear role in the formation of efficient portfolios. Hudson-Wilson et al (2003) presented the case for the inclusion of real estate in general within an investment portfolio; It reduces the overall risk of the portfolio, because it responds differently to expected and unexpected events in comparison to other asset classes. It achieves an absolute return competitive with other asset classes. To hedge against unexpected inflation. Constituted in a portfolio it reasonably reflects the general investment universe (marketB.J.P.vanVeggel,AmsterdamSchoolofRealEstate2009 23
neutral portfolio). It delivers strong cash flows to the portfolio.
Real estate has, according to Grissom et al. (1987) and Liang et al. (1996), significant diversification benefits and helps to create well-diversified portfolios. However, public real estate vehicles in the form of real estate investment trusts (REITs) are subject to stock market sentiment (Paladino and Mayo, 1998). The preferable allocation of real estate has been researched by Fogler (1984), Firstinberg, Ross and Zisler (1988), Ennis and Burik (1991), Kallberg, Liu and Greig (1996), Brounen and Eichholtz (2003) and many others, suggesting to allocate approximately 10% to 20% of your portfolio to real estate. Not only can diversification be realized within an investment portfolio by adding real estate to the asset mix, diversification can also be accomplished within the real estate asset class itself. For instance, by spreading the investments over several real estate segments. Each segment has its own specific characteristics and the different drivers (for each segment) that influence rental growth, capital growth or supply and demand levels lead to diversification of the investment portfolio. The subject of this thesis does not require to investigate all separate property types, but we will look at the different features of infrastructure and biogas plants in particular, as we have done for real estate as a whole.
Another way to diversify is by spreading investments geographically. Although the world has become smaller and (financial) markets influence each other, each country still has different levels of maturity with regard to their political, judicial and fiscal systems which form a framework for the real estate market to operate in. Besides the economical and political factors, there are also real estate specific factors such as transparency and liquidity that influence the real estate performance. xx So, spreading an investment portfolio geographically leads to diversification.
3.5 Infrastructure
Recently infrastructure has become more of interest to investors. Privatization and public-private joint ventures to realize infrastructure have contributed to that. As biogas plants can be seen as part of the infrastructure-segment, it will be more broadly explained in the next paragraphs and is defined as follows: The fundamental facilities and systems serving a country, city, or area, as transportation and communication systems, power plants, and schools. xxi
The importance of infrastructure is clear. It is essential for the economic evolvement of every nation. The trend in which governments have given up their (investment) monopoly in infrastructure projects has made infrastructure an investable asset for investors. Generally, infrastructure projects are large. Building bridges, energy plants or roads are capital intensive and require infrastructure funds (and public money) to be realized. The Biogas industry differs from infrastructure as a whole in various ways and to understand the distinctions, the general characteristics of infrastructure will first be presented.
3.6 Infrastructure Characteristics

Infrastructure investments are characterized by being xxii : Essential (public) services: It provides the community with services and fascilities that are essential to everyday life like transportation and energy. Low volatility and inflation hedge: By providing essential services with a long term horizon (and contracts) in combination with the competitive edge mentioned before, leads to stable and predictable consumer demand. This stability in cash flows and returns makes volatility low and in most cases revenues are linked to inflation. Geographically immovable: It is composed of immovable, physical and capital intensive components that are united with its surroundings. Strategic and competitive advantage: regulation and legislation as well as the capital intensive nature makes infrastructure in most cases not duplicable. Long term: Infrastructure contracts are in most cases long term. Toll road concessions can last up to perpetuity and the capital intensiveness adds to a long term character of investments. Defensive asset: electricity, roads and water are less likely to be replaced than other consumer goods. Low correlation with other assets: This provides diversification benefits for an investors portfolio.
Naturally, each different type of infrastructure has its own characteristics which may differ from infrastructure as a whole.
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3.7 Comparison Real Estate and Infrastructure

In what ways do both asset classes match and where are the main differences? Table 3.1 shows:
Table 3.1 Real Estate + +/+ +/+/+/+/+ +/+ +/+ Infrastructure + + + + + + + + + + + - = modest
Heterogeneity Long development period Long life span Illiquid Large scale investments Stable long term revenue stream Low volatility Diversifying capacity Inflation hedge Management intensive Government involvement Maturity investment market Relative to other assets and each other:
+ = substantial
+/- = average
There are more similarities between real estate and infrastructure than just the immovability. Heterogeneity, illiquidity and life span are also mutual characteristics. It needs to be said though, that illiquidity for example has certain relativity to it. Although both real estate and infrastructure are illiquid, infrastructure is generally more illiquid than real estate. This most certainly is the case for the large scale of investments. Real estate investments are considered large in comparison to other assets like stocks and bonds, but investing in infrastructure, where investments can accumulate to billions of Euros, is something completely different. This issue can be considered as one of the main reasons why investors may be hesitant to invest in infrastructure and partly explains the relative immaturity of the market. The other part is obviously explained by the lack of opportunity to invest private money in public services. Although there are many similarities between infrastructure and real estate, the correlation between the two is not significantly higher in comparison to other asset classes. In particular, Peng and Newell (2007) found that unlisted infrastructure in Australia over 1995-2006 performed strongly (14.1% p.a.) compared to real estate (10.9% p.a.), although with a higher risk level (5.83%) compared to real estate (1.46%). They viewed unlisted infrastructure as the second-best performing asset on a risk-adjusted basis over this 11-year period in Australia. Importantly, unlisted infrastructure was not significantly
correlated with direct real estate, stocks or bonds. This reinforces the performance differences and portfolio diversification benefits of infrastructure with real estate and in a mixed-asset portfolio. xxiii
3.8 Market for infrastructure investments

