Quick! What's the first thing that comes to mind when you hear the word "biofuels"? I'll bet you thought of ethanol and biodiesel, but those are so 2013. While the first-generation biofuels will continue to dominate the Renewable Fuel Standard, or RFS, the U.S. Environmental Protection Agency will now formally recognize natural gas fuels derived from biological sources, or biogas, and electricity produced from biogas that is used to power electric vehicles as advanced fuel pathways. That will inject quite a bit of green into the balance sheet and product offerings of Clean Energy Fuels (NASDAQ:CLNE), which has been developing biogas resources for quite some time.
How is natural gas used as a fuel?
There are two types of natural gas fuels: (1) compressed natural gas, or CNG, and (2) liquefied natural gas, or LNG. While LNG has gained some traction in heavy-duty trucking applications, the high cost of super-cooled storage makes it a less attractive option than CNG. The main component of both fuels is methane, which can be derived from pipeline gas sourced from an underground deposit (fossil fuel) or from a landfill, wastewater treatment facility, or farm (biogas, biomethane, or renewable natural gas). CNG and LNG produced from the latter are now qualified as advanced fuels.
Why does this matter for investors?
While Clean Energy Fuels is developing a nationwide infrastructure for CNG from both fossil and renewable sources, the company's Clean Energy Renewable Fuels subsidiary markets biomethane fuel called Redeem. The company owns processing facilities at two landfills in the United States that will have a combined annual production capacity of 29.2 million gasoline equivalent gallons of fuel at full capacity, while a third facility will add an additional 7.3 million gasoline equivalent gallons each year. It's a relatively simple process, too. The company assumes the cost of purification and depreciates the capital expenditures on each facility, which ships purified biomethane via existing natural gas pipelines.
A total of 36.5 million gasoline equivalent gallons may not sound too impressive, but Clean Energy Fuels is committed to developing and acquiring new biomethane production facilities across the country. The new EPA policy should further spur development of biogas -- and no company is better positioned for technology implementation and/or partnership within the fuels network (i.e., access to its distribution network) than Clean Energy Fuels.
What's the revenue potential?
This is a bit tricky to calculate and could work out several ways over the next few years as the EPA further develops the biogas rules, but here's a simple scenario. A Renewable Identification Number, or RIN, is generated for every gallon of renewable fuel created. The EPA tracks the number of RINs generated to keep a tally on renewable-fuels production throughout the year, while RINs are also swapped to create revenue to subsidize and encourage production (producers), meet federally mandated blending obligations (blenders), or turn a quick profit (traders). The value of an advanced biofuel RIN is determined by market demand and energy content, but biogas RINs have historically sold for roughly $1 per gasoline equivalent gallon.
That may not sound like much at first pass, but consider that it works out to roughly $13 per million BTU of natural gas. That's nearly 300% of the market price for natural gas! Similar prices would make the currently planned biomethane capacity of Clean Energy Fuels worth an additional $36.5 million each year. That's chump change compared with the roughly $90 million pulled in by the company in each of the past five quarters, although it would have slashed the company's 2013 net loss by more than 50%. Then again, stopping the calculation there would be short-sighted.
Investors should think about the opportunity in two ways: (1) volume of biomethane available and (2) mandates. The EPA estimates that 52% of the nation's methane emissions -- a greenhouse gas many times worse than carbon dioxide -- are derived from landfills, animal farming practices, and wastewater treatment facilities. Trash decomposing in landfills represents 18%, or nearly 290 million metric tons of carbon dioxide equivalent, of America's total annual methane emissions. In other words, there's plenty of methane -- really cheap methane -- available for conversion into electricity or higher-value chemical products. To be clear, Clean Energy Fuels is looking beyond landfills for expansion projects, which represent an even larger potential market.
And, of course, there's always the possibility the EPA creates a mandate requiring that biogas represents X% of the CNG market each year (parallel to the ethanol/gasoline mandate). It may take a few years to develop such a mandate, considering that this is the first year the EPA has solidified the biogas route for advanced fuels, but Sweden and Germany boast CNG markets comprised of 60% and 25% biogas, respectively. The American market for CNG is much larger, but the country also has much, much more biomethane available for capture.
Foolish bottom line
It's important to remember that Clean Energy Fuels has been committed to developing sources of biogas for several years -- it isn't suddenly chasing easy subsidies. Apparently, the company saw the opportunity long before the EPA did. While it's impossible to estimate the exact financial opportunity, converting the nation's vast reserves of biogas from landfills alone into CNG for fuel represents a massive opportunity for the company. Clean Energy Fuels' production capacity may be small today, but biogas is sure to be a key value driver for the company's long-term growth strategy.