schiller-food waste biogas-final

Food Waste Biogas Development

Michael Schiller Firebox Research & Strategy LLC

Beachwood, Ohio

One of the fastest growing areas of alternative energy development is biogas, a source of sustainable, renewable energy that is derived from the processing and treatment for disposal of a variety of organic waste streams generated by agricultural, industrial, commercial and residential sources. The most advanced technology used to produce and capture biogas are anaerobic digester systems (AD Systems), used primarily in the US for the processing of sewage for energy recovery but used extensively in Europe for the treatment of food wastes. In comparison to other alternative energy sources, biogas is economically competitive with fossil fuels when taking into account cogeneration applications, waste processing and sustainability benefits however, on a stand-alone basis, the cost of some AD System biogas projects are marginally competitive at best. The purpose of this paper is to provide an understanding of the economics of biogas energy derived from anaerobic digestion by defining biogas resources and the anaerobic digestion process and then focusing on the development, costs, risks, and financing and accounting challenges.

Biogas

Biogas is generated from the biological decomposition of organic matter by bacteria in an anaerobic or oxygen free environment and consists primarily of methane, carbon dioxide, carbon monoxide, hydrogen sulfide, water vapor and other trace gases in various concentrations depending upon the organic feedstock and the process used for its production. Feedstocks

There are five primary sources of organic waste used in biogas production,

including: 1. Agricultural waste; 2. Industrial food processing waste; 3. Municipal solid waste or MSW; 4. Fats, Oils and Grease or FOG; and 5. Biosolids.

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2 Petroleum Accounting and Financial Management

Agricultural Waste

Agricultural organic feedstocks for biogas production include cattle, pig and chicken manure; energy crops such as maize (corn), barley, sugar beets or grass; and crop residuals (the materials left over after harvesting of food crop, and silage). In the past, animal carcasses were included as an agricultural biogas feedstock, but in recent years most states have restricted the use of animal carcasses, requiring either immediate burial or incineration.

State authorities generally regulate agricultural waste disposal, often in conjunction with local jurisdictions, such as counties who regulate through land use permitting. Industrial Sources

The food processing industry generates a significant volume of organic waste in the manufacture of foods for human and animal consumption. Industrial food waste includes fresh fruit and vegetable juice, peels, seeds and parts, draff (spent brewery grain), milk and dairy materials, seafood products, and other food products rejected in the manufacture of processed foods. Although these materials generally have high biogas yields, the availability of alternative disposal methods to landfills, such as selling it to farmers and animal husbandry operations for use as livestock feed supplements, makes it more expensive to obtain for energy production than other sources. Federal, state and local authorities regulate the disposal of industrial food waste. Municipal Solid Wastes

The United States produced some 250 million tons of municipal solid waste last year, of which approximately 10% to 12% is food waste, or about 25 to 30 million tons. While most cities continue to allow organic wastes to be commingled with non-organic wastes, a few cities, notably San Francisco, Seattle and Portland, Oregon, have instituted rules for diverting food waste for separate processing or treatment and disposal. As a result of the success of these diversion programs, many cities are looking at the implementation of source separated organics (SSO) rules for commercial and institutional generators of food wastes. Sources include grocery stores, restaurants, hotels, hospitals, corporate or educational campus cafeterias and other organizations with large-scale food preparation operations. In addition to food waste, some communities, such as Portland, Oregon, include yard waste such as tree trimmings and grass clippings as part of the residential organic waste stream. MSW generators pay tipping fees to landfill operators for disposal of the food waste. If a community has implemented some form of source separation

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policies for organic wastes, the tipping fees may be lower than those for non-organic wastes to provide a financial incentive to the waste generators to divert the organic material from the landfill waste stream. Federal, state and local authorities regulate the disposal of municipal solid waste. Fats, Oils, Grease

Fats, Oils, Grease (FOG) is a major source of sewer system damage in most US cities, creating significant clogs resulting in sewer system overflows, especially during storm events. Most US cities and many states have imposed rules and regulations requiring commercial and industrial operations using FOG in their food preparation and manufacturing processes to install grease traps for diversion of FOG from the sewage stream for separate processing and treatment for disposal.