Private sector involvement in financing of public infrastructure and services is not entirely new. In the course of history, some public services have been private during certain periods in time. Railway concessions were awarded to private entrepreneurs in the U.S. and in the 1980s the UK government started to open up private sector investments in infrastructure. Since then, the infrastructure industry gradually and fundamentally started to change and commercialize. At this moment, The UK and Australia have the most mature privatized infrastructure market, but still only 20% of all infrastructures are actually private property in these 2 countries. xxiv There are several ways to involve the private sector in infrastructure investment. The government can do so through privatization, for example, in which case the private sector provides capital and management services to an entire industry rather than to individual projects. So, the government can privatize a public utility that generates and distributes electric power, rather than grant a concession to a private company to generate power that is then sold to the public utility. If the government simply wishes to benefit from private-sector management expertise, it can contract with the private sector for the provision of management services while continuing to finance the project and retaining ownership of the projects assets. Or, the government can simply secure finance by leasing the projects assets to the private sector, while continuing to be responsible for the management of the project. xxv The total estimated global market for infrastructure (based on value) is about 20 trillion Euro and is expected to grow over the coming years. xxvi Large capital investments are needed to realize an adequate infrastructure. Governments are aware of this and increase the possibilities for investors to (co-)invest in infrastructure projects. Figure 3.2 shows the cash flows in situations where private money is invested in infrastructure projects. Funding can be done either through funds and institutions or in a direct way.
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Figure 3.2
3.9 Conclusion
What are (according to literature) the main characteristics of real estate and infrastructure investments? Real estate is a broad description of a large asset group and is characterized by: stable cash flows, attractive returns, (moderate) inflation protection, and possible diversification opportunities. Biogas plants are real estate because of its immovable features, but even more because the land and its resources are important aspects of its use. It is a part of local infrastructure which is described as: The fundamental facilities and systems serving a country, city, or area, as transportation and communication systems, power plants, and schools. Infrastructure differs from traditional real estate in the sense that it is: an essential asset for communities, high volume and long term, as well as a defensive asset which has an incorporated competitive advantage because of its one-of-a-kind nature. Infrastructure has traditionally been developed and owned by governments but its investment market has opened the door for private (mainly institutional) investors to co-invest in infrastructure. This market could be an indication of how investments in biogas and renewable energy will develop in the near future.
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Chapter4:Biogasinvestments
4.1 Introduction
Biogas plants are not new. In more mature markets like Europe and the US. biogas installations have existed for many years. This indicates that biogas is a proven technology that is not new and unknown, which is beneficial for attracting investments. An article by Raven and Gregersen describes the experimental introduction of biogas plants in Denmark since the 1970s. The experiences that have supported and setback biogas development are mainly caused by a shift in energy and environmental policies and limited availability of organic waste. xxvii Apart from these important drivers, more characteristics and investment considerations will be identified in this Chapter.
4.2 Biogas: the process

The working of a biogas plant has been briefly introduced in Chapter 2. The technical process and needs will be further explained in this paragraph. In agricultural biogas plants, manure as well as other renewable raw materials, like corn and cassava are most often used. The most important part of the biogas plant is its reactor or fermenter where the raw materials or its waste water are decomposed or treated. The fermenter is made out of a gas-tight, closed steel and cement chamber.
Figure 4.1 xxviii
Under airtight conditions and through several chemical stages, anaerobic bacteria transform the organic material into biogas. Then, the biogas is burned in a combined heat and power plant in order to produce electricity and heat. The electricity is often sold back to the waste provider (at a discount) and to the public electrical grid. Certain governments guarantee a specific price and buy-obligation for electricity produced by small biogas plants.
The process residue, being mineral nutrients, is very well usable as a fertilizer that is far superior to ordinary manure xxix and the originally polluted waste water comes out clean and can be reused for irrigation purposes.
4.3 Biogas investment characteristics

As was pointed out in Chapter 2, external (private) investments in Biogas usually go through buildown-operate-transfer (BOOT) companies that own and operate the biogas plant for a period of typically 10 years before transfer to the neighboring industry. This last part makes the transaction a bit like a lease construction as we know it in traditional real estate. One important issue is that biogas development is always dependant on feedstock and a long-term bulk buyer for the electricity that is generated. Biogas plants can be developed autonomously but in most cases are connected to a neighboring industry in a BOOT construction. So, a possible deal always starts and ends with the farmer/industry willing to cooperate and do business. As renewable energy is usually not part of the day-to-day business for them, explaining the opportunity and agreeing on development conditions can be time consuming. This may sound familiar for real estate developers who deal with land owners on a regular basis. As the industry can get rid of its (until recently) worthless wastewater and gets cheaper electricity in return and no investment (apart from land) from them is required, industries may very well be interested in participating. On the input side, the industry is usually only asked to provide a piece of land to build the biogas plant on. Furthermore of course the agricultural waste as fuel for the plant. In line with agriculture itself, operations are season dependant and a biogas plant is generally not operated all year round. On the exit side (electricity and heat), the industry will be the plants primary customer. Access energy can be sold to the power grid (if present) at market price or a rate that is guaranteed by the government (depending on country). The sale of CERs provide an extra source of income for biogas projects.
To get an idea of the stakeholders and cash flows involved, a typical biogas deal is graphically presented in figure 4.2:
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Figure 4.2
The main characteristics of biogas investments are as follows:
Collaborative development: The developer typically cooperates with the feedstock owner (industry). In a BOOT company, parties agree to transfer the plant to the industry after a certain amount of time. This generates a dividend based exit for the developer, but sale to another strategic or financial investor is also a possibility at any stage. Cooperation or direct involvement of other stakeholders (e.g. utilities, CER-buyers, technology suppliers) are also possible
Location dependant: A big similarity between real estate and biogas assets is the importance of the location as an indication for attractiveness. High transportation costs can affect a good biogas project just as bad accessibility can reduce attractiveness of a retail space. Biogas plants are unique in that the feedstock is almost always within a very short distance from the plant thus ensuring low transport costs. In conducting feasibility assessments of projects, one needs to ensure that there is a captive, reliable supply of input waste material to capture and obtain the biogas. The availability of waste is considered
essential for the success of the project. This is why the project sponsor will generally be the feedstock owner (e.g. rice miller) and the location of the plant will be nearby the generation of the feedstock. A biogas plant creates value-addition to existing farmland if an industry is nearby. Biogas can increase the value of property by highlighting a pre-existing but underutilized and under-marketed product.
Low heterogeneity: Biogas plants have little to do with architecture and have a simple goal: maximum efficiency in converting waste to energy. So, apart from the fuel type (e.g. manure or wastewater) and technology, biogas plants look alike. Differentiation in size obviously is also present.
High investment costs Depending on the plant size, a feasible deal size for a professional investor could range from 3 mio for a 2 MW facility up to 15mio for a 10 MW plant.
Multiple income resources As can be seen in figure 4.2, cash income consists of electricity sales to the industry and grid as well as the sale of CERs. Both components represent the rent of the investment. Multiple income sources often result from fertilizer sales as well. This largely depends on the feedstock but also on the local managers connections with farms and communities in the project area.
Government influenced Returns may be affected by new policies like the Kyoto protocol and local legislation on renewable energy. Some examples of these policies will be discussed in the next two paragraphs (e.g. VSPP).
Short but renewable life span: The technical lifespan of biogas plants is around 10 years but can be renewed by revising and renewing certain parts of the installation. The investment costs amount to approximately 1/3 of the initial investment. The economic lifespan is dependent on new technologies and the availability of waste. Unlike real estate the technical lifespan seems to be a better basis for depreciation than the economical.
Attractive returns Because not much research has been conducted in this field yet, there is not a lot of published articles on actual business results. While the Asian Biogas market matures, more market evidence will be available. For investing in an immature and an environment which is by no means risk-free, one would
expect most (international) investors to require at least a 20% IRR. Completed transactions and feasibility analysis (of which most is confidential) indicate that electricity based returns result in IRRs between 20-30%. If certification and carbon sales are added, these IRRs can grow up to 50%. The case study in Chapter 6 will include a cash flow model to further clarify cost and returns for a typical biogas deal.
Intensive management Building a biogas plant, especially in developing countries can be time consuming and complex. After completion, a 2 MW plant requires 2 people to run it: one responsible for mechanics and another for chemical issues. As the plants depend on waste which can be provided irregularly it is crucial that the plant keeps working during possible operating hours. So, technology needs to be up to date and an educated staff is required. Gains can be multiplied by intensive management, just like with real estate. For instance: additional investment in better generators can lead to higher returns just like double glazed windows can improve the efficiency of a building.
Investment ideology Investment in renewable energy is not always purely commercially driven but influenced by companyor individual policies and ideals. Investing in green and providing energy to rural areas are additional motives to financial gain for investors.
4.4 Funding of private investments in CDM countries

