By: Global Water Intelligence | 22 June 2023
A supportive regulatory environment and rising demand is leading large cities across the US to re-examine how they value their wastewater biosolids. The concept of using P3s to maximise the benefits is rapidly gaining traction.
Big cities across America are increasingly looking to public-private partnerships as a way to monetise renewable natural gas (RNG) from their wastewater treatment plants, while generating additional revenues to stabilise water rates and alleviate budgetary constraints.
While the concept itself is not new, biogas projects which start construction by 31 December 2024 can now recover up to 30% of their eligible costs through a tax credit under last year’s Inflation Reduction Act, which is generating considerable momentum in the sector. Local landfill diversion mandates, fuel conversion targets for vehicle fleets, and city-level net zero commitments are also supporting the uptick in activity.
“There’s a lot of interest and capital available for projects such as this,” said Daniela Brandao, senior project manager in the Infrastructure Division at the San Francisco Public Utilities Commission. SFPUC is currently reviewing responses to a request for information issued earlier this year in connection with a $50 million public-private partnership designed to monetise RNG at the city’s Southeast treatment plant.
“A lot of municipalities see this as ancillary infrastructure to their core business, which means that they’re more willing to let the private sector come in and take responsibility for it,” observed one project developer. “They don’t have the expertise, but they can share in the monetisation, and I think that’s probably driving a lot of it,” he told GWI.
“There is a lot of private ownership of biosolids assets, and in my view, the reason for that is because there’s an interface with the commercial markets,” added Chris Tynan, CEO of Burnham RNG, which is developing a $130 million project for the City of Pasco (WA). “Most municipal managers I talk to have budgetary constraints, and if you start managing your solids chain as a business, you can alleviate some of that pressure.”
While there are relatively few operational wastewater-to-RNG P3s in the US, this is set to change rapidly. Pasco reached financial close on its project this month, Waterloo (IA) is close to selecting a developer, while the City of Riverside (CA) and Kansas City (MO) are already in negotiations with preferred bidders ahead of signing contracts later this year.
Bankability
While the quality of the RNG generated by removing CO2 and other impurities from biogas produced in digesters is relatively uniform regardless of the feedstock, one of the major negotiating points is the fact that such projects are often only truly bankable because they give rise to Renewable Identification Numbers (D3 RINs) – tradeable compliance credits issued by the EPA – and in some states, value-enhancing Low Carbon Fuel Standards.
As well as the ability to generate federal credits (RINs) for the production of renewable natural gas, some states have also introduced low-carbon fuel standards as an additional incentive to decarbonise.
Source: Burnham
Although the RINs market is well established, the difficulty of predicting demand for RNG, combined with the volatility of RIN prices, presents a challenge for developers looking to structure long-term offtake agreements under P3s.
PRICE VOLATILITY IN THE RINS MARKET
Assigning Renewable Identification Numbers to RNG volumes offers a way for municipalities to monetise their biosolids production. Market volatility makes structuring long-term offtake agreements a challenge.
Source: EPA
“The environmental attributes you can generate and monetise from the production of RNG is where the value is, but it’s a very volatile market,” commented one developer. “Can you really lock those revenues down for a long-term contract of 30 years and de-risk the project?”
In Pasco’s case, the local gas utility, Cascade Natural Gas, is acting as the sole offtaker for the entire volume of RNG generated, which guarantees the city fixed payments estimated at around $6 million a year over the long term, and removes the city’s exposure to volatility in the price of the attached RINs.
San Francisco, meanwhile, is working on the basis that its private partner will pay a fee to SoCalGas for the right to use its gas pipeline, and will act as a broker to identify end-users to which it can sell the RNG.
“There will be some revenue-sharing of the commodity plus the renewable credits associated with it,” said Brandao at SFPUC. “We are still deciding the revenue-sharing structure that makes most sense for the partnership.”
Locking down the feedstock necessary to make waste-to-RNG P3s bankable is also a key pre-requisite – and one which was rather unceremoniously thrust into the limelight this month, after Anaergia was forced to allow one of its subsidiaries to file for bankruptcy protection. The reason given was a delay in the enforcement of legislation requiring organic waste diversion in Los Angeles, which meant that Anaergia’s multi-feedstock RNG facility in Rialto (CA) is being starved of the raw material necessary to generate the required revenues to service the project debt.
A new report published this month by independent citizens’ body the Little Hoover Commission could set things back even further, after it called for a temporary pause in the implementation of SB1383, the 2016 legislation which aims to curb methane emissions in California by mandating a reduction in the volume of organic material sent to landfills by 50% by 2020 and by 75% by 2025.
Carbon-negative
When wastewater-to-RNG plants do operate as planned, the promise of burgeoning demand for a carbon-negative fuel source that is subsidised at both the federal and the state levels is only now beginning to be appreciated by municipal managers.
“Renewable natural gas is interchangeable with natural gas, and can use existing distribution systems,” explained Yaniv Scherson, Anaergia’s chief operating officer. “It’s a rapidly deployable drop-in fuel, and there are clear incentives related to shifting to a renewable fuel economy and decarbonisation. In addition, one of the beauties of RNG is that it’s a platform fuel, so it can be converted to electricity or hydrogen very easily,” he told GWI.
“Organic waste releases methane to the atmosphere, and so if we take organic waste out of landfills and feed digesters, the RNG that’s produced is carbon-negative, because the feedstock was diverted and no longer releases fugitive methane to the atmosphere,” Scherson explained. Even if the fuel is subsequently burned – producing CO2 in the process – the emissions avoided by capturing the much more potent methane dramatically offset its effect on the environment.
The very fact that it is a carbon-negative fuel source is particularly appealing to those users who pay a premium to buy RNG on a voluntary basis in order to help meet their decarbonisation goals. The other avenue of demand is the compliance market, where certain organisations are required by regulation to purchase low-carbon fuels.
While people have traditionally turned to solar and wind to decarbonise in the electricity sector, RNG has emerged as the lowest-cost renewable power option for the large swathes of the US economy that are not in a position to make the shift to electricity as a power source. In this context, the end use of the RNG is critical, since the D3 RINs associated with producing RNG from wastewater biosolids are only generated when the end product is used as transportation fuel.
Financing
While the varying nature of wastewater-to-RNG projects means that financing them will inevitably need to be addressed on a case-by-case basis, the taxable green bond issued this month to part-fund the Pasco project could provide a blueprint for future projects.
“We were able to get an investment-grade rating for our P3, which is not typical, and we did a lot of structuring in order to keep our cost of capital down,” commented Tynan at Burnham. “We have an innovative risk-sharing agreement with the city, where they pay us for treatment services – almost like RNG-as-a-service.”
RENEWABLE NATURAL GAS P3S IN THE US WASTEWATER MARKET
The promise of valuable tax credits to offset the cost of building biogas-to-RNG infrastructure has created significant momentum among municipalities looking to monetise their biosolids. The limited availability window means that the market will need to get creative around when construction actually starts.
Source: GWI