While all businesses pay sewer service fees, most communities have or are implementing volumetric-based fee schedules for the discharge of FOG to the sewer system as a financial incentive to support requirements for the installation of grease traps. If a trap has been installed, the FOG generator will pay a tipping fee to a licensed hauler. Federal, state and local authorities regulate the disposal of fats, oils and grease. Biosolids Biosolids are the results of the treatment of sanitary sewer sludge. Most cities today are already processing the nutrient rich biosolids through anaerobic digestion for direct (wet) land application or drying them for use as agricultural amendments to soils for farming, sod and ornamentals. Federal, state and local authorities regulate the disposal of wastewater and ultimately of biosolids treatment and disposal. Anaerobic Digester Systems

AD Systems provide a contained process for the biological reduction of organic waste into biogas, digestate (nutrient rich solids), ammonia and water. Unlike most competing approaches to processing and disposing of organic wastes, anaerobic digesters capture the biogas produced, which allows the resulting digestate to be further processed either into mature compost or fertilizer products. In some cases, it can accomplish this with fewer environmental and community impacts than landfills’ gas recovery systems, AD’s primary biogas competition, or non-biogas producing organic disposal options such as lagoons and composting.


Anaerobic digesters produce biogas through four stages of anaerobic digestion, including:

1. Hydrolysis; 2. Acidogenesis; 3. Acetogenesis; and 4. Methanogenesis.

The four steps involve the biochemical transformation of complex

carbohydrates, fats and proteins into methane, carbon dioxide, water vapor, hydrogen, hydrogen sulfide and other trace elements. Figure 1 illustrates the transformations that occur through the four steps of anaerobic digestion.

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Figure 1: Four Steps of Anaerobic Digestion


Because the different phases involve bacteria with different optimal conditions, maximization of biogas production may involve separating the phases into separate physical stages. Typically, the bacteria involved in hydrolysis, acidogenesis and acetogenesis do best when in a mesophilic environment, where the operating temperatures are between 30˚ to 38˚ C (86˚ to 100˚ F). Methanogenesis bacteria perform best when in a thermophilic environment, where operating temperatures are between 49˚ to 57˚ C (120˚ to 135˚ F). Thus, biogas plants using AD divide the process into a multi-stage design comprised of two stages. In the first stage, a mesophilic hydrolysis tank processes the feedstocks through wet digestion by adding water to create a pumpable slurry which is held in the tank for up to three days to achieve the first three phases of digestion. After the holding period, the slurry is pumped into the thermophilic methanogenesis tanks, also referred to as fermenters, where the material undergoes continuous mixing to ensure maximum contact between the organic material and the bacteria for 20 to 30 days. Food waste digesters target a total solids percentage in the slurry of 10% to 15% although some European digesters reach total solids percentages as high as 20%. By operating the system in a continuous feed mode, the hydrolysis tank can serve as a buffer between incoming feedstock and the fermenters. An example of the overall design of an AD plant is shown in Figure 2.

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Figure 2: Typical Urban Food Waste Anaerobic Digester Plant Design


As shown in Figure 2, the typical AD plant is organized into four process areas, including:

1. Receiving and Pretreatment. The Receiving and Pretreatment process involves the acceptance of the various forms of waste the plant will accept. For farm and wastewater digesters, the receiving and pretreatment facility is simple. For urban plants that accept food waste (MSW) and FOG, the plant will require specialized receiving and depackaging equipment to remove unacceptable contaminants such as plastics, metals, wood and other inorganic matter, and to reduce the size of the material for pumping. Most food waste plants can accept paper products in the process, although they produce little if any biogas. Contaminants are segregated out of the slurry stream and either recycled or hauled to a landfill.

2. AD Process Area. The AD Process area consists of the hydrolysis tank or tanks, the fermenters or methanogenesis tanks and a buffer tank that manages the flow of digestate into the digestate treatment portion of the plant.

