Taking advantage in the era of opportunity

Managing greenhouse gas (GHG) emissions from landfills has evolved from being a financial liability to an economic opportunity for private and public landfills, small and large. As technology and public policy have become more sophisticated, so have the opportunities to turn GHG emissions into a revenue stream.

GHG mitigation at landfills has largely been driven by regulation. With the introduction of the New Source Performance Standards (NSPS) regulations for landfills in the 1990s, large landfill owners were required to control their emissions by the U.S. Environmental Protection Agency (EPA). Since conforming to the new regulations required an outlay of capital and an ongoing maintenance expense, emissions reduction projects were seen as regulatory-driven cost centers, a view that continues today.

As GHG policies evolved to regulate carbon emissions across all industry sectors, so did opportunities to monetize these reductions. Demand for carbon offsets allowed smaller, nonregulated landfills to increase revenue through the installment of gas collection and destruction systems as a means to generate and sell carbon offsets. However, the larger, newly regulated landfills were deemed ineligible to generate carbon offsets since their emissions reduction projects were now required by law. Regulated landfills were, however, able to take advantage of landfill gas-to-energy projects as part of various state-driven renewable portfolio standards (RPS). Given the mature status of the carbon offset and electricity generation markets, margins under these programs have decreased considerably on a national level over the years and are projected to continue their decline.

Today, new technology and policies are once again ushering in an era of opportunity for methane capture at landfills. The collection, cleaning and injection of methane gas into the natural gas pipeline creates biomethane or renewable natural gas, a high-value commodity. These types of projects are seeing returns two to four times higher than comparable landfill gas-to-carbon credit or electricity generation projects.

MARKETS

Demand for biomethane projects is primarily driven by two regulatory programs: the Renewable Fuels Standard (RFS), a federal program, and the Low Carbon Fuel Standard (LCFS), a California-based program. Both programs rely on government and regulatory agency mandates to increase the amount of renewable fuels in the transportation sector and, given the low-carbon intensity and cellulosic nature of compressed natural gas (CNG)/liquefied natural gas (LNG) produced from landfill biomethane, project developers continue to focus on these types of projects.

The RFS is a federal policy administered by the EPA with the goal to reach 36 billion gallons of renewable fuel in the transportation fuel pool by 2022. To ensure the adoption of renewable fuel mandates, the EPA requires the participation of certain types of companies, called obligated parties, including U.S. refiners, producers and importers of transportation fuel (gasoline and diesel), heating oil or jet fuel. These companies are assigned a renewable volume obligation (RVO) based on a percentage of that year’s total fuel consumption forecast and the individual company’s fuel production.

RVOs are met by tracking the volume of renewable fuel introduced into the transportation fuel pool. Obligated parties can accomplish this by physically blending renewable fuels into their fuel pool or through a market-based trading system where the environmental attributes of renewable fuels are bought and sold. Renewable fuels added to the pool are tracked through Renewable Identification Numbers (RINs), with one RIN equivalent to one ethanol gallon of renewable fuel. Companies can use RINs they create to meet their RVO or they can buy and sell RINs.

However, the value of the RIN is based on the type of organic feedstock used in the renewable fuel production process.

RIN type and, by extension, the value of the RIN, is determined by the category code (D Code) assigned to the renewable fuel. The D Code assigned to the renewable fuel is based on the amount of GHG savings of the renewable fuel over a standard gallon of transportation fuel. RINs generated from renewable transportation fuels with higher GHG savings are more valuable because they allow greater capability and flexibility in meeting the RVO. The four types of D Code categories are:

• Cellulosic biofuel, classified as D3 or D7
• Biomass-based biodiesel, classified as D4
• Advance biofuel, classified as D5
• Renewable fuel (nonadvanced/conventional biofuel), classified as D6

D3/D7, or cellulosic RINs, are currently the most valuable type as they offer at least a 60 percent GHG savings over conventional fuel. Facility types that can produce D3 RINs are currently limited to the following:

• Landfill biomethane
• Separated municipal solid waste digester biomethane
• Municipal wastewater treatment facility digester biomethane
• Agricultural digesters biomethane (manure, crop residues and separated yard waste)

The LCFS is a fuel-neutral program specific to California established to reduce GHG emissions using low-carbon fuels. The goal is to reduce the intensity of California fuels by 18 percent by 2030. The program is enforced by the California Air Resources Board (CARB), Sacramento, California, with one LCFS credit representing one metric ton of carbon dioxide (CO2) emissions reductions.

By remaining fuel-neutral, the program allows the market to determine the optimum mix and incentivizes for the development of low-carbon fuels by awarding credits based on the carbon intensity (CI) of replacement fuels. As the CI of the renewable fuel decreases, the number of LCFS credits per unit of renewable fuel produced increases.

