If you own or operate a landfill, you likely have considered whether a landfill gas-to-energy (LFGE) project is feasible for your site. The private sector has a good track record of evaluating and managing landfill gas resources, and has seen a sharp increase in the number of LFGE projects over the last few years. However, based on the number of candidate landfills in the municipal sector that do not have LFGE projects, it appears that potential revenues are being overlooked in this sector.
Indeed, even the owners and operators of smaller sites often can benefit from revenues associated with greenhouse gas (GHG) offsets, which only can be generated by landfills that do not trigger New Source Performance Standards (NSPS) thresholds. Many of the landfills that do not trigger NSPS requirements are smaller ones, which thus are eligible to generate the additional revenues derived from the sale of offsets.
A survey was created by the authors, and participants were asked to report on their experiences with LFGE projects. The survey was completed by participants in LFGE projects in Tennessee, and was supplemented by conducting telephone interviews with several others. The survey also addressed the potential considerations and challenges associated with LFGE projects. What follows is a discussion of our observations on economic feasibility, potential compensation approaches and the contractual terms to be considered before participating in an LFGE project.
Economic Feasibility Assessment
According to survey responders, the lack of financial and legal information needed to make critical decisions remains a source of concern and frustration to decision-makers and stakeholders. Also of concern is the uncertainty and volatility associated with the market, such as the status of renewable energy credits, indexing associated with gas pricing, and even public policy considerations relating to issues such as cap and trade, which have taken a political back seat due to the complexities of implementing such a scheme.
The prevailing project model in an LFGE project is a partnership between the gas provider, developer and end-user, one that is embodied in an enforceable legal contract that is mutually beneficial to all parties. As a landfill owner, knowing at the outset the quality and quantity of your landfill gas supply is essential to negotiating a contract from a position of knowledge and strength. There are various techniques — including computer modeling, review of landfill records and site-specific investigation activities — that can be used to more accurately predict LFG supply and quality. If the landfill owner is not partnering with a developer, then the ability to secure financing becomes more problematic and can require specialized expertise, as there are various types of financing available.
Potential Compensation Approaches
Compensation packages, the vehicle for monetizing landfill gas projects, vary based on several key factors, including location of the project; age, size, depth, and configuration of the landfill; operational considerations; availability of voluntary vs. mandatory "green tags" or credits; availability of and qualification for tax incentives; and availability and proximity of end users. A variety of compensation approaches are highlighted below.
Royalty payments. In response to our inquiries, we learned that when the developer performed the facility development and gas extraction and took ownership of the gas and related environmental attributes, the royalty rates paid to landfill owners varied considerably, ranging between 10 percent and 30 percent. From our inquiries, it appears that the wide variation in royalty rates was largely a function of the relative bargaining power of the parties negotiating the landfill lease agreement. However, we also suspect that the specificity of available information about the quality and quantity of the landfill gas may have been a contributing factor to the wide variation.
Fixed price + sharing of income from environmental attributes. In one Tennessee jurisdiction, we discovered that the developer paid for and built the gas collection facility and extracted the gas, but the landfill owner still retained ownership of the extracted gas, which it sold to the developer. Under this arrangement, the developer purchased the gas from the landfill owner at a fixed price. Also, the developer and landfill owner shared, on a 70 percent/30 percent basis, respectively, the income received from the sale of the environmental attributes, such as renewable energy credits (RECs).
Up-front payments + indexed price + sharing of income from environmental attributes. Under another approach, we discovered that the developer paid for and built the gas collection facility, extracted the landfill gas, and then sold it to customers. The developer made three separate types of payments to the landfill owner: 1) a one-time, up-front "milestone" payment of $100,000; 2) a one-time $200,000 "commercial operations" payment when the facility became operational and commenced gas capture activities; and 3) ongoing payments to the owner related to the sale of the extracted landfill gas, according to a formula indexed to the 200-day moving average price for natural gas at the Henry Hub on the New York Mercantile Exchange. The developer and landfill owner also shared, on a 50 percent/50 percent basis, the income received from the sale of environmental attributes, such as RECs. The landfill owner had ownership of the gas and environmental attributes until it received the corresponding ongoing payments.