3. Energy Processing. The Energy Processing area of the plant takes

the biogas and either removes sulfides (such as hydrogen sulfide) for power production (50% to 60% methane – 40% CO2 blend), or further upgrades to 96% or greater methane for injection into the natural gas distribution system and disposal (venting or capture for use as an industrial gas) of the carbon dioxide.

4. Digestate Treatment. The digestate coming out of the fermenters goes into a buffer tank from which it is metered into a decanter for dewatering to remove up to 60% of the water. The dewatered solids, called cake, are then removed and may be disposed of via land application as agricultural fiber, composted for commercial sale or landfilled. The liquid, called permeate, is then treated, typically by ultra-filtration and reverse osmosis for removal of any residual solids and is either sold as a low value liquid fertilizer or discharged into the sewer system. In some plants, the ammonia in the permeate is removed and blended with the cake to make a higher value fertilizer product.

AD Development Process

The development process of an Anaerobic Digester based bioenergy facility consists of seven steps organized into four phases including a Planning

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Phase, a Permitting Phase, a Contracts Phase and a Build/Operate Phase (see Figure 3).

Figure 3: General Development Process

Planning Phase The objective of the planning phase is to define the project including its sources and types of feedstocks, the off-takes to be produced, and the technology, site selection, and basic engineering that will be used for permitting and initial financial planning.

• Feedstock Analysis. Assessment of feedstock is the single most important task undertaken in the development of an AD biogas project. It typically not only includes assessment of the quantities and types of waste available but the regulatory as well as the competitive environment for obtaining feedstock. For farm digesters, feedstock analysis is simple and based on the feedstocks available in the general area under study. For urban digesters, feedstock analysis is significantly more complicated as potential feedstocks include biosolids, if the project is being developed in conjunction with a wastewater treatment plant, and food waste, if the plant is to co-digest food waste or function as a stand-alone food waste digester.


Feedstock studies generally involve estimates of the volume and types of food wastes available, and the certainty of supply. Also of interest in this phase is determination of the leading food waste suppliers and an understanding of the current collection and disposal infrastructure in place, as well as the public agencies and laws that govern the collection and disposal of food waste. A final critical consideration in conducting the Feedstock Analysis is the determination of the tipping fees the project will be able to earn. Fees are normally based on the prices charged for disposal of organic waste in the project jurisdiction and the transportation costs to the site and its alternatives.

• Off-Take Market Analysis. This task involves assessment of the most attractive off-take options available to the developer. Biogas can be upgraded to pipeline quality standards and injected into the natural gas supply pipeline network for sale to power producers or industrials for use as a green source of energy for compliance with sustainability requirements. It can also be compressed and stored on-site for use as a motor fuel alternative to diesel or gasoline. A third option is to combust it to produce electricity and heat, with electricity sold to a local utility under the Public Utilities Regulatory Policies Act (PURPA) as a Qualifying Facility and the heat either utilized in the process or sold to a local heating and cooling district or a nearby industrial user. Based upon local market conditions, the AD project developer may choose one or more of these off-take options. But it should be noted that the relatively low volumes of biogas generated generally restrict power production to under 10 MW and usually under 5 MW, thus limiting the choice to either generating heat and power or making pipeline quality biogas for injection or compression.

• Technology Selection. For this step, the developer will need to select the AD technology that works best in converting the primary feedstock into the greatest potential volume of biogas. For urban food waste digesters, this suggests a multi-stage, wet, high-solids design1.

• Basic Engineering Design. Once the technology has been selected, the developer will prepare an initial engineering design to determine the permitting requirements of the plant and the local infrastructure

1 Moriarity, Kristi. “Feasibility Study of Anaerobic Digestion of Food Waste in St. Bernard, Louisiana.” NREL Technical Report NREL/TP-7130-57082, January 2013. Page 9.

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connection requirements including water, sewer, natural gas and power.

