How To Sell LFG In A Changing Market

Freddi Greenberg

If you think landfill gas (LFG) was up in the air before, just wait until you see what the federal and state legislators and public utility commissioners have in mind.

Any change in the electric industry will affect the future markets for LFG. For example, if customers can choose their electric suppliers, retail wheeling will be a key feature, opening new markets by allowing electricity to be sold directly to a consumer. Retail wheeling also will allow use of landfill generated electricity at other locations.

The power marketer, working between the generator and consumer, will be another potential LFG-generated electricity buyer. Power marketers buy electricity from a variety of sources and already operate on a limited basis.

The marketers' job includes matching the customer's load with generating output and providing backup power. And, unlike many utilities, marketers, may seek out renewable resources.

Operating in excess of 90 percent capacity should give LFG a competitive advantage over other renewables, such as windpower and hydropower.

Industry changes also may pose risks to existing LFG-fueled facilities. As competition increases, utilities will continue trying to repeal the Public Utility Regulatory Policies Act of 1978 (PURPA) contracts. So far, they have threatened to condemn high-priced facilities, or file for bankruptcy to reduce payments.

Federal Legislation In 1996, Congress extended two important deadlines for projects seeking tax credits. The original deadlines included contracting the facility's construction by the end of 1995 and requiring it to be in service by the end of 1996. Now, these facilities must be operational by June 30, 1998.

However, early this year, President Clinton's proposed budget included a new deadline of June 30, 1997. So, pay close attention to the budget discussions if you are considering a new project.

Despite the deferred service date, the ultimate tax credit expiration dates remain the same:

* Gas production facilities placed in service after 1992 have until December 31, 2007.

* Credits for facilities placed in service between 1980 and 1992 expire on December 31, 2002.

Section 210 of PURPA, which requires utilities to buy LFG generated electricity, has been critical because it provides a guaranteed market. Electric utilities are required to buy the electricity at avoided cost, which is the cost if it had generated the same quantity of electricity or had purchased it. Federal legislation proposed in 1996 and 1997 would eliminate this obligation.

PURPA's modification has been part of restructuring proposals that would open retail electric markets to competition. Typically, these proposals would allow a customer to purchase electricity from a supplier of choice and would give retail customers access to wheeling or transmission service from electric utilities. Currently, a retail electric customer purchases power from a local utility at rates based on the utility's costs to generate and deliver the electricity.

In the future, utilities probably won't have to purchase LFG electricity at avoided cost, placing the generators in competition with other electricity suppliers. However, access to retail wheeling also would increase LFG opportunities through the sale of electricity directly to retail customers. Alternatively, landfill owners could use the electricity generated at other locations.

Independent power industry representatives also are questioning pre-existing utility contracts. Currently, it appears that changes in PURPA will not affect existing contracts, but PURPA's utility purchase obligation may not be available in the future. This adds pressure to complete LFG projects and sign utility power sale contracts as soon as possible. A deadline for grandfathered PURPA contracts hasn't been established.

FERC Rulings In April 1996, Federal Energy Regulatory Commission (FERC), Washington, D.C., ruled on the wholesale transmission or wheeling of electric power. This effectively turns electric utilities into common carriers and requires them to file tariffs, describing how utilities will wheel electricity to wholesale customers.

FERC also ordered qualifying LFG facilities to limit their natural gas use to twenty-five percent of annual fuel input and to certain purposes. The FERC ruled on a case that involved a facility that had overestimated its gas production in the planning stages and now was oversized for its gas quantity.

While the owner wanted to use natural gas to run the plant at full capacity while remaining within PURPA's 25 percent limitation, FERC ruled that natural gas cannot be used for this purpose.

However, FERC stated that natural gas can be burned to keep a facility operating at a normal level if LFG is temporarily unavailable, such as when the gas collection system is out or when changes in atmospheric pressure cause reduced LFG production. Therefore, any proposed use of natural gas should be evaluated carefully to ensure that PURPA is not violated.

Renewable Energy Decisions Federal legislators also are focusing on renewable energy. For example, Representative Dan Schaefer's (R-Colo.) 1996 bill required that all electric generators use a minimum amount of renewable energy and establish a system of renewable energy credits.

As a result, these generators might add LFG to their fuel or purchase it to meet the federal requirements.

And, although a 1997 bill introduced by Senator Dale Bumpers (D-Ark.) requires that electric generators include a minimum of 5 percent renewable power in their generation mix, the bill excludes LFG from its definition of "renewable resources."

In July 1995, the Department of Energy, Washington, D.C., issued its final rule, implementing the Renewable Energy Production Incentive (REPI). REPI, which was adopted as part of 1992's Energy Policy Act, will offer payments of one-and-one-half cents per kilowatt hour to a state or political state subdivision or to a non-profit cooperative for electricity generated using certain renewable technologies.

The payment level is indexed to inflation from a 1993 base year. An electricity sale is required, and the generating facility must be owned by or for the benefit of the entity receiving the REPI payment.

The generating facility must begin operation between 1993 and 2003 and payments are available for 10 years.

Approximately $3.4 million were available for fiscal 1995 - a figure that increased to $5.2 million for fiscal 1996. REPI will expire in 2013.

REPI identified LFG as a secondtier technology that would receive money only after payment is made to all eligible applicants.

However, the LFG track record is encouraging: In fiscal year 1995, individual payments as high as $946,000 were made to five LFG-fueled generating facilities.

Because it must be funded annually, REPI cannot be considered when evaluating project economies, but it can make an attractive supplement to project revenues.