In the dairy industry, renewable natural gas (RNG) has become a common term over the last three years. Similar terms include biogas and biomethane. While dairy manure is an ideal candidate for RNG production, other sources include swine manure, poultry litter, landfills, wastewater treatment plants and food recycling facilities.
In its most basic form, RNG is mainly composed of methane gas, carbon dioxide and trace elements. The methane component garners significant attention because studies have shown it is 28 times more potent than carbon dioxide in trapping heat in the atmosphere.
With a problem comes an opportunity. As it relates to animal agriculture, this is not a new concept. Europe has been collecting and digesting manure for at least 20 years. Additionally, European practices include using crop residues and food wastes, which can be a complement to the bugs and a good source of energy. The U.S. has also been processing manure for some time, capturing gas to run generators that produce electricity for operations or the electrical grid. Incentives often made these projects lucrative. Power utilities saw the chance to supply a portion of their power with renewable energy, typically through power purchase agreements lasting 10 years or less. As many of these contracts have expired, current pricing often doesn’t cover operational costs. With more efficient solar and wind production, utilities find it less economical to pay above-market rates for renewable electricity. The rise of biogas in agriculture was timely.
Revenue opportunities
Regarding the economic feasibility of existing and new projects, several revenue avenues exist. One of the more familiar sources is the California Air Resource Board (CARB) and the Low Carbon Fuel Standard (LCFS). CARB has authority over the LCFS and how it accepts different renewable transportation fuels. In looking at the timeline, changes made in the late 2010s were the catalyst to move animal livestock RNG projects forward. The wave of projects, including those with some existing infrastructure and greenfield projects, began to take off.
In addition to LCFS credits, other attributes include the EPA’s renewable identification number (RIN) credits under the Renewable Fuel Standard (typically D3 RINs) and brown gas or raw gas prices. In addition, there are also other state LCFS programs including Oregon, Washington and, as of this year, New Mexico. Canada also has a program, and there is also a voluntary market outside the regulated markets. Typically, that could include foreign or domestic businesses with a mandate or other groups looking to utilize or offset their carbon emissions.
The market and its volatility are important pieces of this story. Most gas is sold on merchant pricing, meaning it is subject to spot prices. As the market matures, fixed-price options over a period of time are becoming more common. Regarding operational benefits, there are three common methods:
- Working with a developer who provides capital, operational needs and payment for manure with additional payments for milestones if credit prices and market prices rise
- A hybrid approach, where a dairy and developer or investor split costs and revenues
- Direct farm ownership, where the owner and operator finance the project, operate it, and manage marketing the credits and gas
The revenue piece is complex, and I haven’t even covered additional incentives via the Inflation Reduction Act and available tax credits.
Adding RNG projects to dairies
I had the opportunity in mid-May to visit the American Biogas Council’s annual meeting, known as Biogas Americas, in Savannah, Georgia. The first observation is knowing this is their largest audience ever, along with their largest exhibitor collection yet, with over 1,800 attendees – compared to fewer than 200 in the mid-2010s. Enthusiasm and capital interest in these projects are high.
While some areas still produce electricity at profitable pricing, new development focuses on RNG. Developers and investors see attractive returns and are optimistic about future price escalations. Most technology related to gas production and cleanup is proven. There is also optimism about new services or products, such as renewable hydrogen, clean water from the waste streams, and nutrient capture and concentration, which could be added to the current infrastructure. It’s also important to note that dairy operations that bedded with sand were a challenge in the past. Sand separation systems have evolved and have proven themselves and several new projects are built on sand-bedded dairies.
These projects are typically expensive, consisting of three main components: 1) collection or storage methods (upright tanks or covered lagoons), 2) gas cleanup equipment, and 3) compression equipment for loading trailers or injecting into nearby gas pipelines. Depending on the dairy’s size, these projects can exceed $50 million. Dairies with existing infrastructure benefit from lower costs, as upgrades often involve transitioning from electricity generation to gas production. Larger dairies also benefit from economies of scale. While the cost may be more prohibitive for smaller dairies, that is not to say they can’t participate. At around 2,500 animal units, it can be economically viable.
Technology exists for dairies with 100 animal units, though costs can be prohibitive. A hub-and-spoke model, where multiple dairies contribute to a single site, could make projects feasible. Manure can be pumped or trucked to a single site. RNG opportunities on farms are becoming more cost-effective, with improved technology and affordability, much like the evolution of color TVs.
For those considering RNG, many third-party resources, including attorneys, CPAs, lenders and others experienced in the process, can help evaluate what makes sense for your operation. Farmers can be environmental stewards, adding another revenue stream for their operations in the process.
Top considerations for producers considering RNG projects
The main question most people ask is how this applies to their operation and whether they are candidates. Those with 2,500-plus animal units may have already been approached. Some have decided what is best for their operation, some are still uncertain and others may still be candidates.
Given some deadlines for the Inflation Reduction Act related to tax credits, the deadline of Dec. 31, 2024, is important for projects to be both initiated and progressed. This is a key component developers are targeting to start projects.
In terms of an operational business case, several questions arise. The biggest is what impact this type of relationship has on your operation. Who are your partners? What is their experience in developing projects? Can they deliver? What markets are they targeting? How dedicated are they to the future, and who operates the project?
Digging deeper, other questions include supply agreements, operational agreements and expansion considerations. For example, what happens if you want to grow your herd? What if there is a change in the relationship on the RNG project on your property where you are responsible for supplying manure?
Consider your obligations as a producer and the developer’s obligations. Think about the background of your partners, your responsibilities, opportunities to profit in a stronger market, the base case and the implications of not performing. Also, consider land use and how it may affect your property. Finally, think about what you are trading today in regard to carbon credits versus what may be available in the future. These credits are typically transacted once and may limit the ability to transfer or leverage them later.
The main message is to rely on your support network, including your lender, attorney, CPA and processor, to gauge the best action for your operation. Make the best decision for your long-term success with the best information possible.
These are typically long-term relationships. Ensure there is full transparency between your operation and the developer you are partnering with, and understand the impact, benefits, and challenges these arrangements can bring to your business now and in the future.
This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