• Site Selection and Control. Key considerations in site selection not only involve the local connection infrastructure; but also road access for truck traffic; potential buyer access, such as the presence of local truck fleet operators who would consider or are already using CNG as a fleet fuel; and, ultimately, community requirements.

• Financial Planning. During this step of the phase, the project financial model will be constructed, maintained, and updated through subsequent phases of development. Depending upon the technology and off-takes selected, the project may be eligible for renewable energy tax credits, Renewable Fuel Standards RINs (Renewable Identification Numbers associated with alternative fuels), tax-exempt bond financing or tax benefits associated with the location of the plant such as the Federal New Market Tax Credit program (NMTC) or local tax abatements for job creation. In addition, most developers will want to begin preliminary discussions with financing partners, as the financial experience with AD projects is very limited in the US.

Permitting Phase

Once the initial project planning has been completed, the project will need to apply for the appropriate permits and begin the process of determining the project costs.

• Permitting. Air permits will be required for gas upgrading or Combined Heat and Power (CHP) production, and a solid waste disposal permit will be required since the plant is an alternative to a landfill. Local permits may include land use or zoning, waste disposal and sewer discharge permits. In addition, if the area of the plant includes a waste disposal authority, a franchise agreement or permit may be necessary and for which engineering information will be required.

• Community Engagement. As the siting of waste disposal facilities is often considered to have a significant impact on the local community, developers will need to engage the community early in the project permitting process to build local support for the project and educate the community about how the project will be a good neighbor. Typical community concerns include vehicle traffic, noise, odor and visual or viewshed impacts. If local community


associations or development groups exist, developers should approach them and begin to build a dialog about these issues with the goal of establishing some kind of Good Neighbor Agreement which will serve to structure the relationship between the plant and the community. This approach is likely to reduce conflict with the community and to minimize opposition during project permitting hearings.

• Specifications Engineering. During the Permitting Phase the developer will need to provide greater clarity to the permitting authorities and will need to determine the specifications for the plant and how it will interconnect into local energy, road and civil infrastructure. This may include traffic studies, interconnection studies for either power or natural gas grid connections, soil studies, environmental studies and other studies required by the appropriate federal, state and local authorities as part of the permitting process.

• Construction Estimates. During the Permitting Phase the developer should begin to obtain construction cost estimates. These will be needed for use in the financial model as well as the application process for tax benefits.

Contracts Phase

The objective of this phase is to prepare the project for financing, construction and operation.

• Feedstock and Off-take Contracts. The feedstock and off-take contracts are the most important contracts secured by the projectto provide the revenue stream. Feedstock contracts need to address the tipping fees earned by the project for tons of material received, acceptable contaminant levels, delivery terms and conditions, and the tenor of the contract. Off-take contracts need to address delivery prices and responsibilities (including delivery point), the quality of the off-take if upgraded biogas or CNG, and the delivery terms and conditions. For both types of contracts, the key financing issue will be the tenor of the contracts, as both equity and debt participants will want contracts that–at a minimum– extend for the life of their financial commitments.

• Construction Contract. The construction contract is the single most important contract after securing the revenue contracts (feedstock and off-take). The most important aspect of the construction contract will

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be the willingness of the contractor to provide a mechanical performance and a biological performance wrap or guarantee to the plant. European firms that specialize in the construction of food waste digesters routinely provide both types of guarantees, although none have constructed such a plant in the US at this time. No US contractors are providing a performance guarantee to any food waste AD plant other than mechanical performance.

• Equipment Contracts. If the contractor is performing a design-build contract, the developer may not be involved beyond what the terms of the construction contract allow.

• O&M Contract(s). A developer may contract out the operations and maintenance of the plant to a third-party firm that specializes in the operations of AD facilities. A number of such firms are active in the U.S. and typically operate under contract wastewater treatment facilities.

