Webinar outlines aspects, challenges of financing biogas projects

By Lisa Gibson | September 14, 2011

Existing biogas projects have underperformed because of poor operations management, according to Michael Butler, chairman and CEO of Cascadia Capital. A capable staff is therefore a critical part of getting any biogas project financed. “You need to have a professional team on board,” he said.

Butler was one of three speakers for the American Biogas Council’s webinar Biogas Financing: Options, Steps and Resources for Biogas Project Development. “Having an experienced team is critical to making these projects successful,” said fellow speaker David Benson, partner with firm Stoel Rives LLP. 

Besides on-site experienced and capable management, Butler identified a few other key issues in getting project financing including feedstock supply, engineering, procurement and construction (EPC) contracting, and proper project scale. “Feedstock supply is critical,” he said. “That’s why a lot of the projects we see fall down.” Before asking for any sort of financing, a project needs at least 15 years of feedstock locked down, as well as a credible backup plan for replacement feedstock to cover any possible default by any one of the existing suppliers. And the EPC contractor must have a strong balance sheet, he said, adding that the number of EPC contractors is increasing.

Biogas is a fairly new sector in the U.S., Butler said, so its financing structures are conservative, compared with Europe, where the market is better developed. But three typical finance structures in the U.S. include: traditional senior debt and equity; loan guarantees from USDA; tax equity; and sale and leaseback. “This structure can only work if the power offtaker is of high credit quality,” he said of the last option.

"The good news here is that there are different potential project revenues,” Butler said, citing electricity, combined-heat-and-power, gas, fiber and nutrients produced at the plant, and feedstock disposal.

Benson went through a list of financing types including balance sheet, debt, equity, grants and incentives, and public-private partnerships. Grants, he added though, are a “crap shoot.” They’re hard to get, usually small and have a lot of baggage. “They suck up time and resources,” he said. “They’re the pot of gold at the end of the rainbow. You just keep chasing them and they’re hard to catch.”

Financing sources he addressed include banks, capital markets, vendor financing, sponsor equity, strategic equity, tax equity, taxable bonds, tax exempt bonds and public-private financing. Tax credits available for biogas projects include the production tax credit; investment tax credit; U.S. Treasury Department grant; accelerated depreciation; new markets tax credit, which many speakers agreed was the best opportunity for a tax credit on a biogas endeavor.

Speaker Peter Weisberg, senior project analyst for the Climate Trust, discussed the role carbon markets can play in biogas financing, saying the federal carbon bill is dead but California is marching ahead with a bill likely to be enacted in 2013. “It’s looking like the most likely market to move forward,” he said. Four types of projects will qualify for that program including anaerobic digestion of dairy manure, he said.

Nationally, incentives exist for planning and commercial operation of biogas projects, but there is a gap in construction. “What we’ve seen is that sort of debt for construction is really hard to come by for biogas,” Weisberg said. That’s because banks don’t view biogas projects as good collateral, but instead a risky endeavor because many haven’t worked with them before. “So these projects have a large number of incentives, but most don’t come in until the operation phase.”

So a new digester financing entity would bring many benefits, including its ability to aggregate traditional financing such as debt and tax credits, as well as new sources such as public benefits and new market tax credits. “We’ve been in discussions with a couple entities to provide low-interest loans to biogas projects,” Weisberg said.