RNG industry expects US voluntary customers to spur demand after early transport boom

Operators in the growing renewable natural gas industry in the US expect voluntary customers will take up an increasing share of demand in coming years, even if RNG for transportation has spurred the industry's growth over the last decade-plus.

Lucrative credits available under the federal Renewable Fuel Standard, as well as through Low-Carbon Fuel Standard programs in a few states, have made transportation markets the destination of choice for many RNG producers throughout the industry's early boom. But customers in the so-called voluntary market -- including utilities, universities and other companies that rely on natural gas-fired electricity -- could present a more stable demand source for RNG projects in the future as US corporates focus on reducing emissions.

A recent survey of 450 RNG producers by US clean energy consultancy EcoEngineers found that many companies are beginning to draw around $20/MMBtu for RNG sold into voluntary markets on a long-term basis. These stable supply arrangements could look increasingly attractive to producers -- especially if stakeholders are uninterested in the machinations of renewable fuel credits offered for transportation RNG, like Renewable Identification Numbers offered under the US Renewable Fuel Standard.

"Maybe $20/MMBtu isn't the sexiest thing when you have RINs at $2/gal or more this year," Paul Niznik, senior carbon consultant at EcoEngineers, told attendees at the 2022 Renewable Natural Gas Conference in Dana Point, California, on Dec. 14. "But that's a 10-year term flat contract, and your investors or your board or anybody else in your business might say, 'I don't understand RINs but if somebody's offering you $20/MMBtu so I don't have to think about them, that looks very attractive.'"

Financial, ESG drivers

Companies investing heavily in growing RNG business lines add that voluntary market deals can also lead to easier access to financing.

"Having that long-term customer on the back end makes it really easy to go and find financing," Casey Holsapple, VP of business development at US midstream operator Kinder Morgan, told S&P Global Commodity Insights on the sidelines of the RNG Conference on Dec. 14. "Whereas when you go to a bank or financial partner and you say, 'Hey, I'm finding my revenue solely dependent on D3 RINs,' they might go back to the past five years and see D3 RINs have gone down to 60 cents/gal at times ... so that volatility gives a lot of people pause."

S&P Global assessed D3 RINs for cellulosic biofuel at a $2.71/RIN midpoint for the week ended Dec. 15, down from prices closer to $4/RIN recorded earlier this year, but several times higher than prices observed just a few years ago.

Kinder Morgan is one of a few traditional oil and gas players investing heavily in US RNG, earmarking $1.1 billion in RNG-producing assets that it hopes will produce 7.4 Bcf/year of RNG by 2024.

The company began its RNG growth ambitions last year when it bought Kinetrex Energy for $310 million, and has this year purchased three landfill assets in Texas and Louisiana, as well as a portfolio of RNG and gas-to-power assets in Michigan and Kentucky. And while the midstream operator's landfill assets have thus far been mainly oriented toward servicing transport demand, Kinder Morgan expects environmental, social and governance factors will soon promote voluntary demand growth.

"There's a lot of what I call 'corporate ESG goals' that are being pursued and one strategy is to purchase RNG for hard-to-decarbonize facilities," Holsapple said Dec. 15. "There are also a lot of utilities in California that are getting interested in acquiring RNG just for system supply."

More than half of North America's 276 operational RNG facilities are in California, according to the Coalition for Renewable Natural Gas trade group. Utility SoCalGas has pledged to replace 20% of its gas supply with RNG by 2030, as it chases a goal achieve net zero greenhouse gas emissions in its operations and delivery of energy by 2045. The University of California school system currently touts itself as the largest RNG buyer in the voluntary space and has set a goal to secure 40% of its gas from renewable sources by 2025.

Price discovery

Transportation RNG -- which is typically priced around the value of conventional gas, plus D3 RIN credits -- is currently marketable between $30-$35/MMBtu, while RNG sold to utilities, manufacturers and other end users in the voluntary market is marketable between $20-$25/MMBtu, with normal production costs around $15/MMBtu and under, Kinder Morgan's Holsapple told S&P Global.

But those voluntary RNG economics are likely to become even more attractive in the future, according to EcoEngineers' Niznik.

"We're starting to hear that longer, flat-price contracts that are longer than 10 years and closer to 20 years are getting higher rates," Niznik said Dec. 14. "That means that the end buyers who are out there in this voluntary market agree that this market is going to get bigger over time and that it's worth it to lock in supply."

Members of the Coalition for Renewable Natural Gas trade group intend to have 500 RNG facilities operational in North America by 2025 and 1000 facilities online by 2030, building to a long-term goal to capture and control methane from 43,000 organic waste sites across the continent by 2050.