Fixed rental fee. In lieu of a one-time, lump-sum "up-front" payment, the landfill owner may consider charging the developer a fixed monthly rental fee during the period in which the project is under development, and before commercial operations commence and revenues are generated.
Guaranteed minimum "floor" fee. As a variation to the one-time, lump sum "commercial" payment, the landfill owner may consider receiving a guaranteed minimum "floor" fee. Such a fee would guarantee receipt by the landfill owner of a minimum monthly or quarterly rental fee or royalty payment, irrespective of the compensation methodology and the amount of revenue generated from the sale of the landfill gas and environmental attributes. We understand that, in agreements in which developers have agreed to pay a guaranteed minimum "floor" fee to landfill owners, such payments typically do not commence until the developer has recovered some or all of its initial investment in the project.
Allocation of tax benefits. There are two main federal tax benefits that are available to landfill owners and developers of LFGE projects. The first is Section 45 of the Internal Revenue Code (IRC), which is a renewable electricity production credit that is calculated on a per kilowatt-hour basis. That is, under Section 45, the LFGE facility is eligible for a sum certain tax credit for every kilowatt-hour of electricity that it produces. The second tax benefit is found in Section 48 of the IRC, which provides for an energy credit based on the amount of the investment in the renewable energy facility in a given year.
Both the landfill owner and developer have an interest in receiving as much of the tax benefits as possible. How they share the tax benefits varies. One alternative is for one party to receive all tax benefits. A second alternative is for one party to receive the credit from one benefit (Section 45), while the other party receives the credit from the other benefit (Section 48). A third alternative is for both parties to share all available tax benefits on an agreed-upon basis. There also may be state tax benefits to be shared by the parties to an LFGE contract.
Provided below are examples of contract issues of which the landfill owner and developer should be aware while negotiating the terms of an LFGE agreement.
Definitions of certain key terms, such as "environmental attributes," "revenues" and "tax benefits." Since the definitions of these terms likely will determine how revenues derived from the sale of gas and environmental attributes will be shared by the parties, the parties should pay close attention to how these terms are defined, and to any limitations or exclusions that will affect the revenue base upon which the sharing of payments is to be determined.
Financial assurance (insurance requirement/performance bond). Since the developer (and its contractors) will be performing construction activities and engaging in the operations at the leased property, the landfill owner should consider requiring that the developer obtain adequate protective insurance coverage that names the landfill owner and any contractors as additional insureds. Also, depending on the nature and cost of the construction activities, consideration should be given to the need for a performance bond to assure an appropriate level of security for the project.
Representations and warranties. The parties should ensure that they are not making representations or warranties, implied or otherwise, which they are or will be unable to honor. For example, the landfill owner will not want to make a warranty or representation about the quality or quantity of the landfill gas that may be extracted from the landfill, and the developer will not want to warrant that a particular monetary value will be ascribed to environmental attributes that may be derived from the extracted gas.
Right to terminate the lease agreement. Separate provisions that distinguish between termination "for cause" and "at will" may be appropriate, and should be carefully crafted. The lease agreement also should specify the impact of termination on ownership rights, and the disposition of collection systems and related equipment placed on the leased landfill property.
Assignment or subletting. The agreement should identify under what specific circumstances and terms, if any, the parties may assign or sublet their respective rights under the lease agreement.
LFGE projects are on the increase, and the economic and environmental benefits to be derived from them may be quite substantial. However, each project also will face distinct challenges. Therefore, it is essential to do your homework, set goals and priorities, and seek technical and legal assistance as needed.
Steve Batiste, P.E., is a solid waste practice leader at Brown and Caldwell (www.brownandcaldwell.com) with more than 20 years of experience in issues related to solid waste, including landfill planning and design, permitting, landfill gas reuse, LFGE assistance, start-up services, and operation and maintenance.
Jeffrey Karp is a partner and Amir Heyat a law student intern at Sullivan & Worcester LLP (www.sandw.com), a full-service law firm with offices in Boston, New York, and Washington, D.C. The firm's climate practice draws on its environmental, renewable energy, project finance, corporate, and tax practices to offer the legal services necessary to undertake an LFGE project.