麦肯锡-可再生天然气：美国脱碳的瑞士军刀？Renewable natural gas A Swiss army knife for US decarbonization

Mcsey

&company

ElectricPower&NaturalGas

Renewablenaturalgas:ASwiss

armyknifeforUSdecarbonization?

Renewablenaturalgasplaysaroleinreducingemissions—scalingitisonepotentialnear-termactiononthejourneytodecarbonization.

ThisarticleisacollaborativeeffortbyKesterBrons,GracieBrown,NathanLash,RuidiLu,AndjelkaMilutinovic,andGregSantonirepresentingviewsfromMcKinsey’sElectricPower&NaturalGasandOil&Gaspractices.

©GettyImages

November2023

Theenergytransitionisunderway.Corporationsandpolicymakersareembarkingonambitious

decarbonizationjourneystoreducedependenceonfossilfuels.Renewablenaturalgas(RNG)emerges

asanalternativefuelthatcouldcontributeto

substantialemissionsreductionsacrossmultipleindustries.

Atpresent,fossilnaturalgas—whichcomprises

95percentmethane,5percentethane,andtraceamountsofotherhydrocarbons—isthesecond

largestsourceofprimaryenergyintheUnited

States,responsiblefor33percentofthecountry’senergyconsumptionin2021.¹Andinthelast

decade,naturalgasconsumptionhasgrownby

approximately2percentperyear.²AsnaturalgasplaysasignificantroleacrosssectorsintheUS

energysystem—includingbuildingandindustrialheating,transportation,chemicals,andpower

generation—muchinfrastructure(suchaswells,

pipelines,powerplants,andliquidnaturalgas[LNG]exportterminals)hasbeenbuilttoextract,transport,andcombustnaturalgas.

RNGisapurifiedformofwaste-derivedbiogas

generatedfromanaerobicprocessesandthen

upgradedtopipeline-qualitygas.Itisvirtually

indistinguishablefromfossilnaturalgas(botharemorethan95percentmethane).³RNGhasthe

potentialtodecarbonizeaportionoftheemissionsacrossmanysectorsandcanbealike-for-like(inotherwords,a“drop-in”)replacementforfossil

naturalgas—meaningthatendusersdonothavetomodifyengines,distributionsystems,orotherequipmentwhenswitching.

Dependingonthetypeofwaste(feedstock)usedtoproduceRNG,theassociatedgreenhouse

gas(GHG)reductionrangesbetween50percent(emissionsintensityofapproximately50grams

CO2equivalentpermegajoule[gCO2e/MJ])and

300percent(emissionsintensitycoulddroplowerthanapproximately300gCO2e/MJ)compared

tofossilnaturalgas(90to100gCO2e/MJ).This

calculationwillvarybasedonfeedstockaswellasthecalculatedbaselineemissionsfornaturalgas

usedforcomparison(seesidebar,“RNGcanbeproducedfromavarietyofsources—withvaryingcosts,availability,andcarbonintensity”).⁴This

characteristic,combinedwithRNG’sabilityto

beusedinexistinggasinfrastructurewithout

infrastructuremodification,pointstoitsphysicalviabilityasanalternativetofossilnaturalgas.

However,becauseRNGisfeedstocklimitedandisnotalwayseconomicallyviable,itisnotasilverbulletfordecarbonization.Currently,RNGsupplyrepresentslessthan1percentofnaturalgas

supplyintheUnitedStatesand,evenifsupplywerebuiltouttoutilizeallpotentialfeedstock,RNGwouldrepresentabout5to20percentofcurrentnaturalgasdemand.⁵

DespiteRNG’ssupplylimitations,itcanbecomeanimportantpartofaportfolioofsolutionsto

achievedeepdecarbonization,particularlyin

thenearterm,asotherlow-carbonmolecules

suchashydrogenarestillintheearlystages

ofcommercialscale-up.Therefore,scalingup

RNG—anddeterminingwhichend-usemarketscanderivethemostvaluefromit—mattersintheenergytransition.