• Tax Credit and Abatement Applications. During this phase, the developer will need to prepare any applications for tax credits and tax abatements. The timing of application submittals will vary by the type of credit or abatement offered and the requirements of the offering jurisdiction. For example, if the project is to sell electricity, the project will need to file a FERC 556 Form certifying the project as a Qualifying Facility under PURPA. Local municipal or county tax abatements may need to be filed prior to construction, while Federal Production Tax Credits associated with renewable energy production will be filed during operation of the plant. If the plant is upgrading the gas for use as a renewable fuel, documentation for certification of the RINS will need to be filed prior to Commercial Operation.

• Financing Agreements. Financing agreements will be contingent upon the type of financing the project seeks. In general, financing of a food waste to energy anaerobic digest project will have three types of financing partners: municipal partners where the project is being either financed directly or indirectly through feedstock or credit guarantees; investment partners where the financing is through a fund with interests in the sector either on an all equity or leveraged basis; and a strategic partner, or a company that is already active in the waste management industry and is seeking to expand its portfolio in related waste processing. The agreements will differ based upon the specific goals of the investment partner in the project.


Build/Operate Phase

The objective of this phase is to construct, test and initiate commercial operation of the project.

• Construction. Construction of a food waste digester system typically requires 12 months to complete, plus time for additional testing of the plant biogas production performance. The most difficult aspect of construction is the anaerobic tanks which may be made of formed concrete, fiberglass or glass lined steel. Developer preference and cost generally drives the selection of the tank material. If made of glass-lined steel, the tank is manufactured in panels which are then assembled on site beginning with the top ring. As a ring is completed, it is jacked up and the next ring assembled. Tops may be made of stainless steel, or in some cases, lower grade steel. Mixers are suspended from the roof of the tank and baffles installed on the tank walls to help prevent dead spots in the material during digestion. Most tanks also utilize cathodic protection to reduce the risk of corrosion.

• Commercial Operation. To achieve commercial operation, an AD plant typically undergoes a rigorous period of testing involving mechanical operability tests using water. This testing is followed by a phased start-up beginning with seeded hydrolysis and fermenter tanks with digestate from an existing wastewater digester, slow loading of the fermenter with food waste, start-up of the energy plant, and start-up of the digestate treatment facility. Once the plant has been in operation for several weeks (or months, if problems are encountered), a series of performance tests are completed and the plant is accepted for operation.

Project Costs

The cost of biogas is a function of the technology selected and the type of off-takes produced. Simple single fermenter systems with limited municipal solid waste and no digestate processing after dewatering cost the least to develop and construct. Complex systems featuring the ability to accept a wide range of wastes along with multiple fermenters and post-digestate dewatering fertilizer production plants are the most expensive. Overall, a simple plant featuring a single FOG processing line, a single mixed waste or MSW line with the ability to accept industrial food waste, a single fermenter with two hydrolysis tanks, a buffer tank, a CHP plant and simple digestate dewatering

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and treatment plant, should cost about $25 million to design and construct. Larger plants with two fermenters may cost up to $55 million and those with fertilizer production facilities may cost as much as $65 million. The smallest plants, such as an agricultural digester, will cost less than $10 million.

Revenues streams include tipping fees for MSW and FOG, and some industrial food wastes, and energy sales. Tipping fees vary considerably across the country, with areas with dense populations and high land cost commanding high tipping fees and areas with less population density and low land costs having low tipping fees. Tipping fees are also impacted significantly by public waste disposal policies. For example, MSW tipping fees in Portland, Oregon are in the $90 to $100/ton range, while the mandated tipping fees for organic waste diverted from the waste stream are in the $50 to $60/ton range. FOG tipping fees are generally calculated on a volumetric basis, with fees ranging from as low as 6¢ per gallon to as high as 20¢ to 30¢ per gallon.

