January-February 2011

Maximizing the Value of Landfill Gas

Key decisions for landfill owners

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If you are a landfill owner with at least moderate (75 to 300 tons per day) levels of incoming tonnage and no existing landfill gas to energy (LFGTE) project, you have probably been approached by landfill gas (LFG) developers with offers to use that LFG and provide you some form of royalty payment in return. We often hear the statement, “If a developer is interested in my landfill, then doesn’t that mean we have a viable project?” While attention from LFG developers seems positive, remember the developer is looking after his or her own interests and not necessarily the best interests of the landfill owner. In fact, many landfill owners are receiving multiple unsolicited proposals for LFGTE projects from private developers that promise various technologies, revenue proposals, and business plans. A landfill owner, particularly municipal and independent private owners, should be well informed about the options, and the impact of decisions, before choosing to pursue an LFGTE project. This article provides landfill owners with an overview of the LFTGE project development process, including:

• Basic LFG information (LFG 101)
• Overview of LFGTE projects
• LFGTE feasibility studies
• Overview of LFGTE project development process
• Procurement and contracting 
• Project financing

The city of Victoria, TX, is referenced throughout this article to illustrate how the various steps in the procurement process were addressed during the development of the city’s LFGTE project. 

Landfill Gas 101
The beneficial utilization of LFG for heat, electricity, or other fuel needs is not a new concept in the municipal solid waste industry. In fact, the first LFG collection and utilization projects began in the 1970s, and many well-known projects remain in service as the landfills continue to accept waste. The Environmental Protection Agency’s (EPA’s) Landfill Methane Outreach Program (LMOP) has a published listing of 509 existing LFGTE projects in the United States, with an additional listing of 530 “candidate” landfills (data as of December 2009). According to LMOP, these candidate landfills are landfills that have at least 1 million tons of waste in place.

Historically, LFGTE projects were financially and technically feasible mostly at larger landfills with higher LFG generation and collection rates or where significant tax incentives were available. However, with advances in gas processing technology and public awareness of LFG as a fuel source, LFGTE projects have steadily become more feasible for a wider range of landfill sizes and circumstances. 

Add to these advances the momentum behind the “green” movement and the availability of additional funding sources, and many landfills in the United States are now viable candidates for LFGTE projects. Additionally, the final “endangerment” and “cause or contribute” findings for greenhouse gases (GHGs) by the EPA in December 2009 and the newly enacted Mandatory GHG Emissions Reporting Rule bring LFG into the national spotlight and lead many landfill owners to consider collection and beneficial use of LFG.

In developing an LFGTE project, not only is there an environmental benefit with the destruction of the GHG, there is also a potential economic benefit for the landfill. LFG is comprised mainly of methane, carbon dioxide, and several other constituents. On average, LFG contains about 50 percent methane, which means that LFG has an average heat content of 500 British thermal units (Btus) per cubic foot, or half the heat content of pipeline natural gas (almost entirely methane at approximately 1,000 Btus per cubic foot). This energy content allows the LFG to be utilized as a medium-Btu fuel source in a variety of ways.

Common LFGTE Project Types
There are many variations of LFGTE projects.  However, most projects can be classified into one of three types:

• Onsite generation of electricity for sale to an electric utility
• Direct thermal utilization of the LFG as a medium-Btu fuel by piping the gas to a nearby thermal-energy user (to offset natural gas or other fossil fuel usage)
• Processing of LFG onsite (or nearby) to produce natural-gas-quality product for pipeline sale or other alternative fuel use (e.g., compressed natural gas for vehicle fuel)

As evident in Figure 1, the projects that generate onsite electricity are the most common.

The engine gallery for a landfill-gas-to-energy project.

OnSite Electricity Generation—Generation of electricity is quite common and can be adapted to both low flow rates (50 cubic feet per minute) and higher flow rates (greater than 2,000 cubic feet per minute), depending on the conversion technology used. The most common electricity generation technology for LFG involves the installation of reciprocating engine generators. Depending on the growth of a landfill, LFG-fueled engine generators may be installed in increments, as additional units are installed to take advantage of higher quantities of LFG available (since gas production increases with the amount of waste in place). Capital costs for producing electricity with engine generators typically range from $1,200 to $2,200 per kilowatt of generation capacity. For example, a plant with approximately 3 MW of generation capacity would typically have capital costs in the range of $3.6 million to $6.6 million (in addition to the cost of the LFG collection system).