ThisarticleexplorestheRNGlandscape,

includingtheregulatoryenvironment,the

prospectsandchallengesfordevelopers,andpotentialunlockstocapturevalueandrealizeRNGasasustainableenergysource.

TheRNGmarketandevolving

regulations

PolicyaddressesthreeareasoftheRNGmarket:first,whichendusesconsumeRNG;second,

thecalculationofRNG’scarbonintensity(andthereforeitsvalue);andthird,whereRNG

physicallycomesfromandtowhereitcanbesent.

Enduses

MostRNGgoestowardcompressednaturalgas(CNG)vehiclesduetopolicyincentives,includingthefederalrenewableidentificationnumber(RIN)

1“U.S.energyfactsexplained,”U.S.EnergyInformationAdministration,May2023,accessedOctober2023;“Learnaboutnaturalgas,”Enbridge.2“Naturalgasconsumptionbyenduse,”USEnergyInformationAdministration,August2023,accessedOctober2023.

3“Renewablenaturalgas,”UnitedStatesEnvironmentalProtectionAgency,August3,2023.

4“LCFSpathwaycertifiedcarbonintensities,”CaliforniaAirResourcesBoard.Note:Notonlythetypeofwaste,butalsoalltheassociatedbaselineemissionsfromtheprocessesthatRNGisreplacinginfluencetheGHGreductionpotential.Baselineemissionsfromlandfillmethanearevery

differentfrommanurefromruminantslikecowsandpigs.

5Renewablesourcesofnaturalgas:Supplyandemissionsreductionassessment,AmericanGasFoundation,December2019;McKinseyanalysis.

2Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?

RNGcanbeproducedfromavarietyofsources—withvaryingcosts,availability,andcarbonintensity

RNGfromanaerobicdigestioncanbemadefromseveralwastefeedstocks.ThefourprimaryfeedstocksusedtodayintheUnited

Statesarelandfillwaste,agriculturemanure,foodwaste,andwastewaterresidues,withpotentialfuturesourcesofsupplyfrombio-masswaste(Exhibit1).

Exhibit1

Thereareseveralpossiblerenewablenaturalgasfeedstocks.

RNGproductionpathwaysNaturalgasendusers,

bysector,TCFdemand(2022)

Renewablenaturalgas(RNG)

supplysources

Municipalsolid

waste/landillgas

Wastewater

Foodwaste

Agriculturewaste

(eg,dairymanure)

Covercross,plant

byproducts,and

additionalbiomass

RNG

>95%CH₄

Biogas

50–75%CH₄

Biogascanalsobeused

upgrading

forpowerwithout

toRNG

Powerproduction

Transportation

Buildingheat

Industrial¹

~12.1

~0.1

~8.5

~10.4

1Includinghydrogenproduction.

Source:EnergyInformationAdministration(EIA)

Thesefeedstockshavevaryingcarbonintensityandcostsofcapturingandprocessingthebiogas(Exhibit2).

Landfillwaste:Landfillscancapturethenaturallyemergingbiogasfromlandfillwaste,whichisthenupgradedintoRNG.RNGfromlandfillbiogasisthemostcost-effectivepathwaytoday,aslandfillsarealreadylegallyrequiredtocapturethebiogasandhenceonlyneedtobuildtheupgradingequipment.¹Asaresult,landfillbiogasiscurrentlythelargestRNGfeedstockintheUnitedStates

(representingaround70percentofcurrentcapacity).²However,giventhatlandfillsalreadycapturebiogasandthereforehavemuch

lowerassociatedmethaneemissionsintheirbaseline,RNGfromlandfillbiogasalsodeliverstheleastemissionreductionincontrasttonaturalgas(50to60gCO2e/MJcomparedtoaround90to100gCO2e/MJforfossilnaturalgas).³

Agriculturemanure:Agriculturemanure(forexample,fromdairy,swine,andchicken)isanaerobicallydigestedintobiogasand

upgradedintoRNG.⁴RNGfromagriculturemanuredeliversthelargestemissionreductionduetotheavoidedmethaneemissionsthatwouldotherwiseoccurifthemanurewerenotdigested.⁵Asaresult,ithasgrowninrecentyearstoabout20percentofUS-announcedcapacity.Mostofthisisfromdairyfarms,asthosearetheeasiestplacestocollectmanure.However,thecurrentcostsassociatedwithconstructingandoperatingananaerobicdigestormakeproductioncostsnearlytwiceashighaslandfillRNG.

