RNG 2015 Recap: Stronger and More Stable Market for Renewables
December 28, 2015
Earlier this month Michael Carim and I attended the Coalition for Renewable Natural Gas’s 4th annual Fuel, Heat, Power, and Policy Conference, held in San Diego, California. As members of the coalition and regular sponsors of the event, we’ve attended this conference in years past and were excited to see the number of attendees significantly increasing, with more than 150 participants representing various players in the renewable fuels marketplace. Overall, discusses focused on policies and market conditions supporting the development of renewable natural gas production and development. I’ve outlined some of the highlights for you here.
EPA Mandated Volumes Drive Demand and Fuel Production
The first day of the conference featured panel discussions where experts summarized and answered questions regarding the recent release by EPA of mandated volumes for renewable fuels under RFS2 for 2014, 2015, and 2016. Overall, the biogas producers I spoke with in San Diego were pleased with the increased mandatory volumes for cellulosic fuel for 2014 through 2016, though higher quotas would have put more pressure on obligated parties to secure RINs in advance. EPA addressed this concern by contending that unrealistic goals which are not linked to actual cellulosic fuel production capacity would elicit backlash from oil companies and, potentially, lawsuits to revise the goal later on. This discussion led to the acknowledgement that for biogas producers, QAPs are more or less mandated by the market since the perceived risks are significant enough to drive up prices for QAP-approved producers (or inhibit buyers from purchasing from small producers that do not have a QAP). Buyers will elect to buy D3 RINs instead of cellulosic waivers only if they are confident that the risk associated with RINs is very, very low.
The panel also discussed the effect the mandated volumes have had (and will have) on cellulosic D3 and advanced D5 RINs prices. Essentially, the differential between D3 and D5 RINs prices is based on the cellulosic fuel waiver, which is set at $1.33/ethanol gallon equivalent (EGE) for 2016, up from $0.64/EGE in 2015. In short, each EGE of biogas produced potentially earns the price of a D5 RIN (~$0.40) plus the price of the cellulosic waiver ($1.33 in 2016); the total is basically the price of D3 RINs. (There are 11.727 RINs for each MMBtu of biogas produced and used for transportation.)
In reality, buyers of RINs do not want to pay the whole cellulosic waiver price in addition to the D5 price, so most negotiate a discount. Discounts have become the norm due to the fact that the buyer could purchase the waivers from EPA instead of the D3 RINs and the associated risk due to potential invalidation down the road. Buyers have already shown reluctance in adjusting to the new 2016 waiver price, trying to continue purchases based on the much lower 2015 price, considering that the cost of biogas production has not increased.
LCFS Prices Steadily Rising, Verification Program in the Works
Prices for LCFS credits have quadrupled since the beginning of 2015,when LCFS was updated and re-confirmed, reaching $115/TCO2 (equivalent to $6-9/MMbtu, depending on the fuel pathway); there is confidence they will increase even more in the next few months since the regulation is more permanent . Any existing fuel pathways must be re-certified by January 31st, though most biogas producers have selected default pathway and carbon intensity (CI) values, so the re-certification process is more or less an administrative step.
Sam Wade of the California Air Resources Board (ARB) responded to questions regarding the upcoming verification and sustainability certifications for LCFS. The agency is reviewing EPA’s QAP program in conjunction with its own Mandatory Reporting Regulation (MRR) and offset verification program to develop an LCFS verification system. At this stage we anticipate the scope will be to verify both the pathway and CI determination on a regular basis, including the initial determination at registration. The verification program will also include assessment of the credits generated to confirm that the fuel was actually produced according to the procedures and technologies stated in the registered pathway. The process is still at an early stage, however, and Sam invited the stakeholders to provide comments to ARB. (See here for more information.)
Overall this year’s conference was a great opportunity to connect with the regulatory agencies, renewable natural gas producers, and service providers and share valuable insight that will inform next steps for the new year. I look forward to the new opportunities that will arise and milestones that we’ll achieve as the markets for RINs and LCFS continue to grow and evolve.