In this month’s edition of Business Report, we delve into the recent, more intense focus on methane gas as a potent greenhouse gas (GHG) and the increasing interest and investment in renewable natural gas (RNG).
Methane Gas Focus Intensifying
Over the past several months, methane gas, as a component of greenhouse gases (GHG) and contributor to climate change, has come under increased scrutiny. A number of prominent news outlets—CNN, NPR and Vox among others—have begun to talk about methane gas, as a lesser known, but more potent contributor to climate change, noting it is anywhere between 25x to 80+x (depending on the time period) more effective in heat trapping than carbon dioxide (CO2) emissions. And, although much smaller in total amount than CO2 emissions, controlling methane emissions is increasingly being viewed as a quicker way to make a difference and slow climate change—in essence the fastest, most effective knob to turn to fight global warming. This has culminated in a United Nations’ (UN) 2021 climate change report calling for methane emission reductions, and most recently, the US/EU pledge to reduce methane emissions by 30% by 2030, which is expected to be highlighted at the upcoming international climate talks in Scotland in November.
Although not Primary, Landfills are Known as a Significant Source of Methane
The EPA has cited MSW landfills as accounting for 15% of US methane emissions, while the May 2021 UN report has noted that landfills and waste together account for around 20% of North American methane emissions, which ranks as the third largest “human activity” source. Organic waste coming into the landfill is the driver—it is estimated that 40%-50% of food is wasted and food waste accounts for about 20% of total waste. As a result, it is estimated that organic waste sent to landfills amounts to around 5% of global GHG emissions. A study based on NASA data in California also pointed to landfills as a material contributor to methane emissions based on individual sites in that state. The solid waste industry has recognized this and has stepped up efforts to more accurately measure landfill gas—it is currently an area of dispute and debate—as EREF believes the current EPA measurement methodologies may overestimate landfill methane emissions. The EPA is now set to move forward on tighter emissions standards for landfills and lowering the threshold for when gas collection systems must be put in place after a delay during the Trump administration. This has been variously estimated to encompass between roughly 1600-1900 sites and is expected to cut landfill methane emissions by 7%. NSWMA and SWANA have subsequently come out and supported the regulations, primarily for providing consistency and certainty.
But Therein Also Lies the Opportunity
Currently, basically all large open landfills have a gas capture system in place, and given that a relatively smaller number of large landfills handle the bulk of the US landfilled MSW, it is estimated that 92% of US landfilled MSW is covered by some sort of gas capture—though the EPA only puts that capture at 75% efficiency. Looking at sites individually and by the numbers, however, tells a different story. According to Resource Recovery magazine, 229 out of 751 sites receiving up to 500,000 tons per year DON’T have gas recovery systems. Overall, on a facility-by-facility basis, only slightly over half of active US landfills have gas recovery systems. And, according to EPA data, less than a quarter of an estimated 2600 open and closed landfills have gas collection systems in place. While obviously a number of small sites may not justify an investment, overall, this still presents a meaningful opportunity for GHG reduction.
Taking gas collection a step further provides an opportunity for even greater return, both environmentally and financially. Landfill gas-to-energy (LFGTE) facilities, whether they convert landfill gas to electricity (considered low BTU) or RNG (considered high BTU) provide two environmental benefits—they reduce the need for fossil fuel, and when RNG is used to power fleets, they reduce CO2 emissions—besides channeling the methane into more productive uses than simply flaring it. It is estimated that only 500 landfills around the country capture methane and convert it into energy. The EPA estimates that nearly 500 more could cost-effectively turn their methane into an energy resource.
Archaea Energy (ticker symbol LFG), a company which develops projects that produce RNG from landfills and digesters, serves as a bellwether for interest in, demand for, and capital expected to be deployed into LFGTE broadly and RNG in particular. The company intends to focus on high BTU RNG plants and conversion of landfill gas-to-electricity plants to RNG. In its proxy, the company notes that the landfill sector remains relatively fragmented and provides long-term visibility and opportunity. In its estimation, there will be a 60% increase in landfilled waste in place by 2050, and a 44% increase in landfill gas production. Archaea estimates only 13% of overall landfill gas volumes are being converted to RNG. The proxy notes that more than 450 landfills are currently flaring, venting or turning landfill gas into electricity, which accounts for more than 70% of the landfill gas industry. The company further notes that many of these sites are municipally or privately owned and often need partners for expertise or capital, particularly as many are single site operations. Strong renewable energy (RIN) pricing and California’s Low Carbon Fuel Standard (LCFS) incentives have increased the return on investment for RNG facilities at landfills, and the payback period currently has variously been put at as little as two years but more typically three. Changing RIN and LCFS pricing and credits can certainly add to greater earnings volatility, and to a certain degree policy risk, but a number of longer-term drivers have fallen into place. Other companies outside of the waste sector are also looking to procure RNG as part of their sustainability goals, adding voluntary markets as another driver. Various utilities have also announced 10%-20% RNG targets.
Company Specific Plans Within the Solid Waste Industry
As we spoke to in our write-up of second quarter earnings, solid waste industry analysts were very focused on all the companies’ LFGTE and RNG plans on all the follow-up conference calls. And, the valuations of standalone RNG plays and the increasingly positive returns and financial potential of LFGTE have not been lost on the publicly-traded solid waste companies. Adding to the financial incentives is the fact that landfill sites account for an estimated 90% of the major waste companies Scope 1 GHG emissions, providing added impetus, given all the majors’ own sustainability and emissions reduction goals. GFL Environmental (GFL) has made perhaps the biggest splash thus far, as management has talked about forming a renewable energy platform with 18 landfills targeted as potential project opportunities. GFL has estimated the potential opportunity at $175 million in total (with very high levels of profitability) and likely closer to $75 -$100 million net to the company if it partners. Waste Management (WM) has 16 facilities in service, with the potential of 15-20 future projects. Waste Connections (WCN) targets 3-5 projects over the next five years, and has put the total likely financial investment opportunity at $100-$150 million. Casella Waste (CWST) has also targeted 2-5 projects, with a preference for using third parties. Republic Services (RSG) is looking at 15 projects, with perhaps 5-7 per year, and the company characterized the opportunity at around $200 million in revenues. Management also expressed its interest in partnering to leverage someone else’s expertise and capital, as again, there appears to be no lack of companies outside the industry interested in investment in the area. The RNG facilities/projects cost anywhere from $7.5 to $30+ million, depending on their size, and as previously noted, currently have a payback of less than three years.
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