Foodwaste:Source-separatedorganicwasteisanaerobicallydigestedintobiogasandupgradedintoRNG.AccordingtoCalifornia

AirResourcesBoard’sCurrentFuelPathwaysTable,RNGfromfoodwasteemitsbetween–80and–30gCO2e/MJ,thesecond-high-estemissionreductionafteragriculturalmanure;however,USsupplyislimitedtodayasitischallengingtosecureadequatelyseparatedorganicwaste.⁶Productioncostsarecomparabletomanure-basedRNG.

1Finalfederalplanrequirementsformunicipalsolidwastelandfills.UnitedStatesEnvironmentalProtectionAgency,May10,2021.

2Renewablenaturalgasdatabase,ArgonneNationalLaboratory,May23,2023.

3“LCFSpathwaycertifiedcarbonintensities,”CaliforniaAirResourcesBoard,May26,2023.

4Themicrobialprocessthatoccursinoxygen-freeoranaerobicconditionsproducesmethane,whichcanthenbecollectedforRNGproduction.Anaerobicdigestionand

upgradingtoRNGiscapitalintensive,whichhashistoricallyledtolowadoptionrelativetopotential.

5Renewablenaturalgasdatabase,ArgonneNationalLaboratory,May23,2023.

6CaliforniaAirResourcesBoard,May2023,accessedOctober23,2023.

Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?3

Wastewatertreatmentplants(WWTPs):OrganicresiduesfromWWTPscanbeanaerobicallydigestedintobiogasandupgradedintoRNG.RNGfromWWTPtypicallyhaslifecycleemissionsofapproximately30to40gCO2e/MJ,leadingtoamorelimitedemissionreductionthanRNGfromagriculturalmanureorfoodwaste.⁷However,becauseitrequiresdigestors,productioncostsarehigherthanlandfill.Hencethepathwaycurrentlyhaslimitedsupply.

Otherbiomasswaste(notatscaleintheUnitedStates):Covercropsankdplantby-productsareemergingasothersourcesofbiomassfeedstock.WhilethesesourcesarelessestablishedintheUnitedStates,theabilitytodevelopandcommercializeotherbiomassfeedstocksinalow-carbonintensityway,atscale,couldexpandthepotentialsupplyofRNG.

Exhibit2

Renewablenaturalgasfromanaerobicdigestioncanbemadefromvariouswastesources.

Renewablenaturalgas(RNG)productionpathways

Agriculturalmanure¹

Fossil

FoodwasteWastewater

naturalgasLandill

CurrentUSsupplypotential,millionMMBTU²/year

603,600890

1,200

70

95

ActualUSsupply,2022,millionMMBTU²/year

~37,500~70

~20

~5

~5

Penetration,³%

N/A

~8

~2

~7

~6

Carbonintensityrange,

gCO₂e/MJ⁴

80–90

50–60

30–40

–30to–80

<–150

Supplycostrange,

$/MMBTU²

3–5

10–15

25–30

20–25

15–20

1Includeschickenandswine.

2MillionBritishthermalunits.

3Calculatedassupplydividedbypotential.

4Gramsofcarbondioxideequivalentpermegajouleofenergy.

Source:CARB;EIA;McKinseyanalysis

7Ibid;Renewablesourcesofnaturalgas:Supplyandemissionsreductionassessment,AmericanGasFoundation,December2019.

4Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?

schemeandtheLowCarbonFuelStandard(LCFS)

availableinBritishColumbia,California,Oregon,andWashington.⁶Basedonouranalysis,thesepoliciescanprovideincentivesupto20timesthevalueof

naturalgas.