Investor appetite suggests that existing technology is ready for scale-up now, and that renewable energy can increase its share of the energy mix without waiting for further technology development. xxx CDM has created a market for investments in sustainable energy in developing countries. Foreign private money is finding its way to these markets. Project development, consultancy and financing are the main pillars of private investments. This thesis focuses mainly on the development side in which private investors can invest, because of the real estate angle on biogas investments. As in real estate, upfront financing is an important component for feasible investments. Commercial banks are starting to finance CDM projects, but other sources of funds are also available. Domestic financing (loans) are not easily accessible so most financing is provided by international financial Institutions. Examples of these other sources of funding are xxxi :
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o Grants provided by international agencies and organizations (e.g. the EU). o Export Credit Agencies which provide guarantees in order to incentify banks to provide credit facilities. o Government subsidies o Global environment funds o Future CER revenues can be used as a collateral. This is easily achieved by pre-selling the CERs. o Private equity investors may provide enough equity for banks to provide the remaining money. Debt equity ratios generally are 50/50 in current market.
Understanding the cash flow (electricity- and CER sales) and the value of assets (land, installation and cap rates) are critical for the development of the financing market for CDM projects. The main risks that are involved in CDM financing will be discussed in the next Chapter as part of a SWOT analysis.
4.5 Market for biogas investments in Thailand

As an agricultural based country, Thailand has a high potential for energy production from agricultural residues. For each residue, the distribution of corresponding potential energy needs to be analyzed in order to determine where power plants can be located with respect to availability of resources and accessibility to infrastructure. xxxii For the last five years, energy consumption in Thailand has grown faster than GDP growth by an average of 40% per year. With imported oil increasingly being used to meet domestic demand while world oil prices have been rising (until recently), the necessity of Thailand using its own resources to meet its energy needs has increased as well. Promotion of alternative energy has thus been made a priority activity, with government support backing the potential to lead the way in developing profitable and socially valuable investment in sustainable energy. xxxiii This makes Thailand the best researched and largest market for biogas projects in SE Asia. For instance, Thailand is the first market in SE Asia where biogas facilities are being sold after completion. Additionally, some plants have sold their carbon reductions numerous times.
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European carbon purchasers entry into the market is another sign of the growing asset demand for biogas plants as a means of reducing carbon output in large coal producing energy companies portfolio. RWE from Germany and other big European companies often look to buy stakes in renewable energy companies as a means of securing eventual carbon reductions. The Thai
Government has been trying to promote the utilization of renewable energy as another means to diversify energy sources. It aims to establish a 3-5 percent Renewable Portfolio Standard (RPS) for all new generating capacity installed, and the targeted share for renewable power generation has been proposed at 6 percent of total generating capacity by 2011. xxxiv Government support is illustrated by legislation regarding very small power producers (VSPP) which will be explained below: Very small power producer (VSPP) The government has established a pricing program for small generators of renewable energy. Thai utilities must therefore purchase electricity from private generators at prices set by the Very Small Power Producer (VSPP) program. The VSPP program was launched to support renewable electricity production from biogas, biomass, municipal solid waste (MSW), wind, solar, and other renewable energy sources. It is restricted to power generated from renewable resources with capacity less than or equal to 10 MW. The government subsidy for VSPP is an increment to the electricity purchase price, depending on the type of renewable energy, and as such is called an adder. As of September 2006, installed capacity of VSPPs was 2,333 MW xxxv In this way, biogas plants have a secured demand for its generated electricity (selling to the grid) at a subsidized price. The second revenue stream (apart from electricity) is generated by the Clean Development Mechanism (CDM) that has been introduced in Chapter 2. This mechanism provides the possibility to generate carbon rights (CERs) to sell on the market. The process of certification in Thailand is regulated by the National Committee on Climate Change. Projects can be submitted and will be judged on the basis of the following characteristics and objectives xxxvi shown in table 4.3:
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Table 4.3 Area Environmental Objective of project o Preservation of environmental quality o Reduction of CO2 o Systematically managed project (long term) o Reducing usage of non-renewables Social o Involvement of local communities o Approval of all relevant agencies o Benefits achieved should be extended to local community Economics o Promotion of economy in project area
It should be noted that, apart from these favorable investment incentives, Thailand is currently coping with an image problem. Investor appetite is influenced by the recent anti-government protests. The airport sit-in has incurred economic damage and emphasized the importance of the 81 year old King Bhumibol in his role as stabilizer. The political insecurity will undoubtedly be monitored and assessed by investors when entering Thailand in the coming years. Private investments can be done through specialized biogas investment companies. Companies like: CleanThai, TBEC, Philbio, Asiabiogas, W2E and Papop are actively initiating new biogas deals and are constantly seeking capital to expand its portfolio. Investments in biogas can be made through these companies. As markets mature more and more, renewable energy funds will possibly show bigger interest in these companies and its power plant portfolio. These funds can accommodate institutional investors to join the existing private investors in biogas. Similar to the infrastructure investment model in the last Chapter, Figure 4.4 shows these investment lines:
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Figure 4.4
4.6 Differences biogas, real estate and traditional infrastructure

Analyzing the characteristics of biogas investments result in determining the differences between investments in biogas, real estate and infrastructure as shown in table 4.5: Table 4.5 Real Estate + +/+ +/+/+/+/+ +/+ +/+ Infrastructure Biogas plants + + + + + + + + + + + +/- = average +/+/+/+/+/+/probably probably + + - = modest
Heterogeneity Long development period Long life span Illiquid Large scale investments Stable long term revenue stream Low volatility Diversifying capacity Inflation hedge Management intensive Government involvement Maturity investment market Relative to other assets and each other:
+ = substantial
The amount of diversifying capacity and whether biogas can be an inflation hedge cannot be determined because no empirical research exists on these matters. As revenues are linked to electricity
sales, a link to inflation seems probable. Diversifying features from stocks or real estate are also presumed probable because no clear evidence of correlation with these asset classes is expected to be present. The stability of returns for biogas investments can increase by pre-selling CERs and delivering electricity on a contractual basis. It seems that although all three asset classes have their similarities, there several differences which could make biogas investments an addition to an investors portfolio.
4.7 Conclusion
What are the (investment) characteristics of biogas energy plants (in Thailand) and what are the differences with traditional real estate and infrastructure? In a lot of ways, biogas is similar to traditional real estate and infrastructure. The importance of its location, intensive management, stable cash flows and attractive returns are some similarities. On the other hand, biogas investments are characterized by its collaborative nature. A build-own-operatetransfer (BOOT) structure requires teamwork between several stakeholders. Agreeing terms for the supply of feedstock and demand for electricity through PPAs and FSAs is crucial. Furthermore, its: low hetrogeinity, short (renewable) lifespan, multiple income resources (electricity sales, CERs, fertilizer) and regulatory issues make biogas investments different and possibly a green addition to an investors portfolio. Why/how could renewable energy generators become of interest as a new asset class in the portfolio of (real estate) investors? Apart from its diversifying potential, investors could be tempted by several other aspects that characterize the current investment market. Governmental subsidies and funds, CDM and VSPP regulation, growth of energy consumption and expected growth of renewable energy worldwide contribute to investor appetite. A crucial success factor is the fact that biogas plants can actually add value to existing plots of land by converting a traditional cost (waste disposal) into an additional revenue stream. At the moment, the immature investment market consists of a few specialized biogas companies through which investors can invest, but the emergence of funds and further development of the market seems likely in the near future.
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Chapter5:BiogasInvestmentmodel
5.1 Introduction
After having characterized the biogas investment and comparing it to investments in real estate and infrastructure, we have determined that biogas could be a feasible investment and addition to a portfolio. In this Chapter, the features of biogas investments will be further deepened by making a SWOT-analysis. This analysis will lead to the construction of an investment model which can help investors who are (considering) investing in biogas plants. First, the background and structure of such a decision model will be laid out in the next paragraph by looking at an existing model for venture capitalists. To further clarify its working, the model will be applied to a case study in Chapter 6.
5.2 Model Theory and structure

