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Energy & Power – Biofuels: Renewable Natural Gas Stifel Equity Energy & Power – Biofuels: Renewable Natural Gas A game-changer in the race for net-zero Stifel Equity Research | March 8, 2021 Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in their investment decision. All relevant risks, disclosures and certifications appear on pages 58-61 of this report. Key contacts Derrick Whitfield Energy & Power – E&P and Biofuels Managing Director, Stifel Equity Research (214) 706-9451 [email protected] John Annis, CPA Energy & Power – E&P and Biofuels Associate Analyst, Stifel Equity Research (214) 647-3528 [email protected] Billy Howell Energy & Power – E&P and Biofuels Associate Analyst, Stifel Equity Research (713) 237-4531 [email protected] Nate Pendleton, CFA Energy & Power – E&P and Biofuels Associate Analyst, Stifel Equity Research (214) 706-9457 [email protected] Stifel | Renewable Natural Gas 2 Contents Executive Summary ..................................................................................................................................................... 4 Introduction .................................................................................................................................................................. 7 RNG Overview .............................................................................................................................................................. 8 What is RNG? ........................................................................................................................................................... 8 RNG Feedstocks ...................................................................................................................................................... 9 RNG Production Processes .................................................................................................................................... 9 RNG Environmental Benefits ................................................................................................................................ 10 Monetizing Environmental Attributes of RNG ..................................................................................................... 11 RNG Demand .......................................................................................................................................................... 12 RNG Supply ............................................................................................................................................................ 16 RNG Economics ..................................................................................................................................................... 16 RNG Feedstocks ........................................................................................................................................................ 20 RNG from Landfills ................................................................................................................................................ 21 Landfill gas RNG project economics ................................................................................................................... 24 RNG from Animal Waste ....................................................................................................................................... 25 Dairy RNG project economics ............................................................................................................................. 28 Chicken litter RNG project economics ................................................................................................................. 29 Swine RNG project economics ............................................................................................................................ 30 RNG from Water Resource Recovery Facilities .................................................................................................. 31 Water resource recovery facilities economics ..................................................................................................... 32 RNG from Thermal Gasification............................................................................................................................ 34 RNG Policy and Regulatory Support ........................................................................................................................ 36 U.S. Renewable Fuel Standard ............................................................................................................................. 36 California Low Carbon Fuel Standard .................................................................................................................. 39 Other State-Level Programs ................................................................................................................................. 40 RNG for Power Generation ................................................................................................................................... 40 RNG Voluntary Programs ...................................................................................................................................... 42 Canadian RNG Policies and Regulations ............................................................................................................ 43 RNG Operators ........................................................................................................................................................... 45 Important Disclosures and Certifications ................................................................................................................ 58 Stifel | Renewable Natural Gas 3 Executive Summary A game-changer in the race to net-zero We are bullish on the fundamentals of renewable natural gas (RNG) as it is positive for the environment (net negative carbon form of energy post-combustion), it is economic today (10-60% project IRRs), and offers immense growth potential (IEA projects an 18x increase in supply by 2040). Furthermore, for the world to get to net-zero by 2050, we need a lot of net negative carbon sources of energy, given that the most prevalent conventional (fossil fuels) and renewable (solar, wind) sources have positive carbon intensity profiles over their lifecycles (Figure 1). As a result, we believe the premium for RNG projects with negative carbon intensity profiles will only increase over time as investors internalize this reality. Irrespective of the final energy product, these projects are part of the solution. What is RNG? Biogas is a renewable energy source comprised of a mixture of methane (CH4), carbon dioxide (CO2) and small quantities of other gases produced by anaerobic digestion of organic matter in an oxygen-free environment. Biomethane, or renewable natural gas (RNG), is a near-pure source of methane produced either by “upgrading” biogas or through the gasification of solid biomass followed by methanation. RNG is indistinguishable from conventional natural gas and can be used without any changes to transmission or end-user equipment. If RNG is still a hydrocarbon, why does it matter? RNG is a net positive for the environment. In short, not all greenhouse gases (GHGs) are created equally. While methane only accounted for 10% of all U.S. GHG emissions in 2018, methane is one of the most potent GHGs with a global warming potential that is 28x to 36x greater than that of CO2, according to IPCC. According to the EPA, in 2020, 30% of human-caused methane emissions in the U.S. stemmed from organic wastes at farms, landfills, and water recovery facilities. RNG enables the capture of these emissions that would have otherwise been released into the atmosphere and is used to displace fossil fuel consumption. RNG is economic today and improving. In 2020, dairy and landfill gas projects earned average price realizations of $100/mmbtu and $30/mmbtu, respectively, well above their respective average cost of supply. Based on our assessment of over 20 projects across the primary RNG feedstocks (landfill, animal manure, wastewater), we estimate the industry generates project-level IRRs in the 10% to 65% range assuming strip prices and current federal and state program. We expect returns to improve as operators advance anaerobic digestion technology, improve operating efficiency, and better integrate digestate sales into their operations. RNG offers a differentiated source of growth. RNG production has grown by a 17% CAGR over the last 15 years and is expected to grow at a 16% CAGR over the next 20 years based on the IEA’s Stated Policy Scenario. As of year-end 2020, there were 157 RNG projects operational in the U.S. According to the AgSTAR database, only 58 active animal manure projects were operational out of the over 22,000 potential locations. We estimate approximately 4,800 farms are commercially viable based on ICF’s economic thresholds for the low potential scenario (+1,000 cows, +5,000 pigs). Assuming only select dairy and swine farms, that represents a +80 fold increase in potential projects. Stifel | Renewable Natural Gas 4 Executive Summary (cont.) Is policy supportive? Policy has been the single most impactful catalyst. The combination of policy (Senate Bill 1383, requiring reductions in short-lived climate pollutants)
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