TheCNGmarketissmall—transportrepresents

lessthan1percentofUSnaturalgasdemand.TheCaliforniaCNGmarketisalreadysaturatedwith

RNGandwillcontinuetobesaturatedasgrowth

inelectricvehicles(EVs)outpacesgrowthinCNG.⁷Othersectors’uptakeofRNGwilllargelyhingeonpolicy,including:

—Buildings(26percentofnaturalgas[NG]

consumption).Severalstates—including

California,Illinois,andMinnesota—havepassedpoliciesthatfacilitategasutilitiesblendingRNGintotheirsystems.⁸

—Powergeneration(38percentofNG

consumption).RNGcouldtheoreticallyearn

valueinpowergenerationinsomestates

throughRenewablePortfolioStandards,thoughRenewableEnergyCertificate(REC)pricingis

currentlyinsufficienttospurtheRNGmarketinthepowersector.⁹Alternately,theEnvironmentalProtectionAgency’s(EPA)December2022

proposedruleintroducedapotentiallymore

lucrativeopportunitytogenerateRINsvia

biogas-to-powerforelectrifiedtransport,butrelevantpolicieswerenotimplementedintheEPA’sfinal2023RenewableFuelStandards.¹0

—Industry(32percentofNGconsumption).TheUnitedStatesdoesnothavepoliciespromotingtheuseofRNGinindustry.Industrialdemand

forRNGisinsteaddrivenbycompaniesmeetingvoluntaryclimatetargets.¹¹

Carbonintensity

Undersomepolicymechanisms,thecarbon

intensity(CI)ofRNGiscriticaltoitsvalue.Therefore,CIaccountingpolicywillinfluencetherelativevalueofRNGproductionpathwaysandwhichtypesof

RNGgotowhichendmarkets.

Forexample,inCalifornia’sLCFSpolicytoday,

varyingassumptionsrelatedtoavoidedemissionsduringRNGproductionresultinmateriallydifferentcarbonintensitiesandassociatedLCFScredit

valuesacrossproductionpathways.¹²Agriculturemanureisassumedtoemitmethaneinabaselinescenario;asaresult,RNGproducedbyprocessingthatmanureiscalculatedtohaveaverylowCIduetotheavoidedmethaneemissions.Bycontrast,

landfillstypicallyhaveacapthatcapturesthe

methanebeforeitisemittedandalimitedamountofmethaneisreleasedtotheatmosphereinabaselinescenario—therefore,theCIcalculationforRNG

fromlandfillsassumesasmalleravoidedmethaneemission,leadingtoahigherCI(Exhibit1).

FederalRINs,ontheotherhand,arecalculatedonavolumetricbasiswhereeachunitofRNGderivedfromorganicwastewillyieldaRIN,regardlessofCI.

Asaresultofvaryingincentivesforcarbonintensity,

almostalldairyRNGtodayflowstotheCNG

transportationmarketsinCaliforniaandstateswithsimilarincentiveprograms(forexample,OregonandWashington).Pathwayscalculatedtohavehigher

CI—suchaslandfillRNG—areincreasinglyselling

intomarketsthatdonotprovidefinancialincentivesbasedontheCIforRNG.However,regulators

liketheCaliforniaAirResourcesBoardare

currentlyconsideringbaselinemethaneemissioncalculations.¹³

⁶GlobalEnergyPerspective2022,McKinsey,April26,2022.

⁷CaliforniaCNGisalreadymorethan98percentmetwithRNG;“DecarbonizingCaliforniawithrenewablenaturalgastransportation,”Natural⁸GasVehiclesAmerica,October2022;GlobalEnergyPerspective2022,McKinsey,April26,2022.

⁹“Naturalgasexplained,”U.S.EnergyInformationAdministration,April28,2023;Forexample,aTier1renewableenergycertificates(REC)inNew

YorkStatesoldfor$20.10/MWhinthefirstquarterof2023(assessedOctober2023);ataconversionof0.293MMBTUperMWh,thisimplies$5.88/MMBTUfromRECs;“2022complianceyear,”CleanEnergyStandard,NewYorkState,2023.BycontrastRNGfromlandfillbiogas,thelowest-cost

feedstock,costs$11/MMBTUtoproduce.