The market for foreign private investments in Thai biogas plants is not mature. The decision model can and should therefore not be based on a statistical or stochastic method. The decision model will accommodate investors in making a balanced yes or no decision to invest in biogas as well as manage their investment until divestment. Decisions may be subject to both quantifiable and non-quantifiable items, which makes it subject to interpretation. This is no impediment as investment decisions are always subject to a certain gutfeeling, especially with private investors. Any investment is subject to personal risk-return requirements and the model should be flexible in order to apply it to different types of investors. The model will therefore be an actuarial instead of a clinical decision model. Research comparing the clinical and actuarial methods even claims the actuarial method to be superior. xxxvii
Venture capitalists (VCs) are often faced with investment decisions and various authors have researched the decision making process. The (current) characteristics of biogas investments (immature market, high risk return, start-up/development stage), are similar to typical investments for venture capitalists, so existing decision models could be a reference for biogas investments. These decision models can be helpful considering the amount of time that due diligence and negotiation of terms may take because it is imperative that VCs minimize their efforts during screening, so that only those ventures with the most potential proceed to the next stage. The three staged investment process often begins with venture screening. First, VCs screen the hundreds of proposals they receive to assess which deserve further consideration. Those ventures that survive the initial stage are then subjected to extensive due diligence. Finally, the VC and entrepreneur
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negotiate terms of the investment. This process is similar to the many possible small sized biogas investments. Actuarial decision aides are models that decompose a decision into component parts and recombine those parts to predict the potential outcome. For example, an actuarial model about a biogas investment decision might decompose a proposal into decisions about the management team, the feedstock, the market, etc. The sub-component decisions are than recombined to reach an overall assessment of the investments potential. Such models have been developed in a number of decision domains (e.g., bank, lending, psychological evaluations, etc.) and have been found to be very robust. xxxviii
Fried and Hisrich claim that traditional financial research methodologies are not well-suited to an examination of the venture capital investment process. The transactions involved are private and little information is available (similar to biogas). They developed a two-stage methodology to addresses this problem and combined a multiple-case study and an industry panel to construct a model. Fifteen investment criteria were identified, which expand upon three basic constructs: concept, management and returns.
Table 5.1 Concept Potential for earnings growth (to achieve 30% to 70% IRRs) Product thats working already Product must offer a competitive advantage Reasonable capital requirements Management Personal integrity Track record Realistic Hardworking Leadership Flexible Understanding Pressure resistant Returns Exit opportunity in future High rate of return (30% - 70% IRR) High absolute return (not too small deals)
These are broad generic criteria. The specifics of each criterion may vary from VC to VC and opinions will differ on acceptable rates of return as well as the importance of various criteria. The study resulted in a six stage decision model for investment from initiation to funding. The model is explained in table 5.2:
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Table 5.2 Stage Origination Firm specific screen Generic screen First-phase evaluation Second-phase evaluation Closing Explanation
Active or passive introduction to investment proposal. Is investment meeting the criteria specific for the investor? e.g. size, geographic location, industry. General judgment of deal with minimal time spent. Understanding the investment. Meeting of management. Evaluating company, market and financials. Emotional commitment to deal. More time spent on further investigating company and forecasts. Preparation of legally binding deal. Structure and legal documents finalized. Funding is done.
Reject Reject Reject Reject
Reject
Reject
In general, the criteria and decision model above can apply to biogas investments and will be used in constructing the biogas investment model. The characteristics and to be identified risks and considerations will need to be incorporated in the model so that all macroeconomic, legal, financial and personal aspects can be addressed. The process consists of several checks within a chronological course of events which should facilitate the decisions that need to be made.
5.3 SWOT Analysis

