As a mounting number of companies commit to various decarbonization solutions, renewable natural gas could play an increasingly important role in the transportation sector – both as an outright replacement for diesel and gasoline and as the feedstock for bioproducts used in high-emissions, difficult to abate sectors.
Use as a feedstock in the development of bioproducts such as biohydrogen represents an emerging source of demand for RNG. Bioproducts will play a critical role in enabling the transportation industries' transition to a low-carbon future, yet challenges such as high costs, limited supply and regulatory uncertainty must be addressed for widespread adoption.
Renewable natural gas in the transport sector
Renewable natural gas – also referred to as biomethane – is biogas that is captured from decomposing organic waste from landfills, wastewater treatment facilities and livestock manure. RNG is considered a "drop-in" fuel, meaning it can be used interchangeably with fossil gas in a conventional natural gas transmission system when upgraded to pipeline specifications.
Currently in the US, the majority of RNG goes into the transport fuels sector where it is compressed or liquified and used to fuel natural gas vehicles. The concentration of RNG use in this sector has been driven by state and federal incentive programs, namely the California Low Carbon Fuel Standard and the US EPA's Renewable Fuel Standard.
RNG accounted for around 69% of on-road fuel used in natural gas vehicles in the US in 2022, according to a joint report from Natural Gas Vehicles for America and the Coalition for Renewable Natural Gas released in April.
RNG is often touted as a "fuel of the future" due to its low-to-negative carbon intensity and its interchangeability with fossil natural gas. For example, the average annual carbon intensity of bio-CNG under the California Low Carbon Fuel Standard in 2022 was -92.26 gCO2e/MJ. In comparison, the average carbon intensity of fossil CNG under the most recent LCFS current pathway data from the California Air Resources Board was 82.84 gCO2e/MJ.
RNG production capacity in 2022 saw a 218% increase over 2018 levels, with over 280 facilities currently under operation and nearly 500 more under construction or in development, according to the report.
Although production capacity is ramping up, RNG production is still only a small fraction of total US natural gas production, and the cost of RNG far exceeds that of conventional natural gas. Platts, a part of S&P Global Commodity Insights, assessed the value of the North America Renewable Natural Gas Premiums (California and Excl. California) at $30.45/MMBtu and $27.70/MMBtu, respectively, on July 18. In comparison, spot physical Henry Hub has averaged $2.41/MMBtu year to date on July 18, according to data from S&P Global Commodity Insights.
Moreover, there are questions about regulatory uncertainty surrounding RNG that could influence production levels and prices, including whether more states would implement Clean Fuel Standards and if Public Utility Commissions would grant approval on rate cases, the regulatory process that sets the rates a utility is allowed to charge customers, for the use of RNG by utilities.
Bioproducts for transport and shipping
Bioproducts, such as biohydrogen, are rising as innovative means to decarbonize the transportation and shipping sectors with these industries beginning to invest in and commit to sourcing "greener" fuels and feedstocks.
Biohydrogen is hydrogen produced through either the conventional production method of steam methane reforming or autothermal reforming with RNG or biogas from biomass as its feedstock rather than conventional natural gas.
Hydrogen is currently used as an alternative transport fuel in hydrogen fuel cell vehicles in the US, primarily seeing growth in California. This application of hydrogen has garnered popularity recently due to the fact that it only produces water when consumed in a fuel cell. In comparison with conventional gasoline vehicles, the use of hydrogen can reduce CO2 emissions by up to 90% depending on how the hydrogen is produced, according to the US Department of Energy.
Platts last assessed hydrogen prices at California fueling stations on July 5 at $28.23/kg, the highest value since the assessment's launch in September 2021.
Incentives for hydrogen production
A key incentive in the Inflation Reduction Act of 2022 targeted the scaling up of production of low-carbon hydrogen by making available a hefty hydrogen tax credit: the 45v clean hydrogen production tax credit.
The clean hydrogen tax credit amount is determined by the lifecycle greenhouse gases emitted during hydrogen production, with the potential to receive up to $3/kg of hydrogen if the lifecycle emissions are below 0.45 kg CO2e as well as following certain prevailing wage and apprenticeship requirements.
Market players have begun to consider various approaches to reducing their emissions enough to qualify for these tax savings. One approach, the use of RNG as a partial or total replacement feedstock, has been floated by the market as a potential way to lower lifecycle emissions due to its low-to-negative carbon intensity.
The feedstock of the RNG or biogas must be considered as carbon intensities can range significantly.
"One needs to be very careful about the feedstock used. Our analysis shows that the carbon intensity looks totally different depending on whether one is using woody biomass or waste biomass," said Anne-Sophie Corbeau, global research scholar at the Center on Global Energy Policy at Columbia University.
As a result, the exact blend rate of RNG and natural gas that would qualify for the 45v tax credit would depend on the carbon intensity of the RNG used.
The use of RNG for biohydrogen production in the US is still a gray area under the statute of the 45v tax credit, but it is currently recognized under the US Department of Energy's National Clean Hydrogen Strategy and Roadmap, which was released in June.
A remaining uncertainty about the regulatory implementation of the 45v tax credit is the approval of book-and-claim accounting for RNG, said Gabriel Olson, director of carbon strategy and policy at BayoTech, a leading producer of biohydrogen. Book-and-claim is a commonly used accounting mechanism where the end user can claim the carbon reductions of the RNG without receiving the physical molecules as long as it is injected into the interstate pipeline system.
"If this [book and claim] were to not be available, or if it's extremely restricted to specific gas distribution localities like in a particular state or county, it would fragment the market, reducing flexibility, and thus make it expensive and challenging to contract for a reliable source," Olson added.
Whether book-and-claim accounting is permitted will determine the practicality of using RNG as a feedstock to reduce emissions during the production of biohydrogen in an effort to qualify for the clean hydrogen tax credit.
Ultimately, the details of the regulatory implementation of the clean hydrogen tax credit will determine whether biohydrogen production makes sense economically, according to Alex Klaessig, S&P Global Commodity Insights senior director of the Hydrogen and Renewable Gas Forum.
"If the chips fall correctly regarding carbon accounting, the H2 PTC could make biohydrogen a bonanza," Klaessig said.