The past two years have seen a surge in new digester construction, predominantly for production of renewable natural gas (RNG) sold into the California vehicle fuel market.
The process typically consists of digesters or covered lagoons to produce biogas, a gas cleanup plant to make pipeline-quality RNG and an injection point into a natural gas pipeline (either directly or via a compressed natural gas trailer). While the hundreds of millions of dollars already invested in the industry is exciting, there is a growing number of farmers suffering from broken RNG developer promises.
There are several good RNG projects in development; however, many developers are having to renegotiate contracts or abandon projects because they did not do their homework. Often RNG project originators are in such a rush to lock up farms that they fail to ask the right questions or do the right technical due diligence. The result may be a parade of smiling salesmen coming through farmer doors, promising more than the project can economically deliver.
The largest mistake RNG developers tend to make is assuming what carbon intensity (CI) score California will assign a project. The California Low Carbon Fuel Standard (LCFS) rewards projects that minimize existing greenhouse gases being emitted into the atmosphere (in this case, methane being released from a lagoon). The calculation is complex but is predominantly driven by herd size, the percentage of manure being placed in the lagoon and the residence time in the lagoon. The more methane coming out of the lagoon before a digester is installed (baseline emissions), the more beneficial a digester is in reducing methane emissions from the lagoon, and more credits are awarded. If a farm is separating fiber prior to the lagoon or does not have a long residence time in the lagoon, there is less methane reduction, and therefore fewer credits are awarded.
Beyond the CI score, several other factors are crucial in the economic viability of a project. Economies of scale are considerable, thus larger farms are generally more profitable than smaller farms. The quality of manure delivered to the digester is important; more diluted manure requires more digestion capacity to reach the same residence time, and sand can cause performance degradation over time.
Finally, the technical feasibility of processing the biogas to RNG and injecting it into a pipeline may vary from site to site. A large dairy farm (over 15,000 milking cows) with a good CI score and access to an interstate natural gas pipeline may see royalties of seven figures per year, dependent on market pricing. Dairy farms below 3,000 cows should concentrate on non-monetary advantages of anaerobic digestion such as lower odors and higher pathogen kill. Many dairy farms may not be suitable for an RNG project without innovative combination with other nearby farms.
Developers should be selected based on their experience, access to capital, thorough due diligence of the project and a fair contract structure that holds the developer accountable for achieving milestones. The right developer is not necessarily the one making the biggest promises but asking the right questions and structuring the manure rights contract correctly. Generally, a series of up-front payments for developmental milestones with a share of the ongoing revenue is the best royalty structure to keep the developer and farmer incentivized the same way.
When payments are made on a per-cow or per-MMBtu-sold basis, incentives can become misaligned. Further, a clear delineation of responsibilities with the minimization for future contractual conflict is essential. For example, if there is a switch to fiber bedding as part of the project, having the farmer run the fiber separation system will reduce finger pointing if there is a mastitis outbreak. Conversely, the developer should have expertise in running digesters and the RNG upgrading system.
RNG holds great environmental potential and will be an income stream for America’s dairy farmers. Unfortunately, many farmers will have to wait for the benefits as they search for the right developer.
PHOTO: Mike Dixon.
For more information on RNG, view publicly available webinars at Novilla RNG/presentations.
