EPA Develops Financing Options For LFG Recovery

Tom Kerr

In light of the recently released New Source Performance Stand-ards and Emissions Guidelines for landfills, many owners and operators are left wondering how they will finance and support a landfill gas (LFG) recovery system.

To assist owners in this task, the U.S. Environ-mental Protection Agency (EPA) is developing several financing strategies. In fact, the EPA estimates that more than 700 landfills can cost-effectively install LFG re-covery systems, but only about 140 projects in the United States have done so. How-ever, with the new regs in place, more are expected to follow suit.

Because LFG is approximately 50 percent methane - a valuable source of fuel - landfill owners can reduce compliance costs by converting methane to energy. When EPA realized LFG's energy potential, it launched the Landfill Methane Outreach Pro-gram (LMOP) in December 1994.

Aiming to reduce global warming by promoting cost-effective LFG energy recovery, the LMOP enlisted state agencies, utilities, the LFG-to-en-ergy industry, financiers and gas end-users to participate in the State, Utility or Industry Ally Programs.

In return for LMOP participation, EPA provides allies with public rec-ognition; develops key technical, financial and regulatory information; and promotes LFG to energy as an economically and environmentally beneficial technology. Ultimately, LMOP also will help allies achieve maximum environmental protection at the lowest possible cost.

To that end, LMOP recently re-leased the Project Development Handbook that guides landfill owners as they identify, design and implement successful gas to energy projects.

In general, candidates for a cost-effective recovery project include operating or recently closed landfills with more than 1 million tons of waste, a waste depth greater than 40 feet and a local climate with more than 25 inches of annual precipitation. Smaller sites located near facilities with boilers, rotary dryers or greenhouses also may be attractive candidates.

Many LFG to energy financing strategies are available (see chart); these include private equity financing, project finance, commercial loans, direct municipal funding, municipal bond financing and institutional or public stock offerings. Each financing method has certain advantages and disadvantages, depending on the project and the landfill owner.

Selecting the appropriate financing route requires closely evaluating each method's cost and its ap-plication under site-specific con-ditions, according to the handbook.

For example, in private equity fi-nancing, the investor must be willing to share ownership in the project. In return, the investor covers all or part of the project's costs using his or her own equity or privately placed debt. Some potential equity investors include landfill gas developers, equipment vendors, fuel suppliers, industrial companies and investment bankers.

Another strategy, project fi-nance, allows landfill owners to fund construction through commercial debt. In this case, lenders look to a facility's revenue stream, rather than its sponsors, to guarantee repayment. In most project finance cases, lenders provide project debt for up to 80 percent of the facility's installed cost; repayment schedules can span eight to 15 years. The greatest disadvantages to project financing are its high transaction costs and potential lenders' high investment thresholds.

In yet another financing method, the project operator or equipment user leases all or part of its assets. The lessor profits from this ar-rangement because it may receive tax benefits such as accelerated depreciation or renewable energy tax credits. Potential lessors in-clude large engine or equipment suppliers.

Recently, public debt financing - in which secured notes and bonds are offered to institutional investors - has received attention from large, conventional power project developers. This approach, however, is not a likely option for typical LFG projects unless several can be "packaged" together under one owner. In this case, due diligence costs are minimized because the projects are standardized. In order to qualify for public debt financing, a project (or package of projects) must receive a favorable rating from outside credit agencies, have solid supporting contracts and be worth $100 million or more to offset transaction costs.

For municipalities that own a landfill, tax-preferred municipal bonds are a cost-effective project funding method. The resulting debt's interest rate is 1 percent to 2 percent below commercial debt or taxable bond debt, according to EPA. Municipalities also can fund a project directly from operating budgets, eliminating the need for outside financing or partnering. Al-though municipal finance options are probably the most cost-effective ways to fund LFG-to-energy projects, many municipalities have difficulties locating sufficient capital.

LMOP's final project finance strategy involves state-sponsored revolving funds. These funds re-ceive money through tax-exempt bonds and offer landfill owners low-interest loans for financing.

The fund "revolves," or continues to supply financing to new LFG projects, as landfill owners repay their loans. State regulators currently are working with LMOP to determine whether revolving funds are an effective way to promote LFG recovery in their own states.

For more information on EPA's Landfill Methane Outreach Program or to order the Project Devel-opment Handbook, call (800) 952-4782.