EPA Finalizes RNG Rules Which May Serve as Model for RSG Rules

Originally published for customers on June 30, 2023

What’s the issue?

Earlier this month, the Environmental Protection Agency issued a final rule with respect to Renewable Fuel Standards. The statutes that established the program specified certain targets for various fuel types for certain years, but then directed the EPA to fix those goals going forward. In addition to setting those goals for 2023, 2024 and 2025, the new rule also adopted changes for the treatment of biogas and defined the term Renewable Natural Gas for the first time.

Why does it matter?

The provisions for RNG establish a new method for creating and retiring Renewable Identification Numbers (RIN), a unique number generated to represent a volume of renewable fuel. The new method is designed to reduce the burdens associated with biogas RINs but may also provide a roadmap for adopting a similar regime for trading the environmental features of Certified Natural Gas.

What’s our view?

As the EPA acknowledges, there is a definite limit on the amount of RNG that can be produced and consumed in the country, but the adoption of the RIN methodology, if expanded to Certified Natural Gas, could unleash a market for the environmental features of that type of gas as well.

Earlier this month, the Environmental Protection Agency issued a final rule with respect to Renewable Fuel Standards. The statutes that established the program specified certain targets for various fuel types for certain years, but then directed the EPA to fix those goals going forward. In addition to setting those goals for 2023, 2024 and 2025, the new rule also adopted changes for the treatment of biogas and defined the term Renewable Natural Gas (RNG) for the first time. The provisions for RNG establish a new method for creating and retiring Renewable Identification Numbers (RIN), a unique number generated to represent a volume of renewable fuel. The new method is designed to reduce the burdens associated with biogas RINs but may also provide a roadmap for adopting a similar regime for trading the environmental features of Certified Natural Gas.

As the EPA acknowledges, there is a definite limit on the amount of RNG that can be produced and consumed in the country, but the adoption of the RIN methodology, if expanded to Certified Natural Gas, could unleash a market for the environmental features of that type of gas as well.

RIN Market

For biogas, the EPA issues one RIN for each 77,000 Btu of biogas that is produced. If this biogas is then used to make compressed natural gas or liquefied natural gas which is used as a transportation fuel, then the RIN can be used to satisfy a refiner’s or exporter’s obligations under the RFS program. The RINs can also be traded on the open market if it is not needed to meet the obligation of the refiner or exporter. The price for these RINs fluctuates as with any market.

Source: RIN Trades and Price Information | US EPA

As seen above, the RIN price was below $1.00 until early 2021 and since then has been trading generally between $1.50 and $2.00.

New Regulations for Biogas

On June 21, 2023, the EPA issued a final rule that set certain volume requirements for various renewable fuels for the years 2023–2025. The rule also, however, included biogas regulatory reform provisions that were designed to improve oversight of the program and mitigate against the potential for parties to double-count biogas and help ensure that only valid RINs are generated for biogas-derived renewable fuels.

Prior to the new rule, biogas could only be used to create either compressed natural gas or liquified natural gas and still generate an RIN. Under the new rule, biogas can still be used for those purposes but can also be used as an intermediate feedstock to produce other renewable fuels, such as hydrogen, using steam methane reforming or renewable diesel using a Fischer-Tropsch process.

To facilitate these new uses and to streamline the oversight process for the production and use of biogas, the regulations contain a number of new definitions reflecting the various processes used to produce biogas and make it marketable. Under the previous biogas provisions, EPA broadly defined biogas as “the mixture of hydrocarbons that is a gas at 60 degrees Fahrenheit and 1 atmosphere of pressure that is produced through the anaerobic digestion of organic matter.” However, this raw biogas typically contains significant amounts of impurities and inert gases (e.g., carbon dioxide) and must undergo pretreatment before it can be used to produce transportation fuel (e.g., CNG/LNG in vehicles). In particular, for commercial natural gas pipelines to accept injections of biogas, the biogas must first be upgraded to meet pipeline specifications prior to injection. Under the new regulations, the term for this pipeline quality biogas is, for the first time, defined as Renewable Natural Gas or RNG.