The leading source of off-take revenue for food waste AD projects has historically been electric power sales. If a PURPA power sales contract is pursued, the power rates the project will earn are set by state regulatory authorities working with the utility to determine the avoided cost rate mandated under PURPA for Qualifying Facilities. These rates are determined by the power portfolio the host utility has in place. Thus, a low cost utility fueled by hydroelectric power and coal fired power will have lower avoided cost rates and therefore pay low avoided cost rates. A utility with high cost power fueled by high sulfur coal and high-heat rate gas-fired generating plants will have high avoided costs and thus pay a higher rate for power from a Qualifying Facility. PURPA power sales agreements are attractive since the local investor owned utility has a “must buy” obligation. The “must buy” obligation does not apply to municipal utilities, public utility districts or electric coops, nor does it apply to investor owned utilities if FERC has determined that the utility operates in a competitive power market (e.g., California). If PURPA is not utilized or available, the developer must seek to enter into bi-lateral negotiations for a power purchase agreement with a willing utility.

While electric power sales are the most common off-take revenue stream, the cost differential between diesel and CNG on a gallon gas equivalent (GGE) basis suggests that CNG may be a more cost effective fuel for motor transportation than gasoline or diesel at current prices. (At the time of this writing, diesel prices were averaging $3.75 per gallon and CNG prices $2.25 per GGE in Ohio. Of course, prices vary over time and the current glut of unconventional gas may be an attractive alternative for many uses.) Based on 6 MPG and 50,000 miles of annual operation and using the Freightliner online


savings calculator2, the diesel fuel bill at these prices is $32,625 for one year versus $24,577 for CNG, a savings of $8,048. Additional revenue on CNG sales is earned through the Renewable Fuels Standards, which creates a Renewable Identification Number (RIN) associated with each unit of renewable fuel created. The RINs are a tradable commodity and prices vary depending upon the availability of RINs in the market. Project Risks

There are eight major risks that a developer will need to manage for the successful completion of a project. These include:

1. Feedstock Risk; 2. Technology Risk; 3. Permitting Risk; 4. Community Risk; 5. Financing Risk; 6. Construction Risk. 7. Environmental Risk; and 8. Operational Risk.

Feedstock Risk

Feedstock risk is the single most important risk that shapes the viability, success and failure of a biogas plant. The urban feedstock supply market involves two distinct but interrelated areas of risk: supply relationships and contracts, and relationships with jurisdictional policy and regulatory agencies. The supply market varies considerably from city to city, with varying degrees of control over the flow of material exercised by waste generators, haulers and disposal entities depending upon what policies are in existence and how the regulatory agencies ultimately implement public policy. Financing will most likely require long term supply contracts, which may or may not be easily negotiated depending upon the historical patterns in the market and the structure of the local industry. In addition, the regulatory environment may involve overlapping agencies and jurisdictions controlling different portions of the business of waste generation, transport and disposal. Mitigating supply risks are both a contractual and public policy processes. Financing partners will require significant education on how the local supply market works and

2 See http://www.freightlinergreen.com/calculator. Diesel prices for Ohio were cited from http://www.ohiogasprices.com/index.aspx?fuel=D and CNG prices for Ohio were cited from http://www.cngprices.com/station_map.php on March 3, 2013.

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the related challenges and risks to make a sound decision. Third party studies and reports on this area of risk are often critical to project success. Technology Risk

The technologies generally used in food waste AD plants are proven with tens of thousands of hours of operational success in the US and Europe including separate and integrated plants. However, the recent history of permitting and financing plants indicates that US financing parties are generally unfamiliar with AD projects outside of municipal sewage treatment facilities and will require an education in the technologies, vendors, and best practices and experiences in operating the technologies. Areas of greatest risk are receiving and pretreatment (essentially the technology of depackaging and contaminant removal) and in the post fermentation processing and treatment of digestate into a revenue producing product stream. As with feedstock risk, third party studies and reports on the technologies employed in the plant will be critical to project success. Permitting Risk

The primary permits that the project will require are a solid waste disposal permit, an air quality permit, a land use permit, discharge permits (NPDES) and building permits. Jurisdictions include local municipalities, state environmental permitting agencies and EPA requirements (generally administered by state agencies in addition to their own requirements). Community Risk

