Peter Weisberg, The Climate Trust
Weekly Policy and Finance Update – October 30, 2017
|Bottom line | A new phase of dairy digester development began in California last week with the award of $35 million in grants to build clusters of projects that inject gas into the pipeline. These projects focus on transportation fuel because of the significant incentive of environmental markets.|
Last week, California Department of Food and Agriculture (CDFA) announced $35 million of grants to build 18 new dairy digesters. This will almost double the number of California digesters. CDFA prioritized the funding of projects that clean biogas and inject it as Renewable Natural Gas (RNG) into the pipeline. Of the 36 grant applications submitted (requesting $75 million in funding), only RNG projects were funded. Nine projects that planned to generate electricity did not receive funding—even those that promised retrofits on the farm that would lower NOx emissions overall. Given local and regional air quality issues in the Central Valley, projects that get the gas out of the immediate region (and often incentivize the replacement of dirtier diesel engines with cleaner natural gas ones) won the public funding. Our read is that all but one of the award recipient projects will involve a cluster of digesters that pipe gas to a centralized cleaning and injection facility, for economies of scale. The RNG will either fuel trucks directly, or be used to replace natural gas in an ethanol refinery.
Environmental markets are driving this focus on transportation fuel. The Air Resources Board estimates that two types of environmental credits make up more than 90% of the sources of revenue for dairy digester projects—Renewable Identifications Numbers for the federal Renewable Fuel Standard (for which projects can generate valuable cellulosic “D3” Renewable Identification Numbers), and the Low Carbon Fuel Standard.
Doubling the number of California’s digester projects is only the beginning. Dairy Cares, which represents the California dairy industry, estimates that between 100 and 200 digesters will need to be built to meet the stringent methane reductions required by Senate Bill 1383. To meet these goals, CalRecycle and CDFA estimate the need for direct state investments or incentives of $100 million per year for five years. And in September this year, the California legislature approved $99 million of funding for CDFA to promote methane mitigation at dairies next year—doubling from the $50 million previously committed.
This will be an interesting test for environmental markets and public funding. Can California continue to sustain the level of support that is needed to build these projects, even with significant grant support? Or will an alternative mechanism—like the Pilot Finance Mechanism currently being considered to mitigate the risk associated with LCFS and perhaps Renewable Identification Numbers—be prioritized, given its ability to leverage private capital with more limited resources? Regardless, this significant number of clustered projects that will deliver gas to the pipeline show a new and consequential phase for digester development is here.
SB 1383 Pilot Financial Mechanism
California Air Resources Board, June 26, 2017
How Payments for Performance Can Help California Meet The State’s New Methane Requirements
The Climate Trust, June 29, 2017
2017 Dairy Digester Research and Development Program Projects Selected for Award Funds
California Department of Food and Agriculture, October 25, 2017
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Image credit: Flickr/Bemep