Title: Renewable Natural Gas – The Next Frontier
Speakers: Andrew Thurmond and Clayton De Arment
Andrew Thurmond (00:07):
Hey, Clayton. Thanks for joining me to talk about renewable natural gas. It’s a very exciting space to be in. It’s a lot of changes, a lot of new things happening. So for starters, can you tell me a little bit about what is renewable natural gas? What is RNG?
Clayton De Arment (00:22):
Renewable natural gas is essentially made by the decomposition of waste material and the waste material decays and is collected and refined into pipeline quality gas.
Andrew Thurmond (00:38):
Right. And the idea behind this is that a lot of these projects, a lot of these waste materials are just creating carbon. They’re adding carbon intensity — the buzzword, CI. And so you’re measuring how much carbon intensity is coming from a project beforehand from a waste material and then how much does your project really reduce the carbon in the atmosphere? And that’s what we’re all looking to do here, right? Is kind of this reducing the amount of carbon in the atmosphere, capturing it and then of course turning it into something you can use in the home or use in a business.
Clayton De Arment (01:12):
That’s right. And methane obviously is one of the largest, most detrimental greenhouse gases. By capturing it and refining it and using it, you’re actually producing a fuel and replacing a fossil fuel with something that is renewable and theoretically carbon negative.
Andrew Thurmond (01:36):
And now there’s some federal incentives for RNG projects.
Clayton De Arment (01:41):
That’s right. Over the last several years, the interest in RNG has been growing. But within the last year, the passage of the Inflation Reduction Act has really increased interest in the RNG space because it has added tax credits back to RNG.
Andrew Thurmond (02:00):
Probably why someone’s watching this video.
Clayton De Arment (02:02):
Yeah, exactly.
Andrew Thurmond (02:03):
Yeah, you talked about the decomposition of materials and there’s really four major ones we see out there that we focus on and maybe five. So it’s agricultural waste, which is dairy and swine — cow and pigs. We see a lot of those because of course their waste products produce a lot of methane. Then there’s food waste. So just the food — bananas, apples, anything that you would put in a composter — similarly gets captured and produces methane. We’ve got waste water and then landfill gas. Landfill gas meaning that a landfill, when you send your trash to a landfill, it’s actually emitting a lot of gas too. And that’s probably the oldest RNG technology that’s been out there and the most established of how to capture it and everything like that.
Clayton De Arment (02:50):
Yeah. So essentially anytime you’ve got a large amount of waste material that is producing methane in one spot, that makes for a good source for an RNG project, whether that be at a dairy farm where all the cow manure is all in one spot and can be easily put into a digester.
Andrew Thurmond (03:13):
Yeah. Although for food waste, we’re actually telling people to bring the waste to our plant. We are the ones who tell people to put the waste in this one spot, but then that creates the aggregation to have enough gas to make it a financeable and viable project. All right, Clayton. So let’s talk about how it works, recognizing that this is two lawyers talking about some highly technical stuff.
Clayton De Arment (03:34):
Yeah. So I guess we’ll talk about it at a kind of a base level.
Andrew Thurmond (03:39):
Maybe a lawyer’s understanding level.
Clayton De Arment (03:40):
Yeah. RNG is produced by the decay of organic material and the methane produced through the decay of the organic material through anaerobic digestion. And essentially you just need material decaying and something to capture it. So the material is generally put into what you call a digester and you allow the anaerobic digestion process to take hold. And sometimes you heat the material up to speed that process up and that process produces methane, which is then taken out of the digester and cleaned up through a process called upgrading where you pull out the impurities and refine it into gas that’s pipeline quality — it can be injected into a pipeline and burned just like fossil natural gas.
Andrew Thurmond (04:34):
Right. And so really there’s a few steps that are happening there. First, you capture the gas, then you transport it to your digester, and then you do whatever magic that happens with either enzymes or heating it up or whatever needs to be done to produce more gas out of it.
Clayton De Arment (04:55):
That’s the technical part.
Andrew Thurmond (04:57):
So it comes from the digester and then it’s going to this upgrading facility where some very technical stuff happens where the gas goes from a low quality gas that you couldn’t really use in anything other than like a cogen type of heating scenario. It’s treated so that then you can, as you mentioned, put it into the pipeline and it becomes the gas that you have in your home — in your stove or to heat your house or anything like that.
