Making a cash cow out of manure isn't easy

ATWATER, Calif. -- The gurgling is loudest near the edges as Carl Morris jumps on a tarp covering a lagoon of decomposing manure.

"It's the world's largest waterbed," said Morris, chief operating officer of Joseph Gallo Dairy Farms in California's Central Valley.

The moonbounce-like, 60-millimeter-thick tarp covers the farm's 24-foot-deep pond. It's a holding tank for manure from 5,000 Holstein and Jersey cows, and the decomposing waste produces 400,000 cubic feet of methane gas per day. That, in turn, powers a generator and provides steam to run a cheese-making plant. It's also very stinky.

"There's nothing high-tech about it," said Morris, who estimates that the farm saves about $2,700 per day in electricity and steam power, plus 400,000 gallons of propane per year.

But carbon traders scoping out the methane digesters for voluntary emissions reductions are saying it's a hard sell financially. That remains true even as Congress moves forward on a bill that would create a huge market for compliance offsets -- greenhouse gas reduction projects in lieu of reductions at facilities covered by the bill.

Aimee Barnes, manager for U.S. regulatory affairs at EcoSecurities, which develops offset projects, said California's political environment is particularly toxic for digesters.

"We've looked into developing a lot of dairy digester projects in California, and have basically run into every possible issue that one could run into," Barnes said. "Even in cases when in theory they should have been able to profit from offsets and free power, they haven't been able to do so."

Only breaking even

Agriculture accounted for almost a third of U.S. methane emissions in 2007, which totaled 700 million tons of CO2 equivalent, according to data from the Energy Information Administration. Total greenhouse gas emissions for that year came to about 7.3 billion tons. Manure, meanwhile, accounts for about 7.5 percent of agricultural methane emissions.

The industry has so far escaped looming mandatory reductions from California and the federal government. But it also has had trouble making a financial case for reducing methane emissions voluntarily.

Gallo Farms in 2004 was among the first in the state to install a methane digester. At its Cottonwood farm, it makes 35 million pounds of cