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CoBank: California incentives spur dairy manure methane digester developments

Progressive Dairy Editor Karen Lee Published on 01 October 2020

In August, CoBank’s Knowledge Exchange division released a report outlining how incentives in California initiated a spike in digester developments in the state and throughout the country.

According to the report, California’s 1.4 million dairy cows are the largest source of methane in the state. When the state moved to reduce greenhouse gases (GHG) by adopting rules for methane emissions in 2017, it legislated a goal for 2030 to reduce dairy manure methane emissions by 40% below 2013 levels.

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As a state law prohibits California from regulating methane from cattle farms until at least 2024, it has used incentives to encourage dairies to develop digesters. The state’s Dairy Digester Research and Development Program (DDRDP) has awarded more than $183 million in grants for 108 digester projects, and the state is about halfway to its 2030 goal.

Data from the EPA’s AgSTAR program showed a total of 255 digesters operating on U.S. livestock farms as of March 2020.

Digesters not only help reduce dairy manure methane emissions, they capture renewable natural gas (RNG). When biogas is upgraded to natural gas specifications and used in the transportation sector of the California fuel market, it is 25 to 30 times more valuable than fossil natural gas, the report states.

“Dairy producers outside of California may be anticipating future environmental mandates in their own states,” Tanner Ehmke, manager of CoBank’s Knowledge Exchange division, said in a press release about the report. “But the possibility of financial incentives and energy market opportunities are what’s capturing attention.”

Consumers’ increasing concern about GHG emissions has led to a demand for products with smaller carbon footprints and pressure put on state governments, retailers and dairy supply chains. This has helped drive the growth of manure methane digesters.

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Financially, digester developments are able to occur because of incentive programs as well as a burgeoning market for RNG.

According to the report, while digesters have been used for electrical generation in the past 20 years, the market landscape has changed. The low cost of electricity means fewer power purchase agreements cover the cost of digester projects, and many are shutting down or converting to RNG. According to DDRDP data, current biogas end use in California is 9% for electricity and 91% for RNG.

Beyond the grant program, there are two main sources of revenue for dairy digester projects in California: the Cap-and-Trade program and the Low Carbon Fuel Standard (LCFS).

Under the Cap-and-Trade program, regulated entities in California pay a fee to the state for their GHG emissions. This revenue funds the incentives for non-regulated sectors, like agriculture, to voluntarily reduce emissions. The LCFS, an option that has generated revenue for dairy biogas, works similarly to Cap-and-Trade but is focused on transportation fuels. Fuel suppliers are required to reduce the carbon intensity of their fuels by blending low-carbon fuels or purchasing credits from an entity with excess credits.

These California policies also incentivize dairies in other states to install digesters to capture RNG. However, LCFS credits are dependent on the RNG being able to reach California through a natural gas pipeline.

There are also some regional initiatives across the country that have LCFS programs in place, and more than a dozen states have adopted clean car standards, suggesting broader LCFS adoption.

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The cost to install a digester varies greatly depending on the dairy’s location, size, manure management and existing infrastructure. But digester companies report the average cost for a herd of 2,500 cows at $3 million, depending on the manure equipment already in place.

Scale is a key component impacting digester costs. A minimum of 2,000 cows is the threshold in California, where the typical digester is a covered lagoon digester producing gas for pipeline injection. Generally, each additional 1,000 cows reduces the cost per cow of digester projects by 15% to 20%.

The report says projects smaller than 2,000 cows may be viable if located near an existing pipeline, but this is less common because an individual dairy’s proportional share to build a centralized gas cleanup and injection facility is about $3 million ($1,200 per cow). Location matters, as distance to reach the digester is a key driver of cost for the collection pipeline.

The costs to address hydrogen sulfide (H2S) within the biogas is also a factor and varies widely depending on local air quality regulations. These costs will be substantially higher in California and other areas with strict regulations. On smaller herds, the H2S removal system tends to be the largest barrier because of its high fixed cost.

On the revenue side, the value of California LCFS is the key component. The value of credits is determined by the carbon intensity goals set by the state and the demand from fuel suppliers.

A high value of LCFS credits reduces the incentive for California to put money into grants. With less up-front grant money available, the need for capital increases.

In some cases, a gas utility aiming to lower its carbon footprint may want to set up a long-term contract for RNG that is not exclusively tied to transportation. In this instance, the returns are significantly lower, but the capital cost of the system is generally paid by the utility.

The risk of policy change to the Cap-and-Trade program and the LCFS is low in California due to the strong climate change concerns in the state. However, the value of credits depends entirely on the legislation that set the target, so changes to the legislation could change or eliminate the value of the credits. Well over 50% of the revenue from most projects generating credits comes from the credits.

Projects outside of California trying to capitalize on credits may have an even higher risk. California consumers are paying for high LCFS values at the fuel pump, and some consumer groups may argue that Californians should not have to spend money for projects out-of-state.

Eligibility for generating credits may also be affected if a state mandates digesters or if the farm fails to comply with local environmental regulations during the period when a credit is generated.

The adoption of dairy manure methane digesters has helped California’s dairy industry make headway on its 2030 emissions goal, but future changes in regulations may impact the availability of grant funding and credit markets.

The full report, “Interest in California Dairy Manure Methane Digesters Follows the Money,” is available at CoBank. end mark

Karen Lee
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