The CIs are determined on an individual facility basis by using the California-modified Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model and takes into account numerous facility-specific data. Based on projects that have undergone this analysis, biomethane from landfills creates highly desirable credits because of the low CI of the fuel.

CURRENT MARKET TRENDS

Both the RFS and LCFS programs have experienced rapid growth over the past few years. Cellulosic biomethane demand under the RFS has grown from 33 million gallons in 2014 to a projected 288 million gallons in 2018, reflective of a 770 percent increase in four years. LCFS credits generated from biomethane under the LCFS program grew a respective 595 percent in three years, increasing significantly from the 98,000 metric tons that were generated in 2013 to the 681,000 metric tons generated in 2016.

Why has there been such a dramatic increase in biomethane production under these programs?

The dramatic rise in biomethane production from landfills and digesters over this period directly correlates to the sharp rise in commodity pricing as more and more biomethane projects shift from the carbon offset and electricity generation markets to transportation markets to take advantage of the greater returns per dekatherm of biomethane produced.

But what has fueled the sharp rise in commodity pricing?

Both the RFS and LCFS programs are directly regulated by either the EPA or the CARB and are designed to increase the adoption of low-carbon fuels in the transportation sector by steadily increasing the amount of renewable fuel on an annual basis. Even with the substantial growth exhibited by these programs over the last few years, the targets set under the programs still significantly outpace current and projected production, resulting in a supply-short market as evidenced by record prices for D3 RINs and LCFS credits in 2017.

BIOMETHANE PATHWAYS

Generating and selling the RINs and LCFS credits is a multiphase process that requires detailed records from source to sink. The list of necessary considerations includes, but is not limited to, the following nine items: 

1. Feedstock and facility analysis
2. Biogas production
3. Biogas cleanup and compression
4. Biomethane pipeline injection and storage
5. Biomethane offtake
6. Facility registration
7. CNG/LNG dispensing
8. Q-RIN validation services
9. LCFS/RIN sales

Biogas, or the untreated gas collected from landfill methane capture, must first be upgraded into pipeline-ready biomethane. This process is generally handled by a developer with experience in building and developing gas cleaning, compression and injection systems. However, prior to the installation and operation of the gas treatment facility, a detailed analysis of the site and the organic feedstock used to create the biogas must be completed during the facility registration process to ensure compliance with the RFS and LCFS programs.

After the biogas is processed into pipeline-quality biomethane, the gas marketer will receive the biomethane and associated environmental attributes at the pipeline injection point. Both programs require the biomethane produced from the applicable facilities to be dispensed as a vehicle fuel either at an on-site CNG/LNG facility or injected into a natural gas pipeline and subsequently dispensed at an off-site CNG/LNG facility.

An important thing to note is that if the facility dispensing the CNG/LNG is in California, LCFS credits can be generated in addition to the RINs for the same dekatherm of biomethane. Using a common carrier pipeline, the marketer will establish delivery via exchange, where biomethane injection can be directly matched to delivery without the need to own a physical pipeline. The marketer is responsible for establishing delivery of the biomethane to the transportation market, and will do this through their portfolio of contracted renewable transportation fueling facilities, also known as tolling facilities.

Once the CNG/LNG derived from the biomethane is dispensed, the associated environmental attributes can be registered and sold. Given the detailed recordkeeping and reporting requirements of the RFS programs, RIN buyers have opted to only purchase Q-RINs, which are RINs that have been audited by a third part approved by the EPA to ensure conformity and to satisfy compliance obligations.

CHECKING IT TWICE

The following checklist is designed to help those individuals interested in increasing returns from his or her landfill: 

1. Is the facility currently producing and collecting biogas?
2. Is the facility generating any kind of value from the biogas?
3. Does the facility have access to a gas pipeline?
4. Would the landfill owner like to increase his or her biogas returns by two or four times?

If the answer to any of these questions is “yes,” working with an established marketer like Element Markets, Houston, can create opportunity and stability for the facility. Established marketers can provide a detailed analysis on the viability and potential returns of the facility. On an ongoing basis, a marketer ensures the entire process runs smoothly by: 

1. ensuring rapid facility registration, based on experience in the market;
2. handling ongoing compliance and ensuring that the facility is continually generating RINs;
3. staying ahead of regulatory and legislative risks by lobbying on behalf of the biogas industry to ensure that the RFS and LCFS programs stay intact;
4. providing a wide range of off-take structures to mitigate risk and maximize returns for biogas producers; and
5. using technology to efficiently manage projects, from projecting real-time cashflow through a web-based customer portal, to creating an accessible library with the necessary documents to create a historical depository of data useful for auditing.

Faizal Hassan is the director of biogas marketing at Element Markets LLC, Houston.