Policy Outlook Informs Sensitivity Analyses of Biogas Alternatives

Introduction After four decades of operating a cogeneration facility to produce electricity and heat, Metro Water Recovery (Metro) commissioned a Biogas Utilization Study in 2021 to consider historical and new beneficial uses of biogas at their Robert W. Hite Treatment Facility (RHWTF) that serves Colorado's Denver metropolitan area. While cogeneration has been the industry standard for biogas utilization at water resource recovery facilities (WRRFs) for decades, biogas upgrading to renewable natural gas (RNG) has become more prevalent due to federal incentives available under the Renewable Fuel Standard (RFS) program created under the Energy Policy Act of 2005. And while the RFS program has been the historic driving force behind the shift to RNG, a drive by major companies to reduce the carbon footprint of their operations are leading to further incentives for biogas, potentially mitigating the risk of relying on a single revenue stream. This study investigated two alternatives for beneficial reuse of the biogas resource at Metro's RWHTF: - Upgrade and continue to operate the Cogeneration Facility to generate electricity and heat using biogas. - Construct a new facility that converts biogas into RNG for direct injection into a natural gas pipeline owned by Xcel Energy (Xcel) and monetize the RNG. While WRRFs across the country have embarked on similar evaluations; this project was unique in that it included an in-depth evaluation of the long-term viability of financial incentive markets, sustainability impacts, future natural gas demand, and the potential impact from current and future state policies. This evaluation was then used to inform sensitivity evaluations of the two alternatives to facilitate decision making. Monetizing RNG The study evaluated four pathways for Metro to generate a revenue source from their RNG. These revenue sources included: 1. Sale of brown gas, 2. Participation in the Renewable Fuel Standard (RFS) program, 3. Participation in state-specific Low Carbon Fuel Standard (LCFS) programs, and 4. Participation in the voluntary market. The sale of brown gas is typically tied to regional natural gas indices, with revenue calculated based on the amount of gas injected into the natural gas utilities' pipeline. The sale of brown gas can be paired with renewable credits as shown in Figure 1. The study evaluated the long-term viability of the RFS program, considered the potential for an LCFS program in the State of Colorado, state legislature geared towards the reduction of the carbon footprint of building heat, and reviewed the strength of voluntary markets. The renewable volume obligations (RVO) under the RFS are set to expire at the end of 2022, and members of Congress have voiced support for the replacement of the RFS with a national LCFS program (similar to California) that provides incentives for a wider range of low carbon fuels. To date, there remains a significant gap in RNG supply to meet the originally planned renewable volume obligations. Whether the RFS program is continued or replaced by an LCFS program, it is anticipated that a system of federal renewable credits will remain in place for the foreseeable future for RNG. The viability of an electric renewable identification number (e-RIN) pathway was also considered; however, the EPA has not approved any such project, despite receiving approval requests. The Colorado Energy Office recently evaluated the viability of an LCFS program for the State of Colorado. This report (Low Carbon Fuel Standard Feasibility Study, September 2020, ICF Resources, L.L.C.) stated that, 'Experience in California, Oregon and British Columbia has shown that LCFS programs can deliver on the above policy objectives, and that LCFS programs are a cost-effective mechanism to reduce GHG emissions and increase the share of lower carbon fuels in the transportation sector, while having a smaller cost impact on retail fuel prices relative to other decarbonization policies.' No movement has been made to date by the State legislature to introduce such a program. Many corporations and utilities have established 'carbon-free' energy goals, which has created a voluntary market for RNG. Due to the higher RIN pricing, increasing RNG demands in the voluntary markets have resulted in increasing value and revenue potential. Table 1 shows the pricing variability for the voluntary markets and illustrates the increases in the market based on current conditions and drivers towards RNG sustainability goals. Long-term Natural Gas Demand As the energy sector transitions to meet renewable energy goals, there is increasing demand for natural gas that is anticipated to continue through 2050. The U.S. Energy Information Administration (EIA) projects increasing demand for compressed natural gas (CNG) over the next 30 years at 1 percent compounded annually. CNG demand is also expected to remain strong in the transportation sector, despite the focus on electrification of light-duty vehicles. CNG continues to be the major fuel source for heavy-duty vehicles. Figure 2 expands on the uses of CNG in the transportation sector and demonstrates there is a steady increase in CNG consumption through 2050. As Xcel, the local electric and natural gas utility, further develops their renewable energy portfolio to meet their 2050 carbon-free electricity goals, natural gas is anticipated to remain the backbone of reliable energy sources and backup emergency power for the next 20 years. State of Colorado Policy Impacts The State of Colorado is targeting a reduction of greenhouse gas emissions by 90 percent of the 2005 values by the year 2050. Legislation approved in 2021 requires natural gas and electric utilities (i.e. Xcel) to reduce the use of natural gas by consumers. Xcel could purchase RNG from Metro to decrease the reliance on natural gas. While a cap-and-trade program introduced this year was vetoed by the Governor, the Public Utility Council is currently reviewing a means of implementation for the legislation which could include an avenue for RNG. Alternatively, Metro could decide to pursue this type of program on a voluntary basis with other states or utilities that have existing programs. While the State has evaluated different types of RNG legislation and potentially creating their own LCFS program, nothing has materialized that would influence Metro's decision on which biogas alternative to move forward with. Variability of Utility Costs Electricity and natural gas costs are large operating expenses for Metro's annual budget. Pricing volatility for electricity and natural gas could impact either of the biogas alternatives. The EIA forecasts that increasing renewable energy capacity will result in a slight decrease of electrical rates through 2050. However, regional differences will occur based on the level of renewable energy in the regional electric utility's portfolio. According to the EIA, natural gas pricing fluctuates based on weather, economic growth, market competition, gasoline prices, and availability. Figure 3 illustrates the yearly average Henry Hub natural gas spot pricing. Sensitivity Evaluations Sensitivity analyses were developed to capture the financial viability of both alternatives based on the changing future conditions described above. Figure 4 presents the range of life cycle costs for the cogeneration alternative, with consideration of changing electricity prices and renewable electricity credit value. Figure 5 presents the range of life cycle costs for the pipeline injection alternative, with consideration of RIN pricing, voluntary market, and natural gas market volatility. Based on the sensitivity evaluations, the pipeline injection alternative in almost all cases provides a positive financial return to Metro when compared to the cogeneration alternative. The pipeline injection alternative has a simple payback of 3 to 10 years depending on the revenue model. When comparing the base case alternatives, pipeline injection has a 20-year net present value that is $205 million higher than the cogeneration alternative. Based on the recommendations of this study, Metro is planning to proceed with preliminary design and development of a biogas upgrading and pipeline injection system.