Elsevier

Ecological Economics

Volume 73, 15 January 2012, Pages 133-141
Ecological Economics

Analysis
Which factors influence the expansion of bioenergy? An empirical study of the investment behaviours of German farmers

https://doi.org/10.1016/j.ecolecon.2011.10.008Get rights and content

Abstract

The German government is planning to increase the share of renewable energy sources. In this context, it is important to understand the decision-making behaviour of farmers regarding investments in renewable energy systems that generate energy from biomass and farmers' reactions to investment-support measures. To study this behaviour, we conduct a survey and confront farmers with a hypothetical opportunity to invest in a biogas plant. Our findings reveal that farmers have heterogeneous investment thresholds. Their investment decisions are mainly driven by capital costs and the subjective perception of the risk resulting from the investment. Other decision parameters like sustainability and non-monetary objectives that are also examined in this paper, play only minor roles. However, bounded rationality is an important factor. Moreover, the influence of an investment subsidy was analysed. Only about half of the amount of the subsidy — as expected according to normative forecast models — is reflected in an increased willingness to invest. Furthermore, farmers who have previously invested in bioenergy plants show lower investment thresholds and have stronger reactions to the subsidy. Regarding the expansion of renewable energies these findings are meaningful for policy impact analysis.

Introduction

To achieve a climate-friendly energy supply in Germany in the long term, the expansion of renewable energies is seen as essential (BMU and BMELV, 2009). This expansion could be supported by a change in economic and political conditions. The recently amended German Renewable Energy Act (Erneuerbare-Energien-Gesetz, EEG), for instance, promotes the generation of electricity from renewable energy sources. Among other things, the EEG is intended to encourage investments in renewable energy systems that generate energy from biomass (BMU and BMELV, 2009). In particular, it fixes the rates that network operators must pay for electricity from renewable sources over a 20-year period (§16 EEG). The additional costs for the production of this electricity are paid by the customers. For the investor, this leads to a reduction of risk exposure on the revenue side.

It has been observed that farmers respond very differently to these incentives. Some farmers have invested in biogas plants, while others have not invested. This might be caused by farm-specific benefit and cost effects that are associated with the investment in a biogas plant. For example, the production of biogas requires the additional cultivation of energy crops, in many cases maize. This might have differing economic effects and should be seen in the context of the existing cultivation of maize and changes regarding crop rotation. However, it may also be the case that farmers make suboptimal decisions due to incomplete information and limited cognitive abilities in processing information, a phenomenon Simon (1956) refers to as ‘bounded rationality’ (see also Kahneman, 2003, Gigerenzer and Selten, 2001, Selten, 1990). Frör (2008) used the concept of bounded rationality regarding environmental valuation. According to this concept, decision makers may come to different results even if they have the same entrepreneurial objectives and face identical business conditions. Bounded rationality does not refer to any deviation from the goal of profit maximisation, but rather to inconsistency in the decision-making behaviour. To estimate the consequences of the aforementioned economic incentives promoting bioenergy production, it is important to understand the decision-making behaviour of farmers including the impact of bounded rationality.

Thus far, a number of studies have examined the general decision-making behaviour of farmers (see, e.g., Berger, 2001, Edwards-Jones, 2006, Ilbery, 1978, Willock et al., 1999). Furthermore, several authors have analysed the economics of biogas plants (see, e.g., Gebrezgabher et al., 2010, Heissenhuber and Berenz, 2006, Keymer, 2009, Wulf et al., 2006), the (spatial) diffusion of biogas plants (see, e.g., Madlener and Schmid, 2008, Markard et al., 2008, Negro and Hekkert, 2008) as well as the production of agricultural raw materials for these plants (see, e.g., Karpenstein-Machan, 2005). To the best of our knowledge, there is no quantitative study of the decision-making behaviour of farmers in the context of investments in biogas plants. For that reason, no models are known that explain the characteristics of different implementations of bioenergy investments. Moreover, predictions of the effects arising from changes in political surrounding conditions have been limited.

The aim of this paper is to contribute to the understanding of the decision-making behaviour of farmers in the context of investments in bioenergy. To this end, we have conducted a survey in which farm managers were interviewed and confronted with a hypothetical investment in a specific biogas plant. The necessary substratum for the biogas plant would be cultivated on land that is currently used for wheat production. To our knowledge, we are the first discussing the following questions:

  • 1.

    Which conversion threshold — measured as (critical) wheat price — is necessary to motivate the respondent to invest in the biogas plant and change the existing production program?

  • 2.

    What are the driving factors that influence this conversion threshold (i.e., individual risk attitude, valuation of sustainability effects, etc.)? To what extent can the observed decision-making behaviour of farmers be attributed to bounded rationality?

  • 3.

    Could the expansion of bioenergy be reasonably promoted by an investment subsidy? How is this subsidy appreciated by the farmers in terms of their investment decision?

  • 4.

    Is there a difference in the observed decision-making behaviour of farmers with prior experience with investments in bioenergy compared to farmers not familiar with this kind of investment?

The paper proceeds as follows: In Section 2, the design of the survey and the methodology are described in detail. Section 3 presents the results of the survey analysis for the outcome of the investment threshold of the hypothetical investment and its potential influencing factors. The explanatory power of the influencing factors is determined and the effect of an investment subsidy on the investment behaviour is illustrated. Subsequently, the result for the observed decision-making behaviour of farmers who have prior experience with investments in bioenergy is compared to that of farmers not familiar with this investment area. The article ends with conclusions (Section 4).

Section snippets

Research Design

An understanding of the decision-making behaviour of farmers is essential to adequately predict the effects arising from political changes with respect to investment conditions. The observation of farmers' real decisions is of little use in this context. On a farm, investment decisions related to a capital-intensive object (such as a biogas plant) are relatively rare. Moreover, basic conditions differ among farms (e.g., the financial resources). So it is hardly possible to draw comparisons (

Empirical Results and Discussion

Section 3.1 presents the results for the trigger price and the influencing factors. In Section 3.2, the explanatory power of the influencing factors is examined using a regression model. Section 3.3 shows the effect of an investment subsidy on the investment behaviour. In Section 3.4, the results of investors and non-investors are compared. For clarity reasons, all data were converted into €/dt wheat.

Conclusions

In the context of a sustainable energy supply and for policy impact analysis, it is important to understand the (different) development of investments in biogas plants at the farm level to make adequate predictions of effects arising from changes in surrounding conditions. In this paper, the decision-making behaviour of farmers in the context of these investments is investigated. As part of a questionnaire, farm managers were confronted with a hypothetical decision situation regarding an

Acknowledgment

The authors would like to thank the editor, two anonymous reviewers, Dr. Oleg Nenadić and Holger Reise for their valuable comments and suggestions. We gratefully acknowledge financial support from the Ministry for Science and Culture of Lower Saxony (MWK).

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