Feasibility Study of Closed-Containment Options

Both government regulators and the Canadian salmon aquaculture industry face ongoing pressure to reduce the industrys potentially adverse effects on the surrounding natural aquatic environment. One option currently being considered is closed-containment, a practice that involves enclosing fish in floating containers or land-based farms to minimise their impact on nearby waters.

Closed-containment can include a range of technologies and operating environments—from ocean- to land-based production systems—with varying degrees of isolation from the environment. Typically, the more “closed” a system is, the more complex its management becomes, since its energy requirements are greater and waste can be more of an issue.

Given this complexity, DFO decided that a thorough analysis of its technical and financial potential should be completed. The information yielded by such a study would benefit all stakeholders (government and industry, as well as the environmental community) by highlighting the technologies’ potential benefits, fostering further innovation, and identifying possible gaps, limits and risks.

In 2008, the Canadian Science Advisory Secretariat (CSAS) published a report entitled Potential Technologies for Closed-containment Saltwater Salmon Aquaculture. That report identified a need to analyze closed-containment technologies, and included economic recommendations. The goal of the current study is to use financial analysis tools to respond to the CSAS report. This study is therefore limited to financial considerations.

The reference case for comparison in this analysis is conventional net pen systems, a type of containment aquaculture currently used in British Columbia and many other parts of Canada, as well as globally. The goal of this analysis is to compare the systems based on realistic, hypothetical operating conditions. But the analysis does not seek to provide potential investors with data that could be used to support future investment. These financial analyses represent a hypothetical venture for different production technologies, albeit based on currently accepted industry practices. The data should not be used to support future investment decisions, because this document is not intended to be a business plan. Business plans are unique to individual projects, and must be undertaken as an exercise beyond the scope of this financial analysis.

All scenarios described in this report were developed and analysed in the context of the current operating environment of the British Columbia industry (i.e., all the capital and operating costs reflect those of a West Coast venture). Further analysis and adaptation would be necessary to reflect a different operating environment accurately.

To begin the study, DFO conducted a preliminary financial assessment of all technology types identified by CSAS. The results indicated that only two of them—net pen and recirculating aquaculture systems (RAS)—were likely to show positive returns (see table below).

S.No Technology Initial Investment Third-Year Income ROE
1. Net Pen $5,000,716 $2,641,147 52%
2b. Rigid-With aeration $23,284,470 -$2,125,885 -10%
2c. Rigid-pure oxygen $24,004,470 -$253,079 -2%
3c. Flexible - pure oxygen $29,332,086 -$2,041,169 -9%
4a. Land - Based Grade $72,352,066 -$17,417,907 -20%
4b. Land - based below grade $67,748,173 -$13,496,265 -19%
4c. Land - based liquid oxygen injection $19,628,900 -$403,142 -4%
4d. Land - based LOX Mechanical filtration $18,858,685 -$260,773 -2%
4e. Recirculating Aquaculture System $22,622,885 -$381,467 4%

Based on this preliminary assessment, DFO conducted more in-depth financial analyses, including sensitivity analyses, on net pens and RAS. The results demonstrate a positive net income for both technologies.

However, with capital expenses of $5.0 million and $22.6 million respectively for net pens and RAS, the analysis found a significant advantage for net pens in terms of pre-tax income. Although RAS production showed efficiencies in biological feed conversion ratio (FCR), temperature stability, and improved environmental control, the presence of higher capital costs, energy costs and labour requirements significantly affected its overall profitability.

The study results also showed that while both technologies are profitable on a pro-forma basis, with returns significantly higher for net pens, RAS technologies are likely to be considerably more sensitive to market forces that are beyond an operator’s control (such as exchange rate and market price), and may prove non-profitable within a range of variability that has been experienced by the Canadian salmon aquaculture industry in the past. These sensitivities are due largely to the high initial capital investment and subsequent associated costs.

As with most emerging technologies, once wider uptake within the sector is achieved, capital and operating costs may go down. If closed-containment technologies achieve a critical mass of production, operators may benefit from economies of scale in the acquisition of capital items, and their increasing expertise could help reduce operating costs.

To conduct this analysis, DFO used costs for net pens that are the result of several decades of expertise and an industry that has achieved the advantages of critical mass. It is possible that RAS-based production systems could experience similar gains, but the scope and time frame of those gains are beyond the current analysis. It is also possible that certain intangible costs (e.g., environmental and social license) could affect the operations’ profitability.

Overall, the analysis showed that RAS technology is marginally viable from a financial perspective, but that it presents a higher level of risk compared to net-pen systems. However, these findings still need to be assessed—and their assumptions validated—in a real-life scenario. Potential next steps could include a pilot scale or demonstration system capable of producing salmon at commercially viable levels (e.g., one module scalable to financially feasible levels) to demonstrate the technical and financial feasibility of closed-containment salmon rearing under real world conditions.

Life cycle analysis of such a demonstration facility should also be undertaken and compared with that of net pen production. Life cycle analysis quantifies and compares potential environmental impacts between systems, and is used to compare local ecological impacts to impacts that are more global in nature, such as climate change, non-renewable resource depletion and ocean acidification.

It would be necessary to know the outcomes of such further analyses in order to determine next steps and to guide government policy direction as it relates to closed-containment for salmon aquaculture.

December 2010

the Fish Site Editor

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