The Dairy Cow Manure Goldrush
A year ago, I wrote in Ag Data News about huge subsidies in California's Low Carbon Fuel Standard (LCFS) that pay dairy farmers to install anaerobic digesters to capture the methane emitted from their cows' manure. It's my second most read Ag Data News article behind the one about the chicken sandwich taste-off.
How have things changed in the last year?
For background, read the original article. I'll wait here until you get back.
There are now 260 anaerobic digesters operating on America's 40,000 dairy farms, up from 207 a year ago. In the last five years, most of the nation's new dairy digesters have been in California.
Refresher on how the LCFS works: Gasoline and diesel incur deficits because they have high high carbon emissions per unit energy. Fuels such as ethanol, biodiesel, renewable diesel, electricity, biogas, and hydrogen earn credits because they have low CI's. The credits have to balance out the deficits.
With the huge growth in digesters, biogas made up 15% of the credits generated in the LCFS in the most recent quarter. However, biogas contributes only about 1% of fuel energy used in the state.
Why does biogas get a large number of credits relative to its energy contribution? Answer: Methane is a powerful greenhouse gas, and if it were not captured, it would have been emitted into the atmosphere and caused warming. Thus, farmers are being paid to reduce their methane emissions, and they produce a little biogas for transportation as a by-product. The value is in prevented emissions. (That said, read this for why I think the subsidies are too big based on the way methane behaves in the atmosphere.)
There remains considerable scope for biogas from dairy digesters to grow in the LCFS, especially given the large subsidies. In 2012, essentially all natural gas used in transportation in the state was from fossil sources. In the ensuing years, biogas from landfills drove fossil gas out of the market. Now, dairy biogas is poised to drive out landfill sources.
Using the numbers in last year's article, an anaerobic digester generates approximately 22.5 MMBTU of biogas per cow per year at a cost of $636. These costs include operating costs and capital cost amortized over 10 years.
The spot price of natural gas has gone up. It exceeded $5 per MMBTU in the fall, before dropping back below $4. With the winter storms hitting the southeast this week, it is now back above $5. At that price, a cow generates 5*22.5 = $112.50 worth of gas per year.
In the most recent quarter for which data are available, the LCFS offered subsidies of $11.37 per diesel-gallon equivalent, which translates to $81.50 per MMBTU. This is the average subsidy; it varies across dairies based on their estimated life cycle emissions. So, from its annual 22.5 MMBTU of gas, a cow receives a subsidy of $1,834.
In addition to the LCFS, digesters can earn RIN credits through the federal Renewable Fuel Standard (RFS) program. Our cow's 22.5 MMBTU of gas would generate 292 cellulosic RINs. At the current price of $3.40 per RIN, this subsidy amounts to $993.
A typical California dairy cow produces 230 cwt of milk each year. At the current price of $21.64/cwt, the cow produces $4,977 of milk per year. For comparison, the cow generates 1834+993 = $2,827 of LCFS and RFS subsidies for gas that costs $636 to produce and which it can sell for $112.50.
These subsidies will not continue forever. The EPA is revising the RFS requirements, and the LCFS only guarantees that a digester will receive credits for avoided methane for 10 years.
Last year, I worried that these massive subsidies will incentivize dairies to expand. Farmers would be farming methane rather than milk. As yet, there is no sign of expanding dairy herds in California or elsewhere in the country, but this remains a concern.
A related concern is that these programs could incentivize more beef cattle to move into confinement, where their manure would be collected in lagoons and farmers could install digesters to profit from LCFS and RFS subsidies. Assistance from a federal program to challenge monopoly meatpackers further encourages such operations.
In short, apart from a predictable explosion in the number of digesters, not much has changed.
For background on the LCFS, read this and this.
I generated the first figure using this R code. The remainder of the figures come from our LCFS data app. Huge kudos to UC Davis ARE PhD student Dan Mazzone for his great work putting this app together and keeping it up to date.