Sliding prices may narrow development of one of last year's fastest-growing sources of California Low Carbon Fuel Standard (LCFS) credits.
Interlocking incentives led by the state's transportation fuel program spurred a nationwide build-out of projects to harvest methane from dairy cattle and swineherds over the past five years to produce more renewable natural gas (RNG).
But a surge in new credits helped cut LCFS prices by nearly half since January 2021. The drop may refocus investment in the largest, cheapest projects.
"Not every dairy farm is created equal," said Tyler Henn, Clean Energy Fuels vice president of business development and renewable natural gas investment.
California's LCFS program reduces the carbon intensity of transportation fuels through steadily falling annual limits on the amount of CO2 emitted during their production and use. Higher-carbon fuels that exceed the annual maximum incur deficits that suppliers must offset with credits generated by distributing approved lower-carbon fuels.
The lower or higher a fuel's score compared with the annual limit, the more credits or deficits it will generate. Dairy methane harvested and supplied to compressed natural gas vehicles has surged, in part due to scores that can place individual projects hundreds of points below the annual limit, many times lower than the nearest low-carbon competitor.
The gap translates to outsized credit generation. RNG made using dairy and other animal methane generated 2.1mn t of LCFS credits in 2021, or about 11pc of all new credits for the year. But dairy digester or animal waste gas made up just 1.5pc of alternative fuel volume in 2021 — displacing less than 2,800 b/d of equivalent diesel. Renewable diesel, which generated three times the credits of dairy and swine RNG last year, displaced more than 20 times the volume of petroleum diesel.
Spot credits have fallen to nearly $100/metric tonne from about $200/t at the beginning of last year. Supplies of new credits from renewable fuels outpaced the demand for higher-carbon gasoline and other fuel in 2021.
Dairy deluge
Thin margins and economies of scale have helped consolidate especially western US dairies to larger herds, according to the US Department of Agriculture (USDA).
Such concentration can reduce the investments needed to capture, process and connect harvested biomethane to US natural gas pipelines. It takes thousands of cows, either at a single large dairy or clustered across several operations, to produce sufficient gas. Projects need not always build new feeder pipelines — trucks can move compressed gas from some sites for injection.
State regulators need dairies and renewable natural gas infrastructure to capture more. California hosts about 20pc of all US dairies, and the operations produce the largest share of the state's methane emissions. California was on pace to meet just half of a targeted 40pc reduction in dairy methane emissions by 2030, according to California Air Resources Board estimated last year. The agency estimated that at least 160 additional dairies would need to use methane capture and processing to meet state goals.
California utilities also face renewable natural gas requirements. Southern California Gas expects RNG including landfill methane to make up 12pc of the gas it delivers to customers in 2030. Pacific Gas & Electric, California's largest utility, plans for RNG to make up 15pc of its gas by 2030, and already serves 22 CNG stations.
Competition for large or otherwise well-suited dairies soared with the combination of mandates and incentives, said Kevin Dobson, vice president of biomass for DTE Vantage.
"We are part of a big, $10bn company, and we are competing against, literally, people that work off of their kitchen table and drive a pickup truck into the farm," Dobson said.
But some dairies may lack manure management infrastructure, may lack easy access to offtake infrastructure, or need costlier equipment to produce the gas, Henn said.
The falling price environment raises the bar on project selection without halting it, Dobson said.
"You got to sharpen the pencil, you got to be a little bit more efficient," he said.
Reined in
Regulatory action could again curb the RNG boom. California limits methane emissions from landfills via another regulation. To generate LCFS credits, landfills must go beyond the cuts the state already requires. Gas captured from landfills averaged 8,260 b/d of diesel replacement but produced just 624,630 t of credits in 2021.
Regulators could still apply credit-slashing, landfill-style methane reductions to dairies. California's SB 1383, passed in 2016, authorized the state to regulate dairy methane as early as 2024. The state would need to consider dairy prices, the potential for dairies to move to other, less rigorous states, and assure that the regulations were "cost effective."
CARB has focused on incentives in communications about meeting dairy methane goals.
Environmental justice and animal welfare groups insist the incentives perpetuate large-scale agriculture that harms cattle, concentrates odors and wreaks other environmental damage. Some truck operators also question the long-term demand for the fuel.
The industry faces state mandates to electrify its fleets, with requirements that manufacturers making rising numbers of zero-emissions medium- and heavy-duty trucks available beginning in 2024. Major fleets that would otherwise prefer compressed natural gas were wary of heavy spending on those fuel systems, Western States Trucking Association head of regulatory affairs Joe Rajkovacz said.
"Those trucks are not even part of the future of what the California Air Resources Board wants to allow," Rajkovacz said.