After identifying the characteristics of biogas investments in the last Chapter, this paragraph summarizes the strengths, weaknesses, opportunities and threats that biogas investments present. This will result in a Swot-analysis for biogas investments. Some of the features in the Swot will be more extensively explained below. Others, which have already been discussed earlier will just be incorporated in the analysis. Strengths The renewable energy market is one of the fastest growing markets worldwide. Generating electricity through biogas is an environmental friendly and proven technology. It uses a waste product as fuel of which plenty is available in Thailand with its strong agricultural base. Biogas plants can function autonomously in rural areas as they provide electricity for communities that have no connection to the main electricity grid. In the current Thai circumstances, the presence of an electricity grid increase the attractiveness (because of VSPP). The typical cash flow
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of a biogas project presents high returns with possible extra returns by certification and sale of CERs (CDM). Weaknesses The immature biogas market can result in financing difficulties (by possibly overestimation of risks). The emergence of specialists in this area may decrease these risks. Like all fuels, or power generators, the industry is dependent on the availability of feedstock. Political turmoil presents a weakness as it scares investors away. A stable government and legal system is important to attract foreign investments. Although biogas technology is proven, management is still intensive and qualified staff is needed. Opportunities Biogas presents an opportunity for third world countries to make electricity available for everyone in combination with extra revenues through the CDM. This can give a social and economic boost to communities and countries whilst preserving the environment. Renewable energy could become a new major revenue stream next to agriculture and tourism. It would make economies less vulnerable by diversification its income.
Diversification benefits, doing the right thing and investing in the fast growing market may also open a window of opportunities to the 21st century (real estate) investor. Technological innovations present both an opportunity and a threat. Biogas is a proven technology which makes it reliable, but innovations could even improve efficiency and returns. At the same time, more efficient and cheaper new technologies could negatively influence the feasibility of biogas projects. Government policies influence the attractiveness of these projects. VSPP legislation CER certification and the CDM secure an important part of the plants revenues. These policies may well improve the attractiveness of biogas investments in the future because of rising CER prices and further improved legislation, but at the same time represent a threat if these subsidies change or are cancelled. Threats From an investor point of view. The risks and threats play an important role. Identifying and diminishing the existing (hedge-able) risks are the way to make investments feasible. In some cases, threats can turn out to be opportunities, but will be mentioned as a threat as uncertainty is considered negative. An example is electricity pricing, which plays an important role in these
ventures. Tariff-setting and linking supply to demand are crucial. No waste, no energy. VSPP-rules diminish demand problems, but market movements for electricity pricing (generally linked to oil pricing) remain uncertain in any energy market. The same market risk applies to the price of CERs and transaction costs. In addition, the CDM market beyond the year 2012 is still unclear. These actual or perceived risks constitute a barrier to the financing of CDM projects, but the returns could also improve if uncertainty is replaced by committed and better legislation. The election of President Obama has created hope for a more involved U.S. environmental policy. The lack of easily available information on projects, technologies, benefits, design and applications present uncertainty. This information risk increases the perceived risks for investors. The macroeconomic risks in South East Asia include: o Inflation risk: Inflation is higher in Vietnam at 6.8% in 2006 compared with 3.3% in the Philippines and 2.8% in Thailand. o Fiscal risk/taxation risk: Government expenditure is higher than its income in several countries in SE Asia so tax increase may be a possibility. o Political risk: Recent turmoil in Thailand has emphasized the political risks. Nevertheless, political maturity is developing in countries like Thailand and the Philippines while for instance Vietnam is expected to remain a communist country with a stable, market oriented economy. Political risks also include those concerning the ratification of the Kyoto Protocol by participating governments and national policy towards the CDM.
Legal and regulatory risks play a role in each country in SE Asia as governments may, from time to time, change or impose new regulations and legal requirements on investments, financial transactions, ownership and other business activities.
Foreign exchange risk and capital transfer restrictions may occur as a result of strong increases or decreases of currency values. Monetary authorities, such as the Bank of Thailand, may impose measures to stabilize their currency to halt either a rapid appreciation or depreciation. In all countries, the monetary authorities have adopted liberal policies with regard to foreign investment. Foreign currency can be easily deposited and repatriated provided these transactions are fully documented (registered). One reason for registration of capital flows is to enable authorities to monitor funds for possible money laundering activities.
There are several commercial- and Project risks. These include whether the project meets all the requirements of the CDM and whether the project will generate the emission reduction credits
estimated for the project. The risks related to the performance of the project itself (revenues) can also be considered a part of these risks. It is imperative that any local partner/principal involved in the project development be trustworthy and reliable in order to establish competency and full transparency in all business and investment decisions. The availability of appropriate investment opportunities and the ability to identify and invest in profitable projects is another type of commercial risk.
There is a threat that exit sales and liquidity opportunities may sometimes not be available. This is called an exit risk . This risk is decreased by relying primarily on the strength of regular dividend returns based on underlying electricity sales that are inherent to the power sector. This results in the following graphical display: Strenghts Weaknesses Unfamiliaritywiththeseassetspresentsfinancing difficulties
Renewableenergyisfastgrowingmarket Environmentalfriendlyinvestment(CO2 reduction) Overestimationofrisks Proventechnology Dependantonavailablefeedstock Lowhetrogeinity Dependantongovernmentpoliciesandstability Cheapfueltogenerateelectricity Intensivemanagement Cleaningofwastewater Illiquidandimmaturemarket(exitproblems) StrongagriculturalbasepresentinThailand ExperiencedstaffandO&Mneeded Favourablelegislation(VSPP+CDM) Opportunities Threats Providingelectricitytoruralareas Exitrisk Possibilitytocreateawinwinsituationfor farmeranddeveloper/investor WillCDMcontinueafterKyotoendsin2012? Givingsocialandeconomicboosttolocal community Macroeconomicuncertainties Attractivereturnsoninvestment Projectanddevelopmentrisks Renewabilityoflifespan Legalandregulatorychanges CERtradingcouldgaingroundincomingyears Currencyrisks Toaddbiogasassetstoinvestmentportfoliofor VolatilityinCERandelectricitypricing(tariff diversification risks) Table 5.3
In order to minimize the mentioned risks and take advantage of the presented opportunities, one should try to:
o work closely with legal, tax and financial experts in each country to ensure that the investment is done in accordance with the host countrys legal, business and financial laws and regulations; o establish a systematic monitoring of risks by utilizing tools and techniques that enable early identification of potential risks and opportunities, including up-to-date monitoring of business, economic and political developments and their potential impact on investments; o develop and maintain contacts with reliable persons in government, industry, business and finance; o conduct regular investment reviews of each investment as well; o regularly assess exit strategies, trends and opportunities.
5.4 The biogas investment decision model