¹0“ProposedRules,”FederalRegister,2022,Volume87,Number250;“RenewableFuelStandardProgram,”UnitedStatesEnvironmentalProtectionAgency,December30,2022.

¹¹“Naturalgasexplained,”U.S.EnergyInformationAdministration,April28,2023.Forinstance,DukeUniversitysigneda20-yearagreementwith

GreenGasUSAtopurchase95,000MMBTUsofRNGtoedgetheUniversityevenclosertomeetingits2024net-zerocommitment;NoraGoldstein,

“DukeUniversitysealsthedealforRNG,”BioCycle,August3,2021;AstraZenecasigneda15-yearagreementwithVanguardRenewablesto

purchaseupto650,000MMBTUannuallytomeetitsnet-zerotargets.JacobWallace,“VanguardRenewablesstrikeslargestopenmarketRNGdealyetwithAstraZeneca,”WasteDive,June14,2023

¹²Lowcarbonfuelstandardpublicworkshop:Conceptsandtoolsforcompliancetargetmodeling,CaliforniaAirResourcesBoard,November9,2022.¹³Ibid.

Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?5

Exhibit1

Productionandavoidedemissionsfromcreatingrenewablenaturalgasarethebiggestsourcesofdifferentiationincarbonintensityacrossfeedstock.

Carbonintensitybypathwaystages,gCO₂e/MJ¹

Agriculture-manurerenewablenatural

gas(RNG)

60

279

–204

–300²

LandillRNG

33

9

60

–55

47

Fossilnaturalgas

60080

9

11

Productionemissions

Transportandcompression

CombustionAvoided

emissions

Calculated

carbon

intensity

1Gramsofcarbondioxideequivalentpermegajouleofenergy.

2Dependingonspeciicscanrangeanywherebetween–200and–500.

Source:CARBBasicnotes;CARBLookuptables;CARBTier1simpliiedcalculator

Policyimpactsfromwhere,andtowhom,RNGcanbesold

TheLCFSbook-and-claimsystemmeans

developersdonothavetophysicallydeliverRNGtotheendconsumer,butrather“book”everyunitof

gasinjectedintothegridand“claim”consumptionwhentheenduserconsumesaunitofgas.This

meansanyRNGdeveloperwithaccesstoaNorthAmericanpipelinemightselltoaCNGfleetin

CaliforniaandearnLCFScreditvalue.

Policiesimpactthewayinwhichendusesectors

consumeRNG,howmucheachsectorispaying

foreachRNGproductionpathway,andfromwheretheybuytheirRNG.Generally,currentpolicy

directioncreatestailwindsfortheindustry.

Tailwindsarestrong,butdevelopersface

realchallenges

Recentregulatorychangessuchasthe

InflationReductionAct’s(IRA)policyguidelines,theEPA’se-RINproposallaidoutinthe2023

to2025FederalRenewableFuelStandard

(RFS),andstateblendingtargetscould

supportanexpansioninRNGdemand.¹⁴In

addition,theIRAcouldprovidetailwinds

forRNGdevelopmentduetoa30percent

biogasInvestmentTaxCredit(ITC)through

2025,aswellascarboncaptureandhydrogen

productiontaxcreditsthatmakebothblue

hydrogenandbroadercleanfuelsmore

attractive.¹⁵

¹⁴

¹⁵

TheEPA’se-RINproposalwasintendedtoallowbiogasprojectstoearnRenewableIdentificationNumbercreditsbysellingbiogasto

produceelectricitythatpowerselectricvehicles;“UnpackingEPA’se-RINproposal,BioCycle,December20,2022;MichaelLevin,“TheIRArevolutionizesADtaxcredits,”BioCycle,August23,2022;“ProposedRules,”FederalRegister,2022,Volume87,Number250.

“Sec.45Q.Creditforcarbonoxidesequestration,”BloombergTax;“Sec.45V.Creditforproductionofcleanhydrogen,”BloombergTax.

6Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?

RNGcapacityintheUnitedStateshasgrown

fourfoldsince2015,withlandfillandagriculture

manureprojectsdriving90percentofUSsupply.¹⁶InvestorsandcorporatesaredeployingsignificantcapitalintoRNG.

