Cellulosic biofuel production took a giant leap in 2014, mostly from renewable natural gas and not so much from the two commercial-scale ethanol facilities brought online last year. In July, the U.S. EPA announced that cellulosic biogas used as transportation fuel could earn D3 RINs and in one month&rsquo;s time, D3 RINs generation soared from the 4,000 recorded for July to 3.49 million for August. In September, that more than doubled to 7.56 million. The total for the year stood at 33.02 million D3 RINs. Of that, 683,000 came from cellulosic ethanol. RINs are the renewable identification numbers used to identify and track biofuel production that obligated parties need to demonstrate blending for compliance with the renewable fuel standard (RFS). D3 is the RIN code for cellulosic biofuel, which includes ethanol, renewable diesel and, now, renewable natural gas.&nbsp;&nbsp; Biogas is nothing new. For more than 30 years, large landfills have been capturing methane emitted by decomposing organic material. Some wastewater treatment facilities, large farms and dairies, and food processing plants also produce biogas through anaerobic digestion. Historically, raw or minimally cleaned biogas has mostly been used to generate electricity to power the facility or sold to the grid. Green power earns renewable energy certificates (RECs), traded in both voluntary markets and in markets with state-level renewable portfolio standards requiring power companies to use specified levels of renewable power.&nbsp; In recent years, rising diesel prices prompted some biogas facilities to upgrade their biogas, removing CO2 and impurities to bring the methane content up to the same specifications required of fossil-based natural gas. The resulting high-Btu biogas is pipeline quality and can be used for transportation fuel when compressed (CNG) or liquefied (LNG). CNG has been the most common fuel used by fleets where medium-duty trucks are close to the fueling station, such as city fleets, local delivery trucks and waste haulers. LNG is typically used for heavy-duty trucks traveling along the growing network of LNG fueling stations. RNG and high-Btu biogas are terms being adopted by the industry to differentiate from natural gas, explains Johannes Escudero, executive director of the Coalition for Renewable Natural Gas. &ldquo;Chemically or molecularly, fossil natural gas and renewable natural gas are the same; they are primarily methane and carbon, with the primary distinction between the two being the source.&rdquo; The potential for RNG growth is substantial, he adds. &ldquo;Nationwide, there are 1,750 landfills that have not been developed. There are 17,000 wastewater treatment facilities that have potential to be RNG production facilities that have not been developed. There are more than 8,000 large farms and dairies and an average 66.5 million tons of food waste each year.&rdquo; If all those resources were converted into RNG, he estimates it would displace 7 billion gallons of diesel fuel. But, only a small fraction has been tapped to date. There are about 1,200 wastewater treatment facilities producing low-grade biogas, 240 anaerobic digesters at agricultural facilities and 636 landfills capturing gas. The landfills with high-Btu RNG facilities number just 42. The biggest barrier to biogas project development has been the $5 to $12 per million Btu (MMBtu) needed to develop a high-Btu project. &ldquo;When you compare the cost of RNG to fossil natural gas, especially with the current low rate of $3.50 or so Henry Hub pricing, how do you make those costs up in order to develop these projects?&rdquo; Escudero asks. &ldquo;The industry needs the incentives offered by policy programs like the federal renewable fuel standard and the state-level, low-carbon, clean fuel programs.&rdquo;&nbsp; The RNG coalition he leads spearheaded the effort to get EPA to approve RNG transportation fuel as a cellulosic biofuel generating D3 RINs. &ldquo;Last year, we testified before the U.S. EPA that there would be upwards of 100 million ethanol gallon equivalents of biogas generated for fuel purposes in 2014,&rdquo; Escudero says. &ldquo;The delayed RVO (renewable volume obligation) has impacted that, and reduced that number.&rdquo; The coalition recently surveyed its members and reported to EPA in a late-February meeting that they expect to produce 212 million ethanol equivalent gallons in 2015 and 363 million ethanol equivalent gallons in 2016. Market Dynamics The ability to earn D3 RINs has significantly improved the economics for high-Btu RNG, says Randy Lack, chief marketing director for Element Markets LLC. The company specializes in the marketing of environmental commodities such as renewable energy credits, emissions, greenhouse gasses, renewable fuel credits and biogas. &ldquo;We essentially partner up with biogas producers to take the biogas at the tailgate and do everything needed to realize the value,&rdquo; Lack says. Municipalities and small producers, he explains, generally do not have the capacity to handle all the details. Element Markets manages the agreements to generate renewable portfolio or renewable fuel credits. It manages the marketing of the RINs and hires the QAP (quality assurance) required by EPA for verification. Also, it can be difficult for a single player to establish itself with a large oil refiner looking to buy D3 RINs to fulfill its RVO quota. With its work in multiple environmental commodities, Element Markets has developed those relationships. &ldquo;I know that the market is still waiting on the RVO to be set, especially for 2015 and 2016,&rdquo; he says. &ldquo;We haven&rsquo;t seen the buying interest by the refiners pick up to the extent that it will, once the RVO is published.