As was mentioned in the introduction, the biogas investment model is a chronological overview from investment identification to divestment similar to the decision methodology of the venture capital model in paragraph 5.2. That model however, does not include the management and exit phases of investments. Some stages can be conducted faster than venture capital decisions because of the uniform nature of biogas investments. The venture capital model has been modified to suit the specific biogas investment characteristics as follows: Table 5.4 VC model Origination Firm specific screen Generic screen First-phase evaluation Second-phase evaluation Closing Screening and feasibility Detailed due diligence Closing Construction O&M Divestment Biogas model Investment identification macro-level Investment identification micro-level
Every stage is clarified by questions which the user of the model should be able to answer with a yes to progress to the next stage. Every investor has its own risk-return expectation, which makes it subject to personal interpretation. The model will be explained in the following pages and is to be
found as Appendix 1. It should be noted that the decision model includes the full operation of investing in biogas. It allows an investor to fully oversee the investment process and its focus areas. Many of the decisions and considerations should however be conducted by the specialized company or developer through which the private investor is investing. Investment identification macro-level Most of the questions which are posed at this level concern general aspects which affect any business. Investors generally dont like uncertainties (risks), especially on macro-level. Political and market instability doesnt attract new investments. Before exploring specific biogas investment opportunities, it is important to be comfortable with both general- and renewable energy (VSPP and CDM) legislation. CDM could for instance be influenced by new international agreements to be made this year in Kopenhagen. Investment identification micro-level Potential investments can originate from a variety of sources established through existing networks of renewable energy players in the region, local or international project developers, financial institutions, business and industry players, relevant government agencies all of whom can also be part of the network and contacts of renewable energy funds. These funds, or investors who wish to invest directly in plants or through specialized companies, should have a marketing plan setting out a list of parties to meet and relevant events such as conferences and seminars on clean energy to attend. Contacts across all aspects of the clean energy sector including equipment manufacturers, financers, project owners, contractors, consultants, regulators will add to specific knowledge and investment opportunities will arise.
When a potential investment is identified, initial meetings will be arranged between the investor/developer and the management of the target company (industry) to establish a common interest between the two parties. Should both parties agree in principle for the investor to invest in the project, a preliminary due diligence on the potential investment will need to be conducted. The investor will need to collect supporting documentation and information about the site, industry and partners. A preliminary feasibility study, permits and consents, financial statements and existing contracts will need to be checked. At the same time, an investor should conduct market checks on the partner companies, meet with regulatory bodies such as monetary, energy and investment authorities in the Investment Area. One will also meet with legal consultants to make sure that the business and
investment are in compliance with legal and financial regulations of the country. As part of the preliminary due diligence, the following aspects will be reviewed and analyzed: Shareholder/Management/Legal details: information on project partners management, their background, reputation, experience, track record and skills. Information on management may be obtained through personal meetings, background checks through various methods (trade publication, interviews with other industry players, private investigators, credit reports, etc). For existing companies, publicly available documents on legal status such as company registration documents (certificate of registration, articles of incorporation, shareholders list) can be obtained. Security of feedstock / fuel supply: The risks related to the supply of feedstock/fuel constitute a very important issue to consider. The feedstock/fuels for renewable energy are affected by seasonality, availability from the source, and competing uses. For biogas projects, it is advisable for the project company to enter into a long term fuel supply agreement for a preagreed pricing scheme with a reputable company that supplies the fuel, pursuant to which penalties would be payable for failure to perform. Transport costs for hauling the material from the source to the power plant site affect the economics of the project and should be avoided. Therefore, it is advisable that projects are situated within the vicinity of the source of fuel. Certification possibilities: Is the specific project certifiable according to CDM regulation? This will need to be checked by applying at the National Committee on Climate Change which is responsible for certification of renewable energy projects. This enables an investor to sell CERs generated by the project.
Screening and feasibility This phase focuses on converting the initial interest to a possible deal. The deal structure and financing will need to be constructed based on the financial basics of the project. Possibly a BOOT company will be founded to transfer the property back to the industry in the future. The reliability of technology and technology supplier are also important issues to consider. The technology for biogas-fuelled power plants has been in use for many years all over the world, and thus it is very common. However, the design parameters vary depending on the type of biowaste used as fuel. The selection of the boiler technology is crucial to the success of the whole power plant because the gasification is considered to be most important aspect of the plant. Thus, the key to mitigating this risk is to choose a reliable supplier with good references to back up its experience and track record.
These references should be checked out to ascertain the adequacy and the performance of the equipment. Proper tendering process should be conducted to select the most appropriate equipment supplier/contractor. This process consists of harmonizing the scope and specifications of the different bidders and comparing them, not only on the basis of price. As the number of hours the plant operates is limited, it is crucial that the equipment is reliable and operating hours are not affected.
Financing of the development (debt-side) is also initiated in this phase. Are local banks willing to finance the deal, or is presale of energy and CERs the best way to fund the deal? These options need to be investigated. Finally, a financial feasibility should be conducted to establish the financial health of the potential investment. A detailed analysis of its financial statements and cash flow projections will be conducted. This is very similar for any real estate cash flow model. For existing companies (projects), at least three-years audited financial statements including balance sheet, tax structure, profit and loss statement, and cash flow statement should be obtained to secure accurate information. In addition, an analysis of the projects 10-year financial projections and the underlying assumptions should be performed to determine the IRR of the project. A sensitivity analysis testing all key assumptions can be performed to determine the strength of the projections. A detailed cash flow analysis which can be used in this phase is to be found in
Appendices 2 and 3 (amounts mentioned are part of case study). Detailed due diligence A detailed due diligence will be conducted before definitely securing the deal. The detailed due diligence should be conducted with the assistance of professional legal and financial consultants. All material facts regarding the target investment company need to be obtained to make a fully informed decision. The due diligence will be conducted in the following areas: Legal: the legal consultant will verify companys ownership, company registration, the board of directors, shareholders meetings, shareholders agreement, authorized signatories, copies of licenses granted, issue legal opinion on these licenses, verify any lawsuit or potential lawsuit against new investors, issue legal opinion on those law suits, review contracts with suppliers, customers, employment contracts of management, leases, land ownership, titles, mortgage, liens and loan agreements. Environmental and social issues should also be part of this due diligence as it can also play a role in the certification process;
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Business and finance: the financial consultant and investment manager needs to check the companys or projects accounting records, accounting policies, accounting systems and internal controls; analyze its projections and their underlying assumptions, business plans, corporate budget, computer systems and capabilities conduct inventory of assets, verify bank borrowings and other debts from trade and other creditors, outstanding receivables and insurance policies. Interviews of employees, customers and suppliers could also be conducted. Technical: an independent technical consultant needs to assist in the technical due diligence. The process should include a full analysis of the technology being employed, the track record of the equipment and its manufacturer, certification and site suitability. In addition, the technical consultant should review relevant contracts such as construction and installation, operations and maintenance, warranties, insurance coverage. Review production/operating permits and licenses, capital costs and budget, contingency allowances, infrastructure design, geotechnical and environmental issues. Closing After final approval to close the deal, a Heads of Terms will be signed with the involved parties which will serve as basis for the shareholders- , investment- and various other agreements (e.g. Finance, FSA, PPA) . Legal counsel should issue an opinion on the completeness of the documentation and capital commitment should be arranged before the drawdown date. Construction Competence of project management team during construction: The construction and installation of equipment is one of the most important stages of the project implementation. It is recommended that a turnkey contract is employed using a reputable Engineering, Procurement and Construction (EPC) contractor. The expertise and reputation of the EPC contractor who is to construct the power plant must be well established. The contractor must have the technical expertise to complete the project in such a way that it will operate in accordance with the costs and production specifications. The EPC contractor should have previous experience in successfully building a similar project. The contractor should be financially strong and have the resources to devote to or solve any problems that might arise. During the construction, it is strongly recommended for the project owner to engage a
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reputable project management consultant or assemble a project management team to act as owners engineer to monitor the performance and progress of the construction. Technical issues in the equipment supply contract: The dynamics between the technical and contractual aspects of the equipment supply is crucial. Once the most suitable supplier is selected, the contracting issues should be carefully negotiated and agreed and consequently integrated in the equipment supply contract, taking into account aspects related to the following issues: o o o o Performance guarantees; Liquidated damages; Guarantees/warranties; Penalties for delays or poor performance.
O&M The competence of the Operation and Maintenance (O&M) team is important. The power plant should be operated as a utility, which means that reliability and availability should be ensured to provide the required electricity to the grid. There are different approaches that the owner/developer can choose for the operation and maintenance of the plant. One possibility is for the project to out-source the O&M by entering into an O&M contract with a reputable company with proven track record in operating this kind of projects. The advantage of this approach is that the performance of the operation could be guaranteed and liquidated damages could be imposed for poor performance. A good O&M contract with a reputable company can also strengthen the case of the project in obtaining project financing from the banks. Another possibility is for the project to hire its own personnel to operate and maintain the plant. It is imperative that only experienced and trained personnel should be taken for the critical posts such as operators and technicians. Apart from the technical part, the investment also needs to be monitored closely. Regular, monthly management reports including key ongoing issues, monthly financial statements, and audited annual financial statements are the key to remain well informed. Regular visits to the investment sites and monthly meetings/teleconferences with the portfolio companys management team also add to financial success of the deal. Divestment Dependant on an investors investment horizon, sooner or later exit strategies will need to be formulated. By following valuation guidelines, an estimated sale price of the investment, to be compared against possible offers will be determined. There are several options available to exit from biogas investments, like:
Listing the shares of the investment vehicle on a stock exchange (IPO) provides the following advantages: o Shares are publicly traded, thus there is an established, transparent, market value. o Liquidity. Once listed, the investment is quickly monetized. o Possibility to expand by increasing capital through stock exchange.
Sale to a strategic or financial investor is another option available. This option usually takes several months and involves several meetings, discussions and negotiations with the potential investor and the existing shareholders. It is also necessary to use the services of legal counsel and an independent financial advisor for valuation of the investment.
Dividend-based returns an exit strategy whereby dividend returns from the investment company or project are sufficient over the investment period to meet investor objectives. This is an excellent exit strategy and most suitable for investments with strong, reliable operating cash flows. At the end of the investment period, the investors interest will be sold or given (BOOT) to the project sponsors or another strategic investor.
5.5 Conclusion
How should real estate investors determine the attractiveness of investments in biogas-plants? The central research question of this thesis has resulted in a chronological decision model that can assist investors in doing a biogas investment. It is based on a model used for venture capital decisions and provides a step-by-step checklist. The model is subject to investor preferences which makes it broadly usable and provides insight in the important fields of attention. Specialized biogas companies will hopefully already ask themselves the relevant financial-, legal- and regulatory questions, but now external investors have a possibility to not only understand, but also interact when it comes to important investment decisions.
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Chapter6:Casestudy:KWTEbiogasplantinThailand
6.1 Introduction
It has been mentioned before that little has been published about specific biogas deals as this is a young but evolving market. Confidentiality due to competition in the current market is another explanation for this lack of transparency. However, several successful developments have been completed and can be applied to the constructed decision model with hindsight . The decision model will be applied to the Korat Waste-to-Energy (KWTE) biogas development which was completed in 2003. Clean Thai is a specialized biogas company which has developed and successfully operated this biogas installation near a large starch factory in the Thai region of Nakorn Ratchasima. The project has been designed and developed as one of the first that benefits from international carbon trading to help support financing projects through the Clean Development Mechanism (CDM). Both the technology and the business model are highly replicable xxxix and could be considered one of the best biogas deals in South East Asia.
6.2 Applying the biogas investment model