Despitetheemergingtailwinds,thisrapidscale-upanddemandshiftcreatescomplicationsforRNG

developers:

—CurrentCNGmarketsareatriskofsaturation.

Themarkethashistoricallybeenthemost

attractiveforRNG;however,growthinUS

demandforCNGisprojectedtoslowpost2030asimprovementsinEVbatterytechnologyleadtoelectrificationoutcompetingCNGinmedium-

dutyandheavy-dutyfleets.¹⁷Inaddition,thehigh

volatilityofLCFSandRINpriceshasdeveloperslookingforlonger-termfixedpriceagreementstolimittheirmarketpriceexposure.Asthe

marketshiftsfromCNG,developersseekto

identifyhigh-valueandlonger-termoff-takers.

—Costtoproduceisincreasing.Supplychainandfinancingcostsaredrivingupprojectcostsandextendingdevelopmenttimelines.Meanwhile,projectdevelopersaretryingtorapidlyscale

uptheirexecutioncapabilities,oftenaimingtobuildmorethantenprojectsperyear(upfromapproximatelythreeperyear),tomeetgrowingdemand.Fewdevelopersyethavethescale,

experience,orbandwidthtoimplementcapitalandoperationalbestpracticesthatareneededtodrivedownprojectcosts.

—Lowest-costRNGfeedstocksourcesare

scarcer.MostUSRNGproductiontodaycomes

fromlargelandfillsanddairyfarms(withmore

than5,000dairycows)thatcandeploylarger-

scaledigestersandhenceoperateatlowerper

unitcostthansmallerfacilities.Thereis,however,stillanuntappedlong-tailsupplyoffarms(such

asswine,chicken,andsmallerdairyfarms)thatarehardertocommercializethanlargefarms,

andlandfillsthataregeneratingbiogastoday

buthavenotyetupgradedtoRNG.Whilesupplypotentialremains,alternatesourcesofsupply

willbehardertodevelopcosteffectively.

PotentialunlocksforRNGdevelopers

Tonavigateemergingchallengesandtakestepstocapturevalue,RNGdeveloperswhoactnowcouldchoosetodosoinseveralways.

Secureoff-takerslookingtomonetizelow-CIproducts

AstheCNGmarketsaturatesandtheregulatory

environmentcontinuestoevolve,developers

mayseektodiversifycustomers—suchasfrom

CNGfleetownerstoamixofutilities,hydrogen

producers,andpotentiallyelectricvehicleOEMs—andtodiversifyexposuretocreditschemes.For

instance,developerscoulddiversifytheircurrentrevenuestreamsfromonesreliantonLCFSand

RINstoincludehydrogenproductiontaxcredits,

orofftakecontractswithutilitiesthathave

blendingmandates.

Therearethreeprimarymarketopportunitiesthatdeveloperscanevaluate,including:

—Collaboratingwithutilitiestodecarbonizeheating,whilemaintainingcustomer

affordability.Utilitieshaveregulatory

requirements—includingthosetoprocure

RNGinsomestates—whilemaintaininglow

ratesfortheircustomers.Therefore,many

utilitieswillseektoprocureRNGonaleast-

costpermillionBritishthermalunits(MMBTU)basis.RNGdevelopers(particularlythosewithlowercostandhigherCI,suchasdevelopers

producingRNGfromlandfills)couldoffer

utilitiesleast-costperMMBTUgasthatmeetstheirregulatoryrequirementswhileminimizingrateimpacts.Theseutilityprioritiesmayshiftovertimeandwilllikelyvarybystate,asgas

utilitiesandtheirregulatorsevaluateandvaluedecarbonizationlevers.

—Watchingregulatorysignpoststomonitore-RINsasapotentialopportunity.LCFS

hasapprovedseveralbiogas-to-power

pathwaysfortransportation,andtheEPA’s

December2022proposedrulewould

havecreatedincentivesforRNG-to-power

projectsnationally.However,therulewasnotimplementedin2023.¹⁸Ifane-RINsruleis

¹⁶¹⁷

¹⁸

Renewablenaturalgasdatabase,ArgonneNationalLaboratory,August2,2023.

