Biogas Market Enters 2023 on Strong Tailwinds

JD Supra

2022 saw a flurry of renewable natural gas (RNG)-related deals, including in anticipation of (and then in response to) the historic Inflation Reduction Act (IRA). Sustainability mandates and the growing maturity of RNG-related credit markets, as well as the IRA’s expansion of investment and production tax credits, drove increased transactions and historic valuation.

Although BlackRock Real Assets’ $700 million acquisition of RNG developer Vanguard Renewables won early headlines, those historic valuations were ultimately led by Archaea Energy, Inc., which oil giant BP acquired shortly before yearend in a transaction valued at nearly $4 billion. Largely driving that price was Archaea’s development pipeline, which BP expects will double its RNG-related earnings by 2030 (to approximately $2 billion), while helping to decarbonize the production of existing energy products.

Close on BP’s heels, Shell announced its own yearend deal to acquire Nature Energy Biogas, Europe’s largest RNG producer, for nearly $2 billion. The deal brings Shell a cash-generating portfolio of 14 operating plants (producing over 6 million MMBtus of RNG annually) and a considerable project development pipeline, including 30 European prospects. Once commissioned, those projects could deliver an additional 9 million MMBtus of RNG annually by 2030.

Other noteworthy transactions included CIM Group’s acquisition of RNG developer MAS CanAM, an affiliate of American and Canadian RNG developer MAS Energy, which netted CIM Group a development portfolio of 7 projects expected to generate more than 3.9 million MMBtus annually.

The rush to acquire RNG development portfolios hasn’t been confined to for-profits underpinned by stratospheric balance sheets; natural gas utilities played an active role in the 2022 RNG market, also, establishing themselves as both financial backers and strategic partners to developers, investing development cash, physical RNG transportation infrastructure, and operating expertise.

“I think [the BP-Archaea deal] really highlights the value that others see for RNG and, really, the growth potential for RNG. And so first, it gives us confidence that we’re going to find more high-growth potential projects,” David Ruud, CFO of DTE Energy Co., a Michigan-based gas and electric utility, said during a late-2022 call. “Right now, we’re just really confident in our business development pipeline.”

Electric utility Dominion Energy Inc. also stressed its near-term RNG pipeline during a recent analysts call; the company has 4 facilities in operation, 11 under construction, and 5 more in development, according to COO Diane Leopold. Chairman Robert Blue emphasized Dominion’s commitment to the industry, telling analysts he means to invest $2 billion in RNG projects by 2035. Meanwhile, Roger Perreault, CEO of natural gas utility UGI, told analysts in late 2022 that the company intends to invest $1.25 billion in RNG by 2025.

Barely 30 days in, 2023 shows no sign of retreating from the momentum established by these and other deals, including those shown in the table above. Earlier this month, Suburban Renewable Energy, a wholly owned subsidiary of Suburban Propane Partners, announced a deal with Equilibrium Capital Group for the acquisition of 2 operational RNG projects and the creation of a project development platform. “Biofuels and renewable natural gas are now mainstream commodities in the transition to low carbon energy and decarbonization of our economy. The major challenge will be scaling cost-effective production supplies to meet market demand. Equilibrium is taking our experience investing in, developing, and operating scalable RNG production infrastructure, and partnering with Suburban’s market leadership and expertise in gas logistics, trading and user applications, to build assets that drive towards these goals,” said Dave Chen, CEO of Equilibrium Capital.

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