Clayton De Arment (05:27):
Yeah. When it’s coming off of the digester, there may be 60% methane, say, and when you need to get into the pipeline, you need say 95% or more. So the upgrading facility is taking that and pulling out the impurities and concentrating it into a higher concentrated methane that can burn just like any other fossil natural gas.
Andrew Thurmond (05:52):
It’s just the gas that’s in your home. No one knows if it came from a dairy farm or what the source really was. It’s all — the intent is that everything looks the same and that’s what the pipelines and the utilities require, so that it all can just be used interchangeably.
Clayton De Arment (06:09):
Yeah, it should all become kind of fungible methane that you can burn in any way that you would burn fossil natural gas.
Andrew Thurmond (06:17):
So then we probably should talk about what we do, right? What the lawyers do, which is how do these projects get structured? What are the key terms? What are the key considerations? What are the new things that we’re seeing?
Clayton De Arment (06:30):
The hottest thing would be investment tax credits and the impact that’s having on projects and the industry in general. That’s obviously generated a lot more interest and excitement. But I feel like there’s a few different ways that people get into the RNG landscape and it’s — you acquire a project that a developer is developing, or you partner with somebody that has a source of that sort of waste materials that will be the feedstock for the project.
Andrew Thurmond (07:06):
So a dairy farmer, a pig farmer, the owner of a landfill, the owner of a wastewater treatment facility — those type of entities that already have the gas, they’re already dealing with permitting obligations and other requirements. Maybe if it’s a landfill, they’re using a flare and they’re looking for an opportunity to monetize that gas that’s already being generated at their facility.
Clayton De Arment (07:28):
That’s right. And you can structure that as a joint venture. You can buy the project outright and have an agreement to source gas or feedstock material — in the animal waste universe that’d be a manure supply agreement, or in the food waste —
Andrew Thurmond (07:49):
Food waste would be a food waste supply agreement, or a tipping agreement. You actually sometimes can see where if you build a food waste processing facility digester, you’ll enter into these long-term agreements with restaurants and other places that have a lot of food waste and it’s effectively a supply agreement — just a little different than what you see in dairy, pig, or even landfill gas. The supply is a little different because you’re asking people to bring it to you as opposed to going to the source. Kind of all the same. And then you mentioned developers too, so you could enter into a long-term development agreement with someone.
Clayton De Arment (08:27):
Yeah, that’s another structure we’ve seen where there’s a developer that may have the relationship with the farmers or food waste parties. They kind of will set up the projects and take them through the construction phases, and bring the projects to you as the acquirer — and the money — to actually fund them and take them from the development stage to a built-out completed project where it’s actually producing.
Andrew Thurmond (09:02):
Right. And all the key agreements could probably benefit from their own video to discuss every key aspect. And that’s where we come in, of course. So some of those agreements you mentioned at the upfront — the M&A agreements or a joint venture development agreement. Then of course there’s a supply agreement, we already talked about that a bit. Then you have to build everything, so we get involved with EPC contractors or construction contracts. Oftentimes, depending on who our client is, we’ll see construction management agreements. There’s O&M agreements, so somebody’s responsible for the long-term maintenance.
Clayton De Arment (09:41):
Yeah, so that’s an operation and maintenance agreement where they will come in and operate it once the project’s built.
Andrew Thurmond (09:47):
Yeah. And the chemistry on these things is so unique or special that it really does require a special operator who knows what they’re doing and knows how to balance the project to make sure it’s maximizing the gas and complying with all the requirements to deliver pipeline quality gas. Sometimes you have to interact with the pipelines, of course. So you’re building out your pipeline to be able to inject into whatever your off-taker’s pipeline is. So that’s a key agreement.
Clayton De Arment (10:17):
Well, certainly offtake is critical as that’s kind of how you’re going to monetize the gas that you’re producing.
Andrew Thurmond (10:26):
And environmental concerns. Of course, we’re talking about a gas that can leak and there’s all kinds of environmental restrictions around that and permitting restrictions that are pretty critical to these projects. Making sure you have the right people in place to comply with your permitting will save you a lot of heartache down the road.
Clayton De Arment (10:44):
Yeah, those are — it’s a good point that environmental concerns are key. Probably more environmental concerns than if you’re putting up solar panels.
Andrew Thurmond (10:54):
Sure, because of course for agricultural waste or landfill gas, we’re talking about operating projects where you’re really coming onto this operational project, trying not to disturb anything with how the landfill operates or how any of the farmers operate, but just extracting the gas. And so you have to navigate their permitting obligations. You have to navigate their uses.
