Renewable natural gas (RNG) is considered by many as the most valuable transportation fuel in North America, and it didn’t happen by accident. This renewable energy resource derived from decomposing cellulosic waste was historically dedicated to electricity generation.
When a handful of companies came together in July 2011, they saw a greater vision for what RNG could be. They formed the Coalition for Renewable Natural Gas (www.RNGCoalition.com) and began a focused and intentional lobbying effort that has exponentially grown the industry into an essential linchpin of the federal government’s Clean Air Act — the Renewable Fuel Standard.
RNG is refined biogas used in advanced applications. RNG as a transportation fuel may be compressed or liquefied into renewable compressed natural gas (CNG) or renewable liquefied natural gas (LNG) and used interchangeably with natural gas in any natural gas vehicle application. The predominant volume of RNG is biomethane captured from landfills. Increasingly, however, RNG infrastructure is converting separated municipal solid waste (MSW), agricultural waste, or wastewater to vehicle fuel using anaerobic digesters.
RNG’s value results from a combination of law and the monetization of RNG’s superb environmental attributes that fulfill the law’s policy objectives of cleaner air and reduced greenhouse gas emissions from the U.S. fuel mix.
RNG is an ultra-low carbon fuel. While biogas composition is typically 40 percent carbon dioxide (CO2), the RNG refinement process removes virtually all CO2. The resulting biomethane is molecularly indistinguishable from natural gas. When combusted as CNG or LNG, the methane molecule is destroyed, resulting in a near-zero emissions profile. On a life cycle basis, RNG results in an 80 percent or greater greenhouse gas (GHG) emission reduction as compared to diesel and in many cases can be carbon negative (110 percent or more).
In July 2014, at the RNG Coalition’s urging, EPA designated RNG as a cellulosic biofuel in its Phase II Technical Amendments to the RFS rule. This is significant for three key reasons.
First, the Clean Air Act proscribes annual volume obligation growth in the cellulosic category from 2015 forward, while the other categories of obligation remain relatively capped. This means that obligated parties (gas and diesel companies) must annually increase the percentage of their total fuel portfolio derived from cellulosic biofuel. RNG therefore has built-in demand required by U.S. law.
Second, RNG joins cellulosic ethanol and cellulose diesel as the primary biofuels in the category. Historically and currently, the total volume of cellulosic ethanol and cellulosic diesel is minimal [approximately 2 million ethanol gallon equivalent (EGE) in 2015]. This means that, at least in the short term, RNG has relatively little competition for fulfillment of the category.
Third, cellulosic biofuels possess greater environmental benefit than other biofuels, and significantly greater benefit compared to gasoline and diesel (life cycle GHG emission at least 60 percent less than baseline). The Clean Air Act deems these emission savings to have value. That value is realized by RNG producers with the sale of RINs (renewable identification numbers). Obligated parties may produce their own qualifying biofuels, or they may purchase RINs from registered biofuel producers equal to their annual obligation.
One RIN is assigned to each EGE of biofuel produced under the program. Obliged parties may then purchase bundled fuel with the RIN, or unbundle the commodity and purchase the RIN at market. D-Codes are used to identity the type of RIN being sold. D5 RINs are advanced biofuels (RNG’s old category). D3 RINS are cellulosic biofuels (RNG’s new category).
RIN valuation is a function of the RIN markets. Each RIN is only worth what a party will pay for it. However, publications like Argus Media and OPIS regularly report index of RIN sales, which allows producers to gauge market value.
In mid-December 2015, D5 RINS traded at $0.76. Converting this price to typical units of natural gas measurement [million British thermal units (MMBtu)], this equates to a D5 value of $8.91 per MMBtu. When added to a Henry Hub spot price of $2.14 per MMBtu the total sale of geologic natural gas and a D5 RIN nets $11.05.
For cellulosic biofuels sold under RFS2, the natural gas spot price (NG) plus D-5 RIN creates an effective price floor. The effective price ceiling is NG + D5 + the cost of a Cellulosic Waiver Credit (CWC).
CWCs are issued by the U.S. Environmental Protection Agency (EPA) each year so that the total available volume of cellulosic biofuel does not at least reach the Clean Air Act’s statutory obligation. Obligated Parties may purchase CWCs along with a D5 RIN to satisfy the D3 requirement.
“Ultimately, there is no substitute for an experienced marketer to help producers find the highest price for their gas and environmental attributes.”
CWC prices are set as a function of law as the greater of $0.25 or $3.00 less the wholesale price of gasoline (with both numbers adjusted for inflation, baseline 2008). In 2015 the CWC price was $0.65. In 2016 the CWC price is $1.33. Again, this is on a per gallon basis and should be adjusted to MMBtu. Using the price ceiling formula and our sample numbers above, NG + D3 should not trade higher than $26.65 per MMBtu (NG+D5+CWC).
The reality of the market is closer to the low end of this range ($11.05 to $26.65) headed into 2016. It must be noted also that the current market is relatively illiquid, meaning the monthly volume of trades is relatively low, putting producers in a less advantageous negotiating position when pushing for a higher valuation within the range. Ultimately, there is no substitute for an experienced marketer to help producers find the highest price for their gas and environmental attributes.
Still, as the RNG industry has responded to its 2014 cellulosic designation, the impact has been exponential. In the three months leading up to the designation (April-June), RNG production averaged 2.37 million EGE per month. By 2014’s fourth quarter, average monthly production had more than tripled. Today, production is more than 12 million EGE per month, and nearly reached 14 million in one month in 2015.
In November 2015, EPA released its Final Rule on 2014-2016 Renewable Volume Obligations (RVO). The cellulosic biofuel category RVO rose from 33 million gallons (2014) to 123 million gallons (2015) to 230 million gallons (2016). Demand is strong and the RNG industry is rising to the challenge.