R. Stephen Lynch

Both public- and private-sector owners of landfills are increasingly engaging project developers for their landfill gas-to-energy (LFGTE) projects. Some of the largest private landfill owners, like Waste Management and Republic Services, possess in-house most or all of the required resources and expertise to build and operate these projects. However, most municipal and smaller private landfill owners choose to partner with firms that specialize in the development, financing and operation of such facilities.

The experiences of landfill owners in securing landfill gas-to-energy facility developers run the gamut from instances in which the landfill owner understands the ins and outs of the project development process right from the start to instances that, unfortunately, became expensive learning experiences. This article will provide an overview of how landfill owners can prepare for the successful procurement of an landfill gas-to-energy developer. In short, site owners must be prepared to put in a lot of hard and detailed work before potential developers begin submitting their project proposals.

Getting a Head Start

To begin with, well before a request for proposal (RFP), request for expression of interest (RFEI) or request for qualification (RFQ) for an LFGTE development partner is issued, the landfill owner must address five key issues:

• Ownership of the LFGTE facility.
• Procurement law and policy.
• Quality advisors.
• The development timetable.
• A preliminary financial feasibility analysis.

It is a common misconception among landfill owners that third-party ownership of their site’s LFGTE facilities automatically means a decreased level of site control. For starters, nearly all LFGTE projects developed with a project partner leave control and responsibility for the operation of all aspects of the landfill, including the landfill gas (LFG) collection and control system, in the hands of the landfill owner.

Any aspect of the development and operation of the LFGTE facility itself that needs to be under the control of the landfill owner can be made so through the appropriate structuring of the procurement documents and operating agreement between the owner and the developer. Given the proven track record of LFGTE project developers to finance, build, own and operate such facilities and their ability to maximize the value of various federal tax incentives for such projects, it is hard to argue against arrangements in which they own the LFGTE facility. However, if the landfill owner insists upon financing and owning the LFGTE facility itself, this preference should be understood up front. Owners should begin their dialogue with potential development partners (whether through an RFP or less formal contact) having already decided the issue of facility financing and ownership.

Procurement law and policy is another issue deserving attention before seeking out a development partner. For municipal landfill owners, this is of particular importance since all governmental entities are subject to some level of procurement regulations. A clear understanding of these constraints up-front can avoid the substantial time and cost associated with the re-issuance or abandonment of procurement efforts due to procedural missteps.

Finding the advisors needed to complete a LFGTE project is something else that a landfill owner must address early on. While some developers will suggest the landfill owner need not engage its own advisors, it is imperative that an owner have its own attorney as well as a procurement advisor guiding it through the partner procurement process. The lawyer may be in-house or from an outside firm. Procurement advisors that specialize in providing financial, economic and business advice to landfill owners are best equipped to educate owners on the money issues and the allocation of risk involved in the individual project. With LFGTE technology being as mature as it is, there is little risk in relying on the technical expertise of the project developer as long as the business and financial relationship is sound and creates a unity of interest between the parties.

Establish a realistic timetable for project completion early on. Since many proposals from potential project developers will require a six-to-12-month exclusive due diligence period granted to the proposing firm, an 18 to 24 month timeframe from initial discussions to commencement of facility operations is not overly conservative.

Preliminary Financial Feasibility Analysis

Of all of the important predevelopment activities, perhaps the most crucial is to develop a preliminary analysis of the potential financial and economic results of the project. This analysis is key to formulating realistic expectations among the landfill owner’s team and stakeholders about the likely benefits of the project.

The preliminary financial model also serves as a useful basis for comparing proposals from potential development partners. A proper preliminary financial feasibility analysis will examine the following key project variables:

• Capital cost.
• Financing cost (debt, federal grant, federal energy investment tax credit, equity, etc.).
• Operating costs.
• Energy performance profile.
• Preliminary renewable energy credit (REC) and electricity pricing.
• Analysis and valuation of potential carbon credits.
• Lifecycle project results from both the landfill owner’s and a potential developer’s point-of-view.

