Renewable natural gas is sparking new interest from lenders and financiers close to Wall Street, with expanding subsidies for RNG production expected to support massive growth and investment in coming years.
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US RNG was a lead beneficiary of widespread support for lower-carbon investing in 2022, as large energy companies such as BP and Kinder Morgan, as well as large private equity firms, piled money into the sector. Another example of growing support for the industry came Jan. 5, when Clean Energy, a transportation-focused RNG marketer with over 550 fueling stations across North America, announced a four-year, $150 million term loan with a unit of New York-based asset manager Riverstone Holdings.
While sums involved in the transaction are relatively modest by energy industry standards, the transaction speaks to RNG's possible status as the decarbonization method of choice for many transport providers, according to the group underwriting the loan.
"We looked at a bunch of opportunities for renewable diesel and for renewable natural gas," Daniel Flannery, managing director of Riverstone Holdings, told S&P Global Commodity Insights in an interview Jan. 5. "But of all the deals that we've looked at ... we felt like this was the most sizeable, most mature, and was not just a speculative bet on regulatory policy."
RNG is made from biogas sourced from landfills, dairy farms and municipal waste centers that, after processing, can be placed on a traditional natural gas pipeline or used in an RNG-compatible vehicle. The industry has experienced tremendous growth in recent years as facilities have rolled out across the US and Canada, although production volumes remain tiny compared with traditional generation or transport fuels.
But Flannery expects that could soon change, considering new subsidies offered under the Inflation Reduction Act signed into law by US President Joe Biden last year. That $370 billion green energy salvo included an investment tax credit promising to reimburse up to 40% of a qualified biogas project's development costs, as well as a renewed $0.50/gal fuel tax credit for RNG used as a transportation fuel.
"Especially for a credit provider like our like us whose focus is to lend money, collect the return and get paid back, we felt the passage of the IRA [created] a lot of tailwinds and a very constructive underwriting environment for a company like this," Flannery said.
Setting aside subsidies for RNG -- which already include credits offered under the federal Renewable Fuel Standard and Low-Carbon Fuel Standard programs in certain states -- Riverstone also viewed RNG as a superior option to other low-carbon avenues transport operators might explore when looking to cut emissions in the next few years. For one, RNG sidesteps certain issues associated with other biofuels looking for market share in the long-haul trucking space, including food vs. fuel arguments linked to biofuels made from soybean oil, canola oil or other bio-feedstocks.
"There's definitely a more circular decarbonization story here that resonates," Flannery said. "To us [RNG] makes perfect sense as a bridge fuel that accomplishes customer sustainability objectives and has a place while we figure out a larger transition to carbon-neutral alternatives that will likely be hydrogen or battery-driven longer term."
Riverstone is not the only financier placing a bet on RNG's maturation. Last year, a unit of asset management giant Blackrock bought RNG producer Vanguard Renewables for $700 million, while New York private equity house Warburg Pincus extended a $320 million line of equity to fledgling RNG producer Viridi Energy as part of an expected $1 billion investment in US RNG opportunities.
While ESG- and sustainability-linked investing has come into vogue in recent years, these bets are about more than environmental credentials, in Flannery's view. His group is forecasting tenfold growth for US RNG production capacity in the long-term, from current levels around 220 MMcf/d to an ultimate potential around 2.2 Bcf/d, while near-term growth could explode following the IRA's passage.
"We think production capacity will grow 50%-ish by 2024 with the passing of the investment tax credit and the growth in new development projects," he said. "We think there's an opportunity to make a lot of money in the near term and medium term."
While financial support for RNG grows, it's not hard to find examples of the industry's acceleration, including new infrastructure. Opal Fuels, which touts a vertically integrated business model based around both RNG production and marketing, on Jan. 5 announced it reached full production rates at the first landfill gas to RNG facility in Florida, at the New River Solid Waste Association landfill in Raiford, Florida.
Companies like Opal Fuels and Clean Energy are taking different routes into RNG production, due largely to economics: last year Kinder Morgan CFO David Michels told S&P Global his company was valuing more "bite-sized" opportunities in landfill RNG, which typically require around $20 million-$50 million in development costs, instead of dairies, which he said can cost "well above around $100 million" to get off the ground.
Clean Energy, which focuses on dairy farm production rather than landfills, plans to use proceeds from Riverstone's recent sustainability-linked loan to fund "rapid expansion" of RNG projects at dairies it is developing alongside joint venture partners Total Energies and BP. The companies have set a goal to produce 105 million gallons of RNG by 2026.