Medium-Btu Direct Use—The use of the LFG as a medium-Btu fuel depends on the existence of a local end user (usually within 20 miles of the landfill). The end user typically utilizes the LFG in an industrial process, such as a boiler. The value of the medium-Btu project to a specific end user will be maximized if the end user operates on a continuous basis and can accept all of the LFG collected from the landfill. The capital costs from this type of process include equipment for the compression and dehydration of the LFG at or near the landfill site and for the construction and fabrication of the pipeline to the end user. Approximate capital costs for the pipeline range from $40 to $70 per linear foot but can vary due to terrain difficulties, right-of-way costs, or other factors specific to the site. Further capital costs may include retrofitting boilers or other units at the end locations.

High-Btu Direct Use—For landfills with higher projected LFG flow rates, usually more than 2,500 cubic feet per minute, the processing of the LFG into a high-Btu end product may be feasible. The product gas, which is approximately 99% methane and virtually equivalent to natural gas, is injected into existing natural-gas pipelines or used for other fueling projects.  Processing the LFG to this high-Btu product requires more complex processes (e.g., membrane filtration, pressure-swing adsorption, or amine scrubbing). Fewer high-Btu projects are in place, and the technology varies, so capital costs are not as well documented; however, data suggest that most projects have been in the range of $3,000 to $3,500 for every cubic foot per minute of LFG processing capacity. For example, a plant with the capacity to process 3,000 cubic feet per minute of LFG would typically have capital costs in the range of $9 million to $10.5 million (in addition to the cost of the LFG collection system). High-Btu projects also tend to have greater operating and maintenance costs than other types of LFGTE projects.

Comparison—The LFG flow rates appropriate for successful projects will vary significantly based on a number of factors. Figure 2 provides typical minimum LFG flow rates for successful LFGTE projects utilizing different technologies.
Conducting a Feasibility Study
As noted, the number of LFG developers showing interest in your landfill for an LFGTE project may or may not indicate realistic financial potential. Conducting a feasibility study before moving forward with the process will provide the landfill owner much more information on which to base decisions and will place the owner on a more level playing field with the developer when negotiating contracts. Other questions the landfill owner may be able to answer during the feasibility study include:

• How much LFG will my landfill generate, and how will I collect it?
• What royalty payment should I expect from the various project types?
• Should I hire an LFGTE developer, or should I develop the project on my own?
• What industrial users are available in the area for direct use of the LFG?
• What are the risks (and rewards) for choosing one project type over another?
• What additional credits, payments, or other funding sources are available?

An LFGTE feasibility study involves determining the technical, financial, and contractual feasibility of the project. Specific to landfill owners, this step involves determining potential LFG recovery from your landfill, understanding basic technology options, understanding funding sources and financial benefits, and, finally, evaluating the operational and financial risks of each project type. For example, assume a landfill has one available industrial user for a medium-Btu pipeline project and the financial analysis shows that it is a more profitable project than generating electricity onsite. While the pipeline project seems more profitable, what happens if that industrial user closes the plant? You may have a pipeline to nowhere. Whereas, if the landfill owner was generating onsite electricity and the utility stopped purchasing the power, the landfill owner would likely be able to sell the electricity to another utility on the grid. These are some of the scenarios that are explored in an LFGTE feasibility study.

The first step of a feasibility study is to determine how much LFG is available. This is typically done through mathematical modeling of LFG generation and collection (e.g., the EPA LandGEM model or other proprietary models). These models estimate the rate of biological decomposition of the solid waste (and therefore LFG generation) dependent on specific independent variables. Important variables include past and future predicted waste receipts, as well as moisture content and MSW composition. A landfill’s LFG generation rate will typically increase as it continues to accept waste and then begin a gradual decline after the last year of waste placement.

