Costs and Survival of Biogas Under EEG Law : A Real Options Approach

Operators of biogas plants, who receive their feed-in tariffs according to the German Erneuerbare Energien Gesetz (EEG), possess a basket of real options, whose payoff structure is similar to put options. The underlying is the main input factor of the plant, field crops. This real option to shut down or abandon the plant under adverse market conditions increases the value for its owner, while it reduces the financial burden for the electricity consumers, whose payoff structure resembles the one of a writer of a digital put option. Using current market prices and technical parameters, we find that the present value of the financial burden of a typical plant is much smaller than determined with a standard Discounted Cash Flow (DCF) method. When taking into account that feed-in tariffs are not inflation indexed, the gap between payoffs measured with DCF and with real option methods widens further. Using Monte Carlo simulation we determine probabilities that biogas plants go out of business. According to our simulations, under current market conditions, the chances that a plant feeds in for the whole guaranteed period of 20 years are less than 25%. We assess by how much aggregation across the idiosyncrasies of the cost structure of individual plants can smooth out the impact of input factor prices which are determined on the world market. Our findings suggest that biogas plants of the same cohort will mostly go out of business in the same or an adjacent year. In our conclusion, we discuss the impact of insecure feed-in on stake-holders of the biogas industry