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Cow Power: beneficiary of the natural gas boom?


Susan Lafferty, David McCullough and Ram Sunkara

Landfills and dairy farms are full of discarded things - remnants and scraps that are deemed useless, worthless and even a nuisance. Or maybe not?

Biogas, the methane produced at landfills, dairy farms (sometimes affectionately known as “cow power”), and wastewater treatment plants, can be used to fuel cars, buses and boats while earning valuable regulatory credits.

While biogas is a renewable fuel that has flown under the radar of many investors and natural gas suppliers in the United States, it is now poised to benefit significantly from market forces presently arising from the incentives contained in the US Environmental Protection Agency’s Renewable Fuel Standard (RFS). 

RFS Mandate

The RFS mandates that increasingly large volumes of renewable fuel to replace gasoline and diesel fuel used as transportation fuel, heating oil and jet fuel. Under the RFS, credits are generated from the production of renewable fuel by renewable fuel producers, which are then freely traded and ultimately acquired and used by gasoline and diesel refiners and importers to demonstrate compliance with the RFS mandates.  

To date, these mandates have largely been satisfied through the blending of ethanol and biodiesel into gasoline and diesel fuel and corresponding retirement of credits representing ethanol and biodiesel. In fact, in 2012 alone, the market for the RFS credits generated from the production of ethanol and biodiesel (known as Renewable Identification Numbers or RINs) was valued at over $2 billion. Gasoline and diesel markets, however, are only able to absorb a limited amount of ethanol and biodiesel.

Despite this constraint, the renewable fuel mandates of the RFS and the corresponding demand for RINs will increase by a factor of ten over the next ten years, leaving many refiners and importers wondering where they will obtain the RINs they need to comply with the RFS? The answer to this question lies in the RFS allowing for the generation of RINs on more exotic fuels that replace gasoline and diesel - one of which is beginning to draw the interest of those in the transportation industry due to market forces not related to the renewable fuels industry.

The Biogas Option

Replacing natural gas used in vehicle fleets and other transportation sources with biogas is one proven method other than ethanol and biodiesel that can help satisfy the RFS mandates and generate valuable RINs. Presently there are over 1000 facilities in the United States that capture and sell biogas gas for purposes that would otherwise utilise traditional natural gas.

Only a limited percentage of ethanol and biodiesel can be blended into gasoline and diesel, but purified biogas may directly replace natural gas and faces no such “blend walls.” Therefore, the market is only limited by the supply of biogas and the number of flex-fuel vehicles and fleets that run on gas. 

Market for Biogas RINs

Biogas that is produced and captured from landfills, dairy farms and wastewater treatment facilities generate an “Advanced Biofuel” RIN at the rate of one RIN per 77,000 British Thermal Units (“BTUs”) of biogas. These RINs may be traded separately from the underlying biogas for which they were generated once the biogas has been made into a transportation fuel and its use is confirmed.

Presently, Advanced Biofuel RINs are trading at approximately $0.80 per RIN. Converting this to a more familiar industry metric, each MMBTU of biogas creates a RIN value under current prices of approximately $10/MMBTU.

To-date only five biogas producers have registered under the RFS to generate RINs, generating over 2.8 million RINs over the past year with a market value of over $2 million. As natural gas prices have plummeted to approximately $3.40/MMBTU, an additional $10/MMBTU is a significant incentive for both biogas producers and natural gas suppliers to use biogas in vehicle fleets and for other transportation needs.

Furthermore, with only five facilities registered to generate RINs out of the over 1000 biogas facilities in the United States, there is a significant underutilisation of the value presented from generating biogas RINs.

How are Biogas RINs Generated?

The RFS is one of EPA’s most complex regulatory regimes. The process for generating RINs on biogas is even more complex with a number of limitations on RIN generation as well as registration, recordkeeping, reporting and documentation requirements that must be met to ensure that the RINs are generated properly and remain valid.