Once the LFG generation and collection forecast is better understood, a financial pro forma should be prepared that takes into account the following (at a minimum):

• Timing and cost of installing and expanding the LFG collection system
• Technology selection and alternatives
• Capital required for LFGTE plant (varies depending on project type and size)
• Operating and maintenance costs for collection system and LFGTE plant
• Revenue from sale of electricity, medium-Btu gas, or high-Btu gas
• Revenue from credits or other incentives
• Sources of project funds (allocation of equity and debt)
• Cost of capital
• Taxes

Some of the variables (e.g., cost of capital, taxes) will vary depending on whether the project is developed by the landfill owner or an LFGTE developer or whether the project is developed by a public-sector versus private-sector landfill owner.

There may be multiple versions of the financial pro forma, since the landfill owner may want to evaluate multiple project types. Also, each project type may have several variations. For example, will an end user for a medium-Btu gas project that is 20 miles away from the landfill but operates 24 hours a day generate more revenue than an end user 3 miles away that only operates 18 hours a day?

If the landfill owner decides to issue a request for proposal (RFP) to select an LFGTE energy developer, the information gathered in the feasibility study will enable the landfill owner to develop a more detailed RFP, which will provide better information to prospective developers when submitting their proposals. Additionally, the feasibility study will provide the landfill owner better information from which to judge proposals from prospective developers and to use in final contract negotiations.

The city of Victoria retained R.W. Beck to conduct an LFGTE feasibility study prior to development of a RFP. After development of the LFG generation and collection model, covering the life of the permitted landfill capacity, the study focused on the financial feasibility of onsite electricity generation and medium-Btu direct use. The LFG flow rates at the landfill were approximately 1,500 cubic feet per minute, and high-Btu direct-use projects typically require higher flow rates. During the feasibility study, several potential end users of the LFG were identified for a medium-Btu direct use project, including one that was 12 miles away. The city also held discussions with local utilities interested in purchasing any electricity generated from an onsite generation project. Based on the feasibility study, the city gained a better understanding of the potential financial benefit from the various LFGTE projects and knew where to focus its efforts during the development of the RFP.

LFGTE Project Development Process
The landfill owner has several options for implementing an LFGTE project. The three primary options are (1) the landfill owner acts as project developer, (2) the landfill owner hires a developer to provide a turnkey project, or (3) a combination of the first two.

When the landfill owner acts as the project developer, the owner responsibilities typically include the following:

• Hiring a qualified firm to determine the feasibility and design, and to permit the project
• Hiring a firm to construct the project
• Contracting directly with the LFG end user or electric utility
• Operating the LFGTE project or hiring a third-party operator

In this scenario, the landfill owner receives revenue directly from the sale of the LFG or electricity to the end user and any credits or other incentives that are applicable. The advantages of this ownership scenario include a greater degree of control over the project and the ability to retain more revenue from the project. The disadvantages include substantially more effort on the part of the landfill owner and a larger capital cost investment (and risk) in the LFGTE project.

When the landfill owner uses a developer, the responsibilities are typically allocated as follows:

• The landfill owner conducts a feasibility study and then hires a developer to design, permit, and construct the project
• The private developer contracts with the LFG end user or electric utility
• The private developer operates the LFGTE project or hires a third-party operator

In this scenario, the landfill owner receives revenue in the form of royalties from the sale of the LFG and any credits or other incentives that are applicable. The advantages for the landfill owner of this ownership scenario include “one-stop shopping” for a developer to manage the project from start to finish and a decreased capital investment requirement for the landfill owner. The disadvantages include less control over the project (developer interests can compete with landfill owner interests or regulatory requirements), and potentially less revenue from the project.

There are many ownership scenarios that fall in between the two described. For example, the landfill owner may choose to own and operate the LFG collection system and send the LFG to the developer, at which point the developer is responsible for any capital and operating costs of the LFGTE plant.
After conducting the feasibility study, the city of Victoria decided to develop an RFP to select an LFGTE developer. The city wanted to hire a developer to expand the existing collection system; design, permit and construct an LFGTE project; and operate the LFG collection system and LFGTE project over the period of the contract. While the developer would contribute the required infrastructure, all of the stationary equipment would belong to the city at the end of the contract.