For RNG to become renewable CNG/LNG, the chain of parties that are involved in ensuring that biogas is produced from renewable biomass and used as transportation fuel includes the following:

• The biogas producer (i.e., the landfill or digester that produces the biogas);
• The party that upgrades the biogas into RNG (the RNG producer);
• The parties that distribute and store the RNG (e.g., pipeline operators);
• The parties that compress the RNG into renewable CNG/LNG;
• The dispensers of the renewable CNG/LNG (e.g., refueling stations);
• The consumers of the CNG/LNG (e.g., a municipal bus fleet);
• And any third parties that help manage the information and records needed to show that the biogas was produced from renewable biomass and used as renewable CNG/LNG.

With this many parties involved in the process, the EPA was concerned that the chance for the creation of an RIN for gas that was not used as a transportation fuel and for double counting was substantial. To address these concerns, the new regulations include key elements designed to minimize such risks, including:

Specifying the party that upgrades the biogas to RNG (the RNG producer) as the party responsible for creating the RIN (RIN generator);

Obligating that RNG producer to assign the RIN at the time and for the volume of the RNG injected into the natural gas pipeline system;

Specifying that the party that can demonstrate the RNG withdrawn from the pipeline system was used as a transportation fuel (RIN separator), can then separate the RIN from the RNG and thus make the RIN separately tradeable.

Mitigating Limited Potential for RNG

The EPA acknowledged that the potential for RNG conversion into CNG and LNG overall is limited by two key factors:

“First, the economics of developing biogas facilities becomes increasingly challenging for smaller facilities, and particularly for facilities located more remotely from natural gas pipeline interconnects. The first facilities brought into the program tended to be the largest and most economical, with it becoming increasingly costly to bring on incremental volume over time. Second, . . . the rate of growth in the consumption capacity of the in-use fleet of CNG/LNG vehicles is expected to slow. When the program started in 2016, there was a sizeable existing fleet of CNG/LNG vehicles that were operating on fossil natural gas and that could quickly be used to generate RINs through establishing contracts for RNG. Since the use of RNG has been saturating the existing in-use CNG/LNG vehicle fleet, particularly the largest and most economical fleets, the use of biogas as a feedstock for renewable fuel production will be increasingly constrained by the much slower growth in CNG/LNG fleet sales.”

One of the goals of allowing the use of biogas as a feedstock for other renewable fuels is to mitigate these limits on the potential use of biogas.

Applicability to Certified Natural Gas

Earlier this year it was reported that the Biden administration was looking at possibly setting standards for certified natural gas (CNG), which is generally considered as geologic natural gas that can be produced under stricter environmental requirements that reduce the overall carbon footprint for the gas that is produced. The goal of such efforts would be to facilitate the use of U.S.-produced LNG to displace Russian gas while also fighting climate change.

The process that was just adopted for RNG may serve as a model for how a similar process for CNG could work. The likely key would be the use of a system like the EPA’s Moderated Transaction System (ETMS). Just as in the RNG model, there are a number of parties involved in the production of CNG, including the exploration and production companies, the pipeline operators, the liquefaction terminals and the ships that deliver the LNG to the end user.

A similar process could be established like the RIN process that was just adopted for RNG, which requires the designation of an RIN by the RNG Producer so it can be tracked in EMTS as the RNG changes hands. As with the new regulations, the producer of the CNG would be responsible for establishing the RIN at the time it injects gas into the pipeline system based on the carbon intensity of its gas production process. The liquefaction facility could then include the carbon intensity of the pipeline used to receive the gas and its liquefaction process at the time it withdrew the gas and liquified it. Finally, either the end user or LNG seller could then update the data for the carbon intensity of the delivery ship.

We will be following the Biden administration’s efforts regarding CNG as well.

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