Because waste disposal facilities are often considered controversial because of odor, noise, truck traffic and vector (rodent and bird borne diseases), the relationship between the project and the community is essential in achieving both permitting success and financing success. As noted previously, mitigating this risk by creating strong relationships with community agencies and activists and actively engaging their support for the project is a critical path item for the successful development of the project. Environmental Risk

The most significant environmental risks to a project would be incurred in the event of a tank failure and the release of partially digested material into the open air or leakage into a watercourse. The material is not considered hazardous and the negative impacts of a tank failure may include the release of noxious odors or excessive nutrients being released into a lake or stream. Most


cities require on-site storage in the event of a tank failure, often requiring up to 110% on-site storage space in the case the largest tank fails. Construction Risk

The focus of this risk is twofold: 1) delay risk and 2) improper installation risk, which includes both mechanical inoperability and biochemical performance failure. Although these risks are best mitigated contractually in the construction contract, insurance can be obtained for them as well, typically through European reinsurers. Pricing of policies, however, can be significant depending upon the terms and conditions of the policy and the definitions of failure. Financing parties will require assurance that the resources of the contractor (or its parent) or any insurer are adequate to support any potential claim. This generally requires a highly rated insurer or a contractor providing a guaranty from a “big balance sheet” parent. Operational Risk

Operational risks typically include process operations, energy delivery operations, and external challenges such as roadwork on key access streets restricting the flow of trucks into and out of the project facility site. Operations risks can be mitigated by retaining skilled and experienced operators of the plant and equipment and by following manufacturers recommended maintenance schedules. Energy delivery risk is somewhat limited as most facilities will interconnect at distribution voltages into a local distribution grid and will have paid the local utility for any upgrades required to deliver the power.

Financing Challenges Tax Benefits

As noted, the primary subsidy for waste to energy development is the Production Tax Credit, a benefit that is available to project owners for each MWh produced, or RFS RINs earned by the project in the event it chooses to produce alternative fuel, which generate revenue by selling them to third parties. In addition, projects are eligible for seven year MACRS on most equipment in the plant.

AD projects may be located in economically distressed areas that qualify for the New Market Tax Credit. While qualifying for NMTC benefits is very

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complicated, if achieved, as much as one-third of the project investment costs may be recovered through the NMTC. Deal Structuring

How a transaction is structured will depend upon whether or not the NMTC is utilized. If used, the NMTC lenders will receive a tax credit equal to the value of the project and then cancel the loans after seven years. Equity and debt is suborned to the NMTC lenders for the seven year period and the project is subject to certain other constraints and regulations to avoid recapture of the credit3.

Should the transaction be treated as a normal investment, it may be handled as a structured finance transaction. In that instance, he developer retains a carried interest in the project in addition to a buyout of most if not all of the development funding from an equity investor and long-term debt. Finding Investors

The most active investors in the waste to energy space are investment funds with missions in renewables or alternative energy, infrastructure, environmental projects, community or sustainability in agriculture. However, the limited number of projects available and the dearth of financing experience require that investors be given significant education on the project risks and mitigation strategies to get them comfortable with the project.

Summary • Diversion of food waste from the Municipal Solid Waste stream is of

growing importance to municipalities and environmental regulatory agencies across the country.

• Anaerobic digester systems are increasingly important in the treatment and

disposal of food waste with the added benefits of recovery of the energy content of the waste and the agricultural nutrient value.

3 For more on NMTC benefits, rules and regulations see http://cdfifund.gov/what_we_do/programs_id.asp?programID=5, http://www.irs.gov/pub/irs-utl/atgnmtc.pdf, and http://rroeder.com/nmtcleverag.htm for transaction structuring.


• Successful AD project development in food waste involves the cultivation of community relationships in addition to relationships with suppliers, customers and regulatory authorities.

• Feedstock and technology risks are the most significant in completing a

project. Financing will require educating non-strategic investors about the risks involved in a project to get them comfortable with the project.

• The types of feedstocks the project will accept drive the level of investment in a project, along with the off-takes the project will produce.

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