Northwest Natural Holding Co. is expanding its role in the growing renewable natural gas market with the formation of a subsidiary focused on supplying renewable fuels to utilities and commercial, industrial, and transportation sector customers across the U.S.

The utility operator on Nov. 5 announced the new nonregulated business line, NW Natural Renewables, would provide fuels processed from existing waste streams and renewable energy sources. The company said it would lean into the insights and capabilities that it has developed through its energy transition initiatives.

Northwest Natural, which does business as NW Natural, has previously entered into deals to invest in RNG facilities and purchase the fuel, leveraging a nation-leading RNG tariff, which the company helped develop alongside Oregon lawmakers and regulators. The company has also pioneered the use of voluntary carbon offsets and decoupling mechanisms to encourage energy efficiency, NW Natural President and CEO Dave Anderson told investors during a Nov. 5 conference call.

"All of that work has culminated in the firm belief that there's a large and long-term need for renewable natural gas," Anderson said. "In the midst of a historic energy transition, the demand for renewable fuels is only going to continue to grow."

RNG business strategy

NW Natural forecast that low-cost RNG supply will outstrip demand in the near-term, as voluntary and compliance-driven targets among states and utilities stoke consumption.

Anderson said the company was not prepared to say what percentage of overall earnings it expects to generate from NW Natural Renewables. Utility operators typically aim to limit the earnings contribution from non-regulated businesses to defend their credit metrics.

The company will primarily seek to acquire or develop RNG projects once key permits and feedstock and lease agreements are in place, NW Natural Vice President for Strategy and Business Development Justin Palfreyman said. In doing so, the operator will aim to understand design and construction costs prior to making an investment and ensure that contracts minimize risk.

"When we're talking about how big this business could get, it's really a function of the risk profile and how we will be able to manage that going forward," Palfreyman said. In order to ensure predictable cash flows, the company intends to build a diverse portfolio of projects with long-term, fixed-price contracts that have limited exposure to volatile federal and state renewable credit markets, Palfreyman added.

The company's first partnership with Brisbane, Australia-based EDL Energy, which owns and operates a portfolio of landfill gas-powered stations, reflected that strategy. NW Natural said it had entered into agreements with EDL Energy to secure 20 years of RNG supply, which its renewable subsidiary plans to market under long-term contracts.

NW Natural gravitates toward landfill gas

NW Natural Renewables' first investment will be a $50 million project with EDL to develop RNG production facilities at two landfills. The projects will convert landfill waste gas into RNG for injection into regional pipeline networks. The partners plan to begin construction in early 2022 and complete the projects in the first half of 2023. The company declined to identify the landfill locations and owner.

Asked whether the subsidiary will branch into dairy and agricultural methane waste projects, Palfreyman said the company is looking into a variety of feedstocks but was attracted to the cost profile of landfill gas projects.

He said dairy and agricultural projects sometimes have higher underlying operational and overall capital costs relative to the volume of RNG they are able to produce. Those facilities also tend to be exposed to California's Low Carbon Fuel Standard market, which the company is trying to avoid, he added.

Activities at the subsidiary will be separate from the NW Natural's efforts to purchase RNG and invest in facilities to fulfill voluntary RNG targets. The company has entered agreements to purchase or develop RNG resources equal to 2% of its annual sales volume in Oregon, unchanged from an update in the last quarter. Under Oregon Senate Bill 98, the company can spend up to 5% of annual sales over the next few years, with the ceiling rising going forward.

Pressure to decarbonize grows in Northwest

The announcement marks NW Natural's latest move to diversify its business, which is still focused primarily on gas utility service in eastern Oregon and southern Washington.

Several cities in the company's service territory are considering building electrification measures in their climate action plans, following a trend pioneered on the West Coast in California and Seattle. While some climate activists argue electrification mandates are necessary to curb gas use and associated emissions, NW Natural has opposed gas bans, arguing instead for decarbonizing the gas grid.

"Central to this strategy is the belief that a diversified energy system is more affordable, more reliable, and importantly, more resilient," Anderson said. "Diversification helps us effectively meet different energy needs and will be even more important going forward as climate change and severe weather pose new risks."

In addition to branching out into renewable fuels, NW Natural has expanded its footprint in the water utilities business since its initial acquisition of two water utilities in Oregon and Idaho in December 2017. It has also been developing a green hydrogen pilot project over the past year.

NW Natural on Nov. 5 reported a net loss of $20.7 million for the third quarter, compared with a loss of $18.7 million in the year-ago period. Its EPS loss of 67 cents beat S&P Global Capital IQ consensus expectation for a 78 cents loss per share, but widened from a year-ago loss of 61 cents per share. Net income in NW Natural's gas distribution segment fell $1.2 million on higher operations and maintenance expense and depreciation cost.