All stages and fields incorporated in the model (Appendix 1) will be addressed while applying it to the KWTE case study: Investment identification macro-level KWTE is a special purpose company with several international owners:
42% by Renewable energy and energy efficiency fund (REEF); 28% by Al Tayyar Energy (ATE); 19% by CleanThai (developer); 5% by Waste Solutions Limited (the technology supplier); 3% by E + Co (a US-based fund focused on clean energy start-ups in emerging markets); 1% by Silk Roads Technology (a US technical consultant); and the remaining 2% by two private individuals.
Macroeconomic and political circumstances where considered suitable by all these (partly foreign) investors to enter the Thai investment market. The biogas market was even younger in 2002 but the investors believed in its opportunities and acted as first-movers. Currency risk may have been hedged using derivatives, but the Thai investors may not have had any reason to do so. The regulatory issues may have sparked investor interest to engage in this venture. The carbon trading market had just been established and this project was designed to benefit of the CDM. Thai VSPP regulations were
also in place to ensure that access electricity, that cannot be sold back to the factory, could be sold to the local utility (power grid). Investment identification micro-level The Cassava (Manihot esculenta Crantz) industry is considered one of the most important economic crops in Thailand. However, cassava is not a staple food for Thai people; it is a cash crop produced by farmers. Nearly all the harvested roots are processed into dry chips and pellets for export as animal feed, as well as into starch, both for domestic use and export. About 80% of the production is exported. The most important market is the European Union (EU). The province of Nakorn Ratchasima also known as Korat is home to South-east Asias largest cassava processing plant, Sanguan Wong Industries (SWI). The facility, located about 250 kilometres north-east of Bangkok, processes 3000 tonnes of raw cassava roots each day, to produce 750 tonnes of native and modified tapioca starch. A new modified starch plant, would commence operations in November 2004, that would generate up to an additional 250 tonnes of modified starch per day. The sprawling facility operates three shifts, 350 days per year, and employs over 700 workers. The production of starch from cassava requires large amounts of water and KWTE was aiming to own and operate a neighboring biogas facility to anaerobically treat the factorys wastewater (feedstock), and selling biogas as a substitute for heavy fuel oil (7,5 million liters a year) and electrical power at discounted rates back to the factory. Selling surplus electricity to the local utility under Thailands VSPP regulations and possible certification and sale of CERs added to the attractiveness of the venture.
SWI is located in a cassava-processing area near a main road which facilitates the receipt of harvested cassava from local farms and the delivery of tapioca and other products made by SWI to its customers. The location of the (5 MW) biogas plant on the premises of SWI was near the lagoons, that would receive the outflow water from the biogas facility. This 8000m3 of nutrient-rich wastewater per day would improve local environmental standards considerably compared to the untreated wastewater from the factory that had been flowing into the environment up to that moment.
These features motivated the partnership to progress to the next stage. The different parties involved (each with its own expertise) needed to trust each other and background checks could be a possibility to confirm this trust.
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Screening and feasibility The deal structure was a buildownoperatetransfer (BOOT) basis. KWTE would do the investment and run the plant for the first 10 years, after which SWI would assume ownership and responsibility for all operations. KWTE and its investors absorbed all financial, technological and management risks. SWI needed only to provide the land and wastewater (through a fuel supply agreement). SWI committed to purchase up to 100% of its electricity and heating demand from KWTE and parties would agree that these energy services were to be sold to the factory for 80% of current market rates for comparable quantities of grid electricity and fuel oil respectively (power purchase agreement). If KWTE fails to produce adequate supplies, SWI simply reverts to the grid and fuel oil for the balance of its needs. The guarantee of feedstock and demand reduced the risks and volatility of the project returns, which improved debt financing possibilities. In addition, the International Finance Corporation (IFC) and the Netherlands established the IFC-Netherlands Carbon Facility (INCaF). This is an associated Trust to enable IFC to purchase, for the benefit of the Netherlands, certified emission reductions (CERs) under the framework of the Clean Development Mechanism (CDM) of the Kyoto Protocol. INCaF agreed to purchase CERs from KWTE generated between 2006 and 2012. INCaF would purchase approximately 50% of the total amount of CERs expected (380,000 tonnes annually) to be generated by the project during the period from 2003 to 2012. These presales enabled KWTE to acquire financing at an (assumed) debt/equity ratio of 60/40.
The technical planning is crucial for performance of the plant and specialists designed the best suitable solution for the SWI situation. The facility proved even more efficient than was expected with 25-30% more biogas available through higher efficiency. All features (revenues and costs) need to be incorporated in a cash flow statement in which the financial basics and feasibility can be judged. The financial model consists of an input and an output part. The cash flow statement in Appendix 2 indicated an IRR of 54,9% including carbon sales. This illustrates the profitability of this specific biogas deal and persuaded investors to continue. Excluding the carbon sales, the IRR for the investment amounted to 18,8% as can be seen in Appendix 3. The sensitivity analysis indicated that downside risk was acceptable.
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Detailed due diligence The legal due diligence included: checking of ownership titles, preparation of agreements (PPA, FSA, BOOT) and checking environmental issues. The environmental (and social) issues play an important role in the certification process. The following potential environment-, health-, safety- and social impacts of the project were analyzed and recorded: General environmental impacts and benefits; Land acquisition and use; Air emissions from biogas and energy generation; Wastewater management and treatment; Noise and odor management; Emergency response and fire safety; Employee conditions and benefits; Community consultation and engagement.
Furthermore, technical, business and finance issues were further audited. The chosen technical design was double checked by an expert and accounting statements of SWI were verified. Closing After the due diligence was completed, the KWTE deal was formalized by signing the closing agreements with the different stakeholders. CER certification was also approved by the National Committee on Climate Change which allowed KWTE to sell CERs to INCaF as of 2006. Construction The technology supplier Waste Solutions Limited and developer CleanThai were both invested in KWTE, which possibly improved the attention for project management and monitoring of construction. The cost of the total Biogas installation was around $ 4,5 million and guarantees on all equipment were secured. O&M At the moment, the biogas plant is still running and generating higher than expected returns. Although far from all financial data is public, KWTE is considered very successful and CleanThai has went on
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to develop several more biogas installations in Thailand. Its qualified personnel is monitoring these investments to maximize electricity and CER sales. Divestment As a result of its BOOT structure, the plant will be transferred back to SWI in 2013. This pre-defined exit strategy means that returns are purely dividend based. The electricity part of returns was easily forecasted thanks to the FSA an PPA and resulted in an IRR of.. The sale of carbon credits has made this venture more attractive and boosts returns up to.
6.3 Conclusion
Due to unfamiliarity, SWI was hesitant to invest in it the development of a biogas plant and as a result international finance had to be attracted. Such international financing usually demands high project IRRs. KWTE achieved these returns by combining guaranteed electricity sales and presale of CERs. The KWTE biogas system has been a success and confirms the possibilities of biogas plants to generating attractive returns for investors, cost reductions for factories and environmental improvements. Applying the biogas investment decision model to the KWTE business case, indicates that all relevant issues are addressed in the model and that it can help investors deciding on new biogas investments. This may help to achieve similar business models for: other cassava factories, other organic waste streams, and other countries.
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Chapter7:Evaluationandrecommendations
7.1 Evaluation
The comparison between traditional real estate, infrastructure and biogas assets has indicated that although many similarities exist, all three have their own specific characteristics. The immature market of biogas investments in Thailand presents opportunities because of its growth potential and attractive returns. Favorable legislation can increase those returns (CDM), but also presents dependability. The related risks are obviously higher than for traditional real estate, but investing through specialized companies and using the biogas investment decision model can reduce those risks. Just like in any real estate venture, arranging critical factors like a good location and reliable partners is crucial for its success. The main reason to think that biogas assets could be a welcome addition to an investors portfolio is the fact that biogas plants can actually add value to existing plots of land by converting a traditional cost (waste disposal) into an additional revenue stream.
7.2 Future and recommendations