Estimating an LFGTE project’s likely capital cost, operating expenses and energy performance is quite easy since there are numerous such projects operating in the United States from which to draw basic empirical data. Preliminary REC and electricity pricing assumptions will vary from state to state because these are largely driven by the strength or weakness of each state’s renewable energy subsidy programs or renewable portfolio standard (RPS). A qualified project financial advisor can help identify the general market level for electricity and REC prices within any state or regional transmission organization such as PJM Interconnection or ISO New England. The financial model may assume the electricity and RECs are sold separately or bundled into one contract with one offtaker.

A couple of years ago, the value of carbon credits was a driving force behind the development of LFGTE and other renewable energy projects. Some of the leading project developers entered the business largely based upon their desire to acquire carbon credits for their own portfolios. Although the voluntary U.S. carbon credit market was never as large and robust as the mandatory markets of other nations, for a while the financial results of U.S. projects were substantially influenced by a project’s ability to create and monetize carbon credits.

Today, the U.S. carbon credit market is on life support with the two primary monetization channels — the Verified Carbon Standard (VCS) and Climate Action Reserve (CAR) — trading between $1.25 and $3.50 per metric ton of carbon dioxide emissions eliminated, well below historic levels. Furthermore, many LFGTE projects do not qualify for either the VCS or CAR programs. Your project’s financial consultant should be familiar with these programs’ requirements and be able to offer a reliable opinion on this issue.

Once each of the key project inputs — capital cost, financing cost, operating costs, energy performance profile, REC and electricity pricing and analysis, and valuation of potential carbon credits — have been estimated on a preliminary basis, the feasibility model should estimate the financial benefits of the project both to the landfill owner and the project development partner.

This preliminary model is key to developing realistic project expectations from the start and to solicit proposals from potential development partners that can be meaningfully compared to each other. Knowing the financial results of the project from the developer’s point of view also will be invaluable in negotiating a favorable project development agreement with the owner’s chosen partner. While a well-structured and executed partner procurement process can establish basic pricing parameters and the structural elements of the final agreement, the reality is that many other details of the project development agreement will be the result of post-proposal negotiations.

The Owner’s Biggest Risk

Ironically, more problems can arise for landfill owners when potential development partners offer too good of a deal than one that may fall short of the owner’s expectations. Given the mature nature of the technology and equipment involved and the inability of project developers to influence REC, electric or carbon markets or the requirements of the various federal tax incentive programs, very few project variables really are within the control of a potential project developer. Project development proposals that offer substantially greater return to the landfill owner than is suggested by your preliminary financial analysis nearly always turn out to be too good to be true. Unfortunately, some LFGTE developers intentionally overstate the potential returns to the owner in order to win the contract, and the real story only emerges later during negotiations after other potential developers are out of the picture.

One key variable, however, is within control of potential project developers and this quality varies widely from developer to developer: access to debt and equity project financing. For landfill owners seeking to develop a project with financing arranged by the development partner, this is perhaps the single most important determinant of project success.

The Golden Rule

The golden rule of project finance is, “The guy with the gold makes the rules.” No matter what the owner’s financial analysis shows or what a project development partner may offer, the final terms of any project ultimately will be set by the project’s debt lenders and equity owners. Thus, it is critical that landfill owners work only with development partners who can offer “in-house” financing — either directly or from capital sources already identified and integrated into the developer’s proposal.

Projects are least likely to be completed when the developer negotiates terms and contracts with the landfill owner and then starts looking for the debt and equity capital required. This will always result in the “guys with the gold” requiring revisions to many aspects of the initial agreements that in turn result in a worse deal for the landfill owner. Going back and negotiating agreements a second time is much more difficult, costly and time consuming than making sure you are working with a project development partner who knows where the funding is coming from during the proposal and project development process.

R. Stephen Lynch, founder and president of Millbrook, N.Y.- based R. S. Lynch & Company, Inc., has advised more than 26 public and private landfill owners in their LFGTE development efforts. R. S. Lynch & Company is also a project partner in the U.S. Environmental Protection Agency’s Landfill Methane Outreach Program.

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