Renewable Natural Gas – Driving Sustainability Goals and Navigating Legal Issues David McCullough, Partner Eversheds Sutherland LLP October 30, 2020 © 2020 Eversheds Sutherland (US) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com. What is Renewable Natural Gas/Biomethane/Biogas? ─ RNG, biomethane and biogas are all terms that relate to the gas (composed primarily of methane) produced from the breakdown of organic material at various locations, including: • Landfills • Wastewater treatment facilities • Dairy, swine, poultry farms and facilities • Food and organic waste collection ─ “Biogas” typically refers to the raw, unprocessed gas that is collected at the source where the breakdown of organic material is occurring. ─ Renewable natural gas (“RNG”), also sometimes referred to as “biomethane”, typically refers to biogas that has been processed and upgraded to pipeline quality specification. This is done through removing a number of the impurities contained in the biogas. • Once upgraded to RNG, the product is commercially interchangeable with traditional natural gas shipped on pipelines and by other means. ─ These terms may be defined differently or undefined under various regulatory programs. The industry often uses them interchangeably, but the definitions above are the most commonly understood. Eversheds Sutherland 2 What is driving investment in RNG? ─ RNG Projects are driven by monetization of the environmental attributes associated with the Project. Over the years, keys to facilitating this monetization have been: • State Renewable Portfolio Standards that require the production of electricity from renewable sources have long provided a baseline interest in RNG • From 2007 – 2015, the federal Renewable Fuel Standard (“RFS”) transformed the transportation fuel landscape • Ethanol and biodiesel came into the market in significant quantities • Since 2015, a combination of the RFS and the California Low Carbon Fuel Standard (“LCFS”) have driven significant investments in very low carbon intensity fuels • Large quantities of RNG, renewable diesel and renewable jet fuel are now present in the market • While there has been recent uncertainty associated with the future of the RFS, the RFS will continue to provide support for advanced biofuels • State LCFS programs, most notably in California, will be the primary catalysts for bringing on additional quantities of advanced biofuels in the near term • Renewable diesel from tallow and waste oils as well as biogas from dairy farms will be the primary beneficiaries • Voluntary programs, as well as corporate mandates, will also provide incentives Eversheds Sutherland 3 Environmental Attributes: What are they? Eversheds Sutherland What Are Environmental Attributes? ─ RNG projects produce significant amount of environmental attributes and understanding them is critical to ensuring their validity and ultimately successful monetization ─ Environmental attributes go by many names: • Environmental attributes • Renewable attributes • Green attributes • Green tags ─ Regardless of the name, they generally refer to the same thing: • The “non-energy” attributes of a fuel or electricity, including type of resource, avoided emissions, environmental benefits and other aspects associated with the production, combustion, use and transport from the point of the production to the intended use of the underlying commodity • Includes credits generated, the rights to credits to be generated in the future and the right to make marketing claims • Tax credits are not typically thought of as being an Environmental Attribute Eversheds Sutherland 5 Environmental Attributes, Variations on a Theme ─ The type and number of credits that are able to be generated on the Environmental Attributes are dependent upon the method of production, quantity, transportation and use of the biogas. ─ The ability to generate credits on Environmental Attributes may change over time as regulations evolve and the opportunity to generate new credits may arise ─ Different entities may generate and claim these credits depending on where they sit in the value chain ─ Different regulatory programs may define environmental attributes differently (e.g., State RPS Programs and the California LCFS) ─ Different companies may have varying ideas on what constitutes an environmental attribute ─ No industry standard documentation for trading environmental attributes ─ Environmental Attributes generally are not considered a good under the UCC ─ Therefore, it is critical to define the term in all of your contracts Eversheds Sutherland 6 How Are They Defined in Contracts? ─ Approaches to defining environmental attributes vary, but largely depend on how they are used and your role in a transaction (producer, marketer, retailer, consumer). ─ An example of a comprehensive definition in the biogas context: • “Environmental Attributes” means any and all current and future rights, credits, benefits, air quality credits, methane capture credits, renewable energy credits, emission reductions, offsets and allowances, howsoever referred to, associated with the capture, production, generation, transportation, use and environmental characteristics of Biogas, the production, generation, transportation, use and environmental characteristics of RNG derived from such Biogas, the displacement of fossil-based natural gas for any use (including thermal use, electricity generation and use as a transportation fuel), the reduction of air pollutants or the avoidance of the emission of any gas, chemical or other substance, including without limitation any similar attributes, whether arising out of international, federal, state or local laws or regulations including without limitation renewable energy credits under Renewable Portfolio Standards, RINs under the EPA RFS and LCFS Credits under state low carbon fuel standards. ─ Parties frequently include a carve out for tax credits associated with the physical biogas production and distribution facility assets: • Environmental Attributes shall not include any existing or future tax credits, depreciation deductions and depreciation benefits, or other tax benefits arising from biogas production, distribution, transportation and end-use facilities. Eversheds Sutherland 7 Platforms to Trade Attributes ─ There is no established platform to trade or clear “Environmental Attributes” as a package/bundle of intangible assets, so title must be established through documentation ─ Certain credits generated from the package of Environmental Attributes may trade on platforms • RINs trade on EPA’s EMTS System • LCFS Credits trade on the LRT-CBTS System • RECs associated with renewable electricity, for example, are commonly transferred within tracking systems managed by electricity market operators (e.g., PJM, MISO, ERCOT) • M-RETs launched renewable thermal REC in January 2020 ─ If no tracking system or other platform is used, title transfer is a matter of contract. Thus it is important to document through attestations and other assurances (depending on the applicable regulatory regime. Eversheds Sutherland 8 Managing Risk in Trading Agreements Key Risks ‒ Proving title – Can the seller establish and convey clean title? ‒ Definitional gaps (Disaggregation) – Is the product defined to be adequately inclusive? ‒ Pathway – Can the seller demonstrate (or otherwise be obligated to help demonstrate) the necessary pathway from source to end use? ‒ Double counting – Have any other parties claimed the attributes? ‒ Regulatory compliance – Do the attributes or credits meet regulatory requirements? ‒ Change in law – What if the law changes? Eversheds Sutherland 9 Contracts Used to Trade Environmental Attributes With Biogas: ─ NAESB • While this has become industry standard, the use of the NAESB is burdensome as it was not designed with environmental attributes in mind. It also contemplates the physical delivery of gas, which often does not occur in these transactions. ─ Bespoke Agreement • The use of an exchange agreement between the producer is often a more elegant way of transferring gas with attributes where the physical transfer of gas is required (e.g., where RIN generation may occur under the RFS). With Electricity: ─ Bespoke Agreement • Commonly used and based on developer forms. Larger corporate offtakers also have their own forms in use within the market. ─ EEI/ISDA • Use of the EEI master is very common for electricity commodity, combined with the REC Annex when including the environmental attributes in renewable energy transactions. • Traditionally geared towards a pure financial agreement, the ISDA has a physical power annex to which parties also add their own REC sub-annex. ISDA is currently