Project Procurement
Regardless of the ownership scenario decided upon for the LFGTE project, the selection of a design/construction firm or private developer of a project should be a competitive procurement process. This will provide the landfill owner with multiple scenarios and options for LFGTE projects that can be formally evaluated. A properly developed RFP (based on information gathered in the feasibility study) will ensure the best value—taking into account financial gain, risk, and other factors. Additionally, this process increases the transparency of the selection process. The following components of the RFP should be considered prior to issuance:

• Desired length of contract and potential for contract extensions
• Responsibility for constructing and maintaining the proposed or existing LFG collection system on the landfill (as separate from the LFGTE equipment)
• Assignment of responsibility for aspects of regulatory compliance
• Preferred or known available LFGTE end-use options or interested parties
• Ownership of credits or responsibility for pursuing other financial incentives

The procurement process, from the start of the feasibility study until the time the project is online, is typically 18–36 months. However, this can vary substantially depending on several factors, including which project type is implemented and any regulatory/permitting hurdles that may be encountered.

The city of Victoria used the information gathered from the feasibility study in the RFP to provide developers a thorough understanding of the project background and parameters for the project. During the mandatory pre-proposal meeting, there were 34 companies represented.  Following the pre-proposal meeting, the city offered an optional landfill tour that provided all participants an opportunity to visit the landfill site. Seven proposals were submitted to the city, representing approximately 20 companies (including prime firms and subcontractors), and included both onsite electricity generation and medium-Btu direct use. Following an extensive evaluation process, including project site visits for the two short-listed firms, the city negotiated a contract with the highest ranked firm. From the initiation of the feasibility study to the selection of the developer took 10 months, with an additional 15 to 18 months anticipated for the completion of the project, for a total of 25 to 28 months.

Funding and Revenue Opportunities
Aside from the traditional funding sources of equity and debt, there may be a number of other funding and revenue opportunities for an LFGTE project. These include carbon credits, production tax credits, investment tax credits, renewable energy credits, and American Recovery and Reinvestment Act funding assistance, although each of these opportunities comes with its own rules, exclusions, and limitations. 

From a funding perspective, it is important to understand the criteria for certain revenue mechanisms that may be available. Production and investment tax credits are only available to tax-paying entities (therefore unavailable to most municipalities). Additionally, these tax credits, as well as renewable energy credits (in most states), are only available to LFGTE projects that generate and sell electricity. Carbon credits (also known as GHG emission credits or verified emission credits) are currently traded on the open market for all types of LFGTE projects but have many restrictions and face increased regulation.

These additional funding sources may influence the financial feasibility of a project and ultimately contribute to positive revenue generation for the landfill owner. They may also turn an already profitable project into a more profitable project. Therefore, it is important to identify and understand these options in the feasibility study, and to pursue these additional funding and revenue opportunities when applicable.

Conclusion
The goal of any landfill owner should be to determine the feasibility of an LFGTE project and develop (independently or with an LFGTE developer) the project in the most fiscally responsible manner while meeting other relevant project or stakeholder goals.

Each landfill is unique, and each potential LFGTE project should be evaluated individually. These projects are typically long-term (15–20 years) and can have positive financial benefits to the landfill owner. Understanding the concepts and following the steps outlined in this article will enable the landfill owner to make informed decisions about the project. In summary, the steps are as follows:

• Conduct a feasibility study to evaluate site-specific options
• Determine desired level of risk and expenditure and evaluate ownership options
• Decide on key components of RFP
• Develop RFP to either hire qualified engineers/contractors or an LFGTE developer
• Evaluate proposals and decide which provides the best value
• Negotiate contracts based on the decisions and information gained in the feasibility process
• Proceed with implementing the LFGTE project

Author's Bio: Joel Miller, P.E., is a project manager and landfill gas specialist for the solid waste practice of R.W. Beck.

Author's Bio: Seth Cunningham, P.E., is a project manager and financial consultant for the solid waste practice of R.W. Beck.