RINs may only be generated by producers registered with EPA, and the registration process can take many months to complete. Furthermore, as EPA has registered only five biogas producers to-date, EPA has not addressed how it would treat many of the business models that natural gas suppliers and traders utilise to bring their product to market

Specifically, of primary importance, in order to generate RINs on biogas, the biogas must be used as a transportation fuel and EPA considers biogas a “transportation fuel” once compressed or liquefied (and potentially converted into electricity). As biogas may be produced by one entity, transported via interstate pipeline by another entity, compressed by still another entity, and used in vehicle fleets by a filling station, it is critically important that these entities meet all of the recordkeeping and registration obligations in place to ensure that biogas is actually used as a transportation fuel.

These obligations take the form of securing affidavits of those who take title to the biogas from the point of production to the end user as well as potentially registering all of the facilities that transport the gas along that chain.

RIN Validity and Future Viability of the RFS

Over the past two years there has been significant controversy surrounding certain biodiesel “producers” generating RINs without generating any actual biodiesel - rendering the RINs invalid and perpetuating a fraud on the market and the individual refiners and importers who used these RINs to satisfy their compliance obligation. This fraud has caused many to question the validity of RINs in the market, particularly those generated by small companies which are not known outside of the renewable fuel industry. Correspondingly, RINs generated by established companies often trade at a premium.

Biogas producers must establish a contractual pathway from production to use as a transportation fuel, which helps to ensure that the fuel is actually produced and will often involve gas pipeline systems operated by well-known companies. As a result, biogas RINs may not face the same skepticism as RINs generated on renewable fuel for which no such contractual pathway is required - such as biodiesel. 

Biogas RINs could therefore be more attractive to those refiners and importers seeking to satisfy their compliance obligations than many of the other RINs in the marketplace.

The fraud surrounding RIN generation has also created questions surrounding the viability of the RFS programme in the future. Many in the refining industry and on Capitol Hill are calling for reforming or repealing the RFS - with several Senators taking a particular interest.

In the near term, any such reform is unlikely. However, as with any government-mandated or subsidised programme, making long-term investments in generating RINs on biogas involves a certain amount of political risk.

Investing in Biogas Production and RIN Generation

While generating RINs on biogas involves wading into a complex regulatory structure and assuming political risk, the added value of over $10/MMBTU presents a significant incentive to invest in the production of biogas and RINs under the RFS. Further, the complex regulatory requirements of the RFS will impact how the producer, supplier and end user structure their contracts and business models.

These requirements may become even more complex in the coming months, with EPA currently undertaking several rulemakings that will impact the generation of RINs on biogas - including allowing RINs to be generated on electricity produced from biogas. As a result, it is important to develop a comprehensive understanding of the RFS and the RIN market as well as engage in discussions with EPA early in the planning stages if contemplating entering this market.

The authors are from law firm Sutherland Asbill & Brennan LLP. They are Sutherland Partner Ram Sunkara, Counsel Susan Lafferty and Associate David McCullough. 

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Comments

Todd Griset said

06 March 2013
Great article. Biogas can also be used directly at the site of its production to generate renewable electricity. For example, my colleagues at Preti Flaherty and I helped a fifth-generation family dairy farm develop an anaerobic digestion system to convert manure and other farm waste to usable biogas. The gas is fed into an on-site one-megawatt generator. The project came online in late 2011, and converts cow manure and off-farm organic waste from a variety of sources into biogas.

We helped the company qualify the project for incentives under Maine's community-based renewable energy pilot program, which gives the owner a long-term contract to sell the facility’s output to its local transmission and distribution utility for up to 20 years at average prices up to $100 per MWh (equivalent to 10¢ per kWh). This works much like a feed-in tariff for qualified projects, giving them a guaranteed buyer and price for the project's output.

Here's a more detailed write-up describing this on-farm generation application:
http://energypolicyupdate.blogspot.com/2012/06/farm-waste-anaerobic-digestion.html

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