Clayton De Arment (11:16):
Yeah, they’ve got storm water issues that you have to navigate. You have to make sure that they’re complying and — you have waste material, you don’t want that in the water supply. But then you also have the air permits as well because you’re producing gas.
Andrew Thurmond (11:27):
Exactly. And landfill gas permitting requirements and restrictions are very complicated and really require a lot of delicate touch to make sure that you were achieving the commercial goals while also not violating anything that the landfill’s required to.
Clayton De Arment (11:44):
Well, yeah. If you’ve got a landfill, there’s plenty of permits related to the landfills that you have to navigate. So that’s important. A very important consideration is how those landfill permits operate and who has the responsibility on those permits. And it’s an issue in the farm space too.
Andrew Thurmond (12:02):
Right. And then I think you’ve mentioned this — the Inflation Reduction Act and how that is going to come into play means there’s a lot more money in the space now. So we’re looking at debt, so credit agreements, but also a new space that folks really need to be thinking about is the tax equity space. So we’re going to have some really good experts who are really experienced in the tax equity space talk about how the Inflation Reduction Act will work in the renewable natural gas space. So we’re not the lawyers to talk about that, but it’s going to be a very key issue for folks who are looking to take tax credits on these projects for whatever’s out there that’s available.
Clayton De Arment (12:43):
Yeah, I suspect there’s going to be a lot of interest in how you can monetize those tax credits, just like it has been with solar or wind — wherever there are tax credits available, the ability to monetize them is going to be a key consideration going forward. And I think there’s still a lot left to be figured out, much like across the board with respect to the Inflation Reduction Act, how the rules are going to work. But I think that’s particularly key in RNG, so that’s going to be a space to watch going forward — how it’s working through with IRS guidance on what’s going to qualify and how.
Andrew Thurmond (13:27):
All right, Clayton. So say I’m new into the RNG space. Say my company gave me a mandate that we want to get into this space, or I’m a sponsor looking to get into this space. What are some of the key contracts I should be thinking about? What are some of the other key things I should be thinking about?
Clayton De Arment (13:44):
I think it’ll depend on how you end up coming into the space. So I think you want to think about: are we going to acquire projects directly? Are we going to try and develop them ourselves through contacting people that have a kind of a waste feedstock and starting soup to nuts —
Andrew Thurmond (14:08):
So being the developer?
Clayton De Arment (14:09):
Yeah, essentially being the developer, or partnering with a developer. You can acquire a project from a developer, you could be the developer yourself, or you could partner with the developer in a development agreement where they bring projects to you. Maybe you have a long-term arrangement where they bring all the projects in a certain state or these type of projects to you. But once you’ve decided which direction you’re going — if it’s acquiring projects, obviously you’ll need your normal suite of M&A project documents. You’ll buy the project and then depending on the state of development, you’ll need to figure out whether that project came along with an EPC agreement or whether you need to go out and find a construction contractor to actually build the project.
And once you’ve built the project, you’ll need to operate the project. Either you operate it yourself or find a third party to operate it. And then —
Andrew Thurmond (15:12):
And if you’re new in this space, you’re probably looking for someone to operate it for you, or you’re going to bring someone in-house who has that experience, because these are pretty highly technical projects. To make sure that you’re producing the right amount of gas and getting it refined the right way really requires a lot of expertise and experience.
Clayton De Arment (15:31):
That’s right. And I think once you’ve gone past the stage of having acquired or developed a project, this suite of documents will kind of all be the same. You’ll need construction contracts, you’ll need your operation project contracts, and you will need your off-take agreements to be able to move the gas and send it into a pipeline to get compensated. And then you’ll want to think about contracts with respect to credits.
Andrew Thurmond (16:06):
Sure. And of course you need supply too. You need a consistent feedstock, which we’ve talked about. Depending on the type of feedstock, you need a really dedicated supply. Either you’re going to the farm or to the wastewater treatment plant or to the landfill, or you’re having food waste come to you, but you need some type of guaranteed supply to make this whole thing work — because otherwise you can’t build a project without the waste.
Clayton De Arment (16:31):
Exactly right. That was a key piece — you obviously need the feedstock to be feeding your project or you’re not going to generate a whole lot of gas if you don’t have the waste material there. Well, thanks, Andrew. It was great to be here and talk with you about this stuff.
Andrew Thurmond (16:45):
Yeah, thanks for having me. I thought this was a really fun conversation.
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