GlobalEnergyPerspective2022,McKinsey,April26,2022.

“Renewablefuelstandardsprogram,”UnitedStatesEnvironmentalProtectionAgency,December30,2022.

Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?7

–3.0

implementedinlinewiththeDecember2022

EPAproposedrule,powerforEVcharging—via

offtakecontractswithpassenger-vehicleOEMs—couldbeanendmarketforRNGproducerstoexplore.

—Fuelinglow-carbonhydrogenproduction

inexistingplants.IntheUnitedStates,mosthydrogeniscarbon-intensive“grey”hydrogen,producedviasteammethanereformation

offossilnaturalgasatapproximately$1perkilogramofhydrogen.¹⁹TheIRAincentivizeslow-CIhydrogenproduction.Forexample,retrofittingexistinghydrogenproduction

plantswithcarboncapturecanproduce

“blue”hydrogen,worthupto$1perkilogramofincentivevaluefortenyearsofproject

lifefromtheIRA.Pendingpolicyguidance,

addingevensmallblendsofcarbon-negativeRNG—aslowas7to10percent—canqualify

forIRAincentivesof$3perkilogram,equatingtoaround$200perMMBTUforRNG(Exhibit2).Thus,thecombinationofnegativeCIRNGandcarboncaptureandsequestration(CCS)

couldpotentiallybeaneconomicallyattractivepathwayforhydrogenproducers.

Acceleratedevelopmentatscale

Supplywillneedtotripleinthenextdecadeto

meetexpecteddemandanddecarbonization

goals.Toscaleupsupply,RNGprojectdeveloperswillneedtobuildcapabilitiesincapitalproject

development.Theseincludeexecutingseveralprojectsinparallelontimeandonbudget;

managingEPCcontractors;securingoutsidefinancingincludingdebtandfederalandlocalincentives;andoverseeingandoptimizing

ongoingoperationsacrossanat-scaleprojectfootprint.

Scaleitselfwillcreatevalue.Asdevelopersscale,theycouldrealizelowercostofcapitalbygroupingmultipleprojectstocapturetaxequityviathe

IRA’sITC(through2025).Additionally,larger

developerscouldcontractatscalewithmajor

customers,likefertilizercompaniesorgasutilities,thussecuringlong-term,morestablecontracts.

Exhibit2

Renewablenaturalgascanpotentiallyunlockincentivesforlow-carbonhydrogenproduction.

CostofbluehydrogenwithATR¹withCCS²including45V(illustrative),³$/kg

OperatingexpensesCapitalexpenses45VPTC

Withoutrenewablenaturalgas(RNG),

bluehydrogenwith95%CCS

canearn$0.75–$1.0/kg

productiontaxcredit(PTC)…

~2.0

~1.25

~1.0

–0.75

–1.0

ATR+95%CCS

$0.75–$1.0PTC

ATR+95%

CCSand

$0.75–$1.0PTC⁵

~0.5–2.5

1Autothermalreforming,aprocesstoproducehydrogenfromnaturalgas.2Carboncaptureandstorage.

3~80kilotonsperannumH₂facility.

4MillionBritishthermalunits.

5Assumes$40/MMBTURNGdrivingincrementaloperatingexpenses.Source:HydrogenInsightsCostModels;McKinseyteamanalysis

TotalcostincludingsubsidiesCarbonintensity,kgC0₂eperkgH₂

…however,a7–10%RNGblendcanunlock$3/kgPTC,implyingeachMMBTU⁴ofRNGgeneratessigniicantvalue

~2.7–3.0

~0to–0.3

$3.0PTC

ATR+95%CCSand$3.0PTC

ATR+95%CCS

withRNGblend

~0–0.45

¹⁹Pathwaystocommercialliftoff:Cleanhydrogen,U.S.DepartmentofEnergy,March2023.

8Renewablenaturalgas:ASwissarmyknifeforUSdecarbonization?

Commercializetheh