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CC - Approval of an Agreement with Clean Energy Renewables for the Purchase and Delivery of Clean Energy Redeem 100% Renewable Natural Gas (RNG) and Consulting Services for the Management of the City’s Participation in the Low Carbon Fuel Standard Program for a Five-Year Term.
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Meeting Date: 07/25/16
Contact Person/Dept: Paul Condran/Transportation
Phone Number: (310) 253-6520
Fiscal Impact: Yes [X] No [] General Fund: Yes [] No [X]
Public Hearing: [] Action Item: [] Attachments: Yes [X] No []
Commission Action Required: Yes [] No [X] Date:
Public Notification: (E-Mail) Meetings and Agendas - City Council (07/19/16)
Department Approval: Art Ida (06/29/16)
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RECOMMENDATION
Staff recommends the City Council approve an agreement with Clean Energy for the purchase and delivery of Clean Energy Redeem 100% Renewable Natural Gas (RNG) and consulting services for the management of the City’s participation in the Low Carbon Fuel Standard Program for a five-year term.
BACKGROUND
In 2007 the United States Congress passed The Energy Independence and Security Act of 2007 (“EISA”) with specific stated goals to reduce dependence on foreign oil, reduce Green House Gas (GHG) emissions, increase US employment in the “green” sector, by increasing the volumes of renewable fuels required to be blended into gasoline, diesel, heating oil and jet fuel to 36 billion gallons by 2022. The EISA also requires moving the focus of renewable fuels from traditional sources to “advanced” and “cellulosic” biomass feedstocks and the EPA was to create regulations to implement EISA within 12 months of the enactment.
California’s Low Carbon Fuel Standard (LCFS) mandates were enacted by executive order pursuant to Assembly Bill 32 to reduce the carbon intensity in transportation fuels by 10% by 2020. The LCFS program is one of the measures adopted by the California Air Resources Board (CARB) pursuant to Health and Safety Code Sections 38500-38599 to reduce greenhouse gases in California.
Credits generated through the LCFS program can be banked without penalty over the course of the program. Credits do not have a vintage (i.e., there is no distinction between a credit generated in 2014 vs one generated in 2018). Credits generated in years before participating in the LCFS Program are not retroactively credited. To date, the City has not received any revenue under the LCFS Program.
The carbon intensity of a fuel is the measure of its greenhouse gas emissions on a lifecycle basis and includes all emissions during extraction and refining, production and processing, and use in the vehicle. Under AB 32, refiners of petroleum that produce gasoline or diesel can comply with the LCFS via many strategies, including by purchasing credits on the LCFS market that were generated by alternative fuel use. The Renewal Identification Number (RIN) are generated by renewable fuel producers and US importers who import renewable fuel produced by foreign/domestic producers. Producers and importers generate RINs based on the production volume and the Btu content of the fuel. RINs can only be generated if the feedstock meets the definition of “Renewable Biomass” using an EPA-approved pathway, classifying the fuel by its GHG reduction versus the fossil fuel it displaces. RINs can only be generated for fuel that will be used in the U.S. for transportation, heating oil or jet fuel purposes.
Staff has identified biomethane, or renewable natural gas (RNG), as a potentially viable alternative to traditional natural gas. RNG has the same chemical composition as traditional natural gas, but has a far lower carbon intensity. Culver City currently purchases its natural gas from the local public utility, Southern California Gas Company (SoCal Gas). RNG can be supplied to the Transportation Facility through existing utility pipelines, pending approval by SoCal Gas and compliance with natural gas pipeline supply balancing requirements and gas quality specifications. The City’s current compressed natural gas (CNG) cost is averaging $0.80 per gasoline gallon equivalent.
