Using a Contracts for Difference Program to Support Dairy Biogas in California

As part of its overall climate strategy, California is seeking reductions in short-lived climate pollutants, such as methane, through the implementation of the 2016 Senate Bill 1383. This California legislation includes a comprehensive strategy to mitigate methane emissions through the adoption of a set of policies and incentives that could increase the production and use of compressed natural gas (CNG) produced from renewable sources. This working paper utilizes the methodology from ICCT’s previous work on durable financial mechanisms to evaluate the costs and benefits of using contracts for difference (CfDs) to support the production of bio-CNG from dairy farms in California. A CfD could provide bio-gas producers with a long-term price guarantee for their project, while leveraging other, existing financial incentives to minimize the cost of the CfD program itself.

Dairy biogas is a promising source of ultralow-carbon energy in California. Due to the greater value of GHG emission reductions within the transportation sector and the greater value of incentives for alternative transportation fuels, diverting dairy biogas toward producing transportation fuel in the form of bio-CNG can support higher prices and offer greater returns to investors and dairy farmers compared to its use for heat and power generation. However, converting dairy biogas into bio-CNG for transportation requires greater upfront investments and capital expenditures than if the biogas were to be used to produce heat and power for onsite consumption, making it a prime candidate for support through a CfD program.

To evaluate the impact of CfDs, we present a cash flow model of hypothetical costs for dairy biogas bio-CNG projects including capital and variable costs to estimate the break-even price for finished fuel to be viable. We then compare these estimates to the market value of bio-CNG in California to project the costs of a CfD program relative to the volumes of fuel supported and their associated GHG benefits.

This study estimates that with a modest amount of funding, a CfD program could support a substantial number of dairy biogas projects and production volumes through 2030. As the CfD program would likely act as a hedge against uncertainty for other, existing policies such as the Renewable Fuel Standard and California Low-Carbon Fuel Standard, its own payments would be minimal in most scenarios. We find that using this approach to support new dairy bio-CNG production would be a highly cost-effective method for climate mitigation, reducing GHG emissions at a cost of $0–$32/tonne CO2e.