&rdquo; Refiners can meet their cellulosic obligation by buying and blending the fuel, buying D3 RINs or buying D5 RINs and paying the waiver price set by EPA. Thus the base value of a D3 RIN is a D5 plus the waiver credit, which is set in the RFS and adjusted based on the consumer price index. The traded value of D3 RINs is much more difficult to determine. &ldquo;Most of the transactions have been private party transactions and the D3 market isn&rsquo;t a quoted market,&rdquo; Lack says. &ldquo;A reason for that is that in 2014, there were 33 million D3 RINs generated in a market that needs 18 billion-plus RINs for all types.&nbsp; This is a very small sliver of a refiner&rsquo;s compliance. And it&rsquo;s a small enough amount of RINs that you are not going to see a bid-offer spread from a broker on a daily basis.&rdquo; The RINs value is a strong incentive. The average landfill site produces around 2,000 dekatherms a day, Lack says. (Each dekatherm earns about 11.73 RINs and 1 dekatherm equals 1 MMBtu). Thus, an average site would generate about 8.5 million RINs per year, if all the production were going to renewable transportation fuels. But the cost of extraction per MMBtu is highly variable and dependent upon not only the volume of gas produced, but its quality, and the proximity to a pipeline and the pipeline&rsquo;s quality specifications. California, for instance, has tight pipeline specifications that double the capital expense for a project, compared to other states. How fast RNG for transportation will grow also depends upon multiple factors in the power market. &ldquo;In the old days, when we had high electric prices, high natural gas and high-priced RECs, you were getting really nice long-term power purchase agreements,&rdquo; Lack says. Today, especially in the Midwest and Southeast markets, there are no good long-term price contracts for renewable power. The large CAPEX for high-Btu is another factor. &ldquo;In power, you can scale very well,&rdquo; Lack says. &ldquo;You put on one engine or two engines or more.&rdquo; There&rsquo;s an absolute economy of scale for gas upgrades, however. &ldquo;You cannot realistically do a high-Btu project, meaning into a pipeline, on a small-scale landfill project.&rdquo; &ldquo;The move to D3 is certainly motivating new development of biogas, but it&rsquo;s going to be hard to develop these facilities,&rdquo; he says. The lack of long-term offtakes is one factor, as well as RFS uncertainties. &ldquo;It takes a company with a large balance sheet and the ability to take on some regulatory and legislative risk to come in and develop these projects and make the investment, predicated upon selling RINs.&rdquo; The market for RNG is there, he adds. &ldquo;When diesel prices were higher, there was a tremendous adoption of CNG and LNG structure across the U.S. It happened pretty quickly, led by companies like UPS and Waste Management and Republic Waste. A lot of larger fleets made conversions and are using significant amounts of CNG or LNG.&nbsp;&nbsp; And that far outstrips the biogas supply.&rdquo; In supplying renewable content to natural gas, RNG is not competing with other biofuels, Lack points out, and the biogas and cellulosic ethanol producers have become brethren. &ldquo;We&rsquo;re not fighting. We&rsquo;re not keeping information from each other. We&rsquo;re at the table together. We want the cellulosic program to stay.&rdquo; Indeed, cellulosic biogas has instantly boosted the volume of cellulosic biofuel, muting the critics somewhat. &ldquo;We&rsquo;re going to give the cellulosic ethanol industry more time to ramp up and get to larger production volumes,&rdquo; Lack says. &ldquo;We&rsquo;re producing a zero carbon fuel, which EPA loves, into what has been an undersupplied and criticized market. I think the efforts of the biogas industry are going to do a lot to ensure the cellulosic market is functioning well.&rdquo;&nbsp; &nbsp; Author: Susanne Retka Schill Senior Editor, Ethanol Producer Magazine 701-738-4922 sretkaschill@bbiinternational.com

DRIVING ON LANDFILL GAS:  Since September 2009, Waste Management trucks around San Francisco have been filling up with LNG at the Altamont landfill. 

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Corporate greening efforts often turn to planting trees, but Clean Energy Fuels says a company would need to plant enough trees to fill 11 football fields to equal the greenhouse gas reduction from switching one heavy-duty truck to RNG. 

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FUELING UP:  Clean Energy Fuels, a member of the Coalition for Renewable Natural Gas,  is building a natural gas fueling station network. 

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FUELING UP:  Clean Energy Fuels, a member of the Coalition for Renewable Natural Gas,  is building a natural gas fueling station network.

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UPGRADING GAS:   The CAPEX for developing high-Btu RNG facilties, such as the one pictured here, ranges anywhere from $5 to $12 per MMBtu, depending on multiple factors.   

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Introducing renewable natural gas, the new player in the cellulosic RINs market.

The 2014 D3 RIN Leap—For Biogas

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