As Culver City dispenses and consumes CNG, a transportation fuel that is more than 85% cleaner than diesel or gasoline, the City is able to generate LCFS credits that can be sold to generate revenue. Culver City dispenses and consumes approximately 800,000 gallons of natural gas annually and is a producer of RINs. More importantly, by introducing and using 100% RNG the City will reduce its carbon footprint even further, by an estimated 35,000 metric tons of GHG emissions to the City’s region, making Culver City one of the cleanest transportation fuel users in the nation. Since 2003, the City’s CO2 emissions from diesel fuel have been drastically reduced, with a total reduction of 107,375 metric tons over the last 12 years. Diesel consumption alone has been reduced by 85% to only 40,000 gallons annually.
On July 13, 2015, Council authorized the release of a Request for Proposals (RFP) to select a firm to provide renewable natural gas and to provide consulting services for the management of the City’s participation in the Low Carbon Fuel Standard Program under California Assembly Bill 32.
DISCUSSION
RFP Number 1585 was released on March 24, 2016 and closed on May 12, 2016. Only one proposer, Clean Energy Renewable Fuels (DBA Clean Energy Renewables), responded.
Clean Energy proposed three options as defined below:
• Option 1: Fossil Natural Gas LCFS Program Credit Management
o Management of the City’s current natural gas volumes with no introduction of renewal natural gas thereby only selling the City’s RIN credits on the open market.
• Option 2A: Renewable Natural Gas (Index-based Discount plus Variable Discount)
o Introduction of 100% renewable natural gas (CE Redeem), plus sell the City’s RIN credits, and the City’s pipeline gas credits combined using current market indicators and timing to sell at the highest points possible. There is some risk in this option as the City would only have a 10% guaranteed revenue return should the LCFS markets crash (which is possible, but highly unlikely). Using this method staff estimates a $2.1 million revenue return over the five year period.
• Option 2B: Renewable Natural Gas (Fixed Discount)
o Introduction of 100% renewable natural gas (CE Redeem), plus sale of the City’s pipeline gas and RIN credits at a fixed discount rate. Because Clean Energy will assume all of the risk at the fixed rate amount, the estimated revenue is projected lower at an estimated $1.2 million over the five year period.
Staff recommends Option 2A as it would generate the maximum revenue possible while lowering the City’s GHG emissions. Attachment 1 provides additional information regarding the estimated revenues associated with each option. Clean Energy has guaranteed one hundred percent renewable natural gas delivery, and has sufficient renewable natural gas supply to meet Culver City’s demand over the entire contract term.
FISCAL ANALYSIS
The LCFS credit market is emerging and is currently difficult to forecast. The price and quantity of credits that may be generated by Culver City will rely greatly on the type and quantity of natural gas used, as well as outside market influences. CARB is considering multiple amendments to the LCFS program that have had some downward effect on credit prices, but most analysts suggest that the compliance stringency in the 2016-2020 timeframe will drive credit prices higher in the near future. Prices have ranged from $21 to $128 per credit since February 2015.
It is important to note, that Clean Energy’s normal 10% fee on the RIN credit returns, is being waived by Clean Energy as the exposure for both Culver City and Clean Energy in this region will generate considerable interest in the RNG sector. The City of Los Angeles is already using this program on a fixed rate of return (Option 2B).
Based on Culver City’s 2015 gas usage and 2015 credit values, using Option 2B, the annual revenue Culver City would realize as a result of using RNG and contracting with Clean Energy to manage and monetize LCFS credits would be estimate at approximately $425,713 annually.
There is no cost impact to the City for this Low Carbon Fuel Standards program.
ATTACHMENTS
1. Attachment 1 - Clean Energy Renewables Pricing Options
RECOMMENDED MOTIONS
That the City Council:
1. Approve an Agreement with Clean Energy for the Purchase and Delivery of Clean Energy Redeem Renewable Natural Gas (RNG) and Consulting Services for the Management of the City’s Participation in the Low Carbon Fuel Standard Program for a Five Year Term; and,
2. Authorize the City Attorney to review/prepare the necessary documents; and,
3. Authorize the City Manager to execute such documents on behalf of the City.