The impact of the credit crisis in the financial markets is influencing global economics. Stock prices have sharply fallen and real estate markets are in distress. It is to be seen how sustainable energy projects will be affected by this economic downturn. Some argue that companies and governments are losing focus on global warming, where other claim that the economic crisis presents an opportunity to make drastic changes like the suffering car industry for instance, that is being forced to produce cleaner cars in return for financial support. Experts agree that a critical move is to put a price on carbon xl . Al Gore says that when governments put a price on carbon, as he believes they will, demand for carbon-free electricity will explode. President Obama is in favor of a cap-and-trade approach that would reduce carbon emissions to 1990 levels by 2020 and invest $150 billion over 10 years in low-carbon sources that will create 5 million jobs. The financial crisis, however, increases the risk that these actions could be put off until the second half of his term. With the environmental summit of Copenhagen on the agenda for 2009, the near future will reveal the intentions and sacrifices we are willing to make. It is clear that investments in sustainable energy sectors must continue to grow in order to reach carbon reduction targets and as a result the CDM program (or its successor) will continue to grow. It will be interesting to see if there will be a shift of investor type with regard to biogas investments. Producing companies could become more aware of the possibilities and as a result develop their own
neighbouring biogas plants and as the market matures more institutional sustainable energy funds will probably be invested in biogas plants. Driven by cost and regulatory issues, efficient energy consumption is becoming a bigger issue for real estate developments. It seems probable that more and more, real estate deals will incorporate energy valuations and utilization of real estate waste streams into their pricing. So a parcel of land or a building that can efficiently use its waste stream, will be valued higher than one that cannot. Adding small biogas plants to shopping centers or residential- and office buildings may be considered when purchasing and developing land and buildings in the future. Future research could be dedicated to this integration of functions. For the time being, the potential for biogas plants in SE Asia is there to grow and possibly attract new investors. The constructed biogas investment decision model will hopefully aid these investors in doing the right thing.
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Appendix1
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Appendix2
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Appendix3
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Biogas energy plants: The emergence of a new asset class for private investors

MSRE Thesis February 2009 Author: Drs. B.J.P. van Veggel

Graduation committee: Dr. N. Kok Drs. R.M. Weisz RA

1.4 Central research question

The figure below indicates the top-down approach of this thesis:

2.2 Clean Development Mechanism (CDM)

2.3 The sustainable Market 2.3.1 General overview

Figure 2.1 Breakdown global sustainable energy

Figure 2.2 Global investment in sustainable energy by region 2006

2.3.2 Private investments

2.3.3 South East Asia

2.4 Short introduction to biogas/biomass

Figure 2.3 Biomass in practice

3.3 Real estate characteristics

high transaction costs; high uniform price;

neutral portfolio). It delivers strong cash flows to the portfolio.

3.6 Infrastructure Characteristics

3.7 Comparison Real Estate and Infrastructure

3.8 Market for infrastructure investments

4.2 Biogas: the process

Figure 4.1 xxviii

4.3 Biogas investment characteristics

The main characteristics of biogas investments are as follows:

4.4 Funding of private investments in CDM countries

4.5 Market for biogas investments in Thailand

4.6 Differences biogas, real estate and traditional infrastructure

5.2 Model Theory and structure

Reject Reject Reject Reject

5.3 SWOT Analysis

5.4 The biogas investment decision model

6.2 Applying the biogas investment model

7.2 Future and recommendations

Paris-based Sustainable Energy Finance Initiative

blends in Australia (http://www.csiro.au/resources/pf13o.html)

Greenpeace (2009), FAQ: Palm oil, forests and climate change

Journal of Real estate Portfolio Management.

Capital Partners (2003), Global Infrastructure Investment for Pension Funds.

for Public and Private Actors.

xxviii xxix xxx xxxi

Science Vol. 243. no. 4899, pp. 1668 - 1674

decision?, University of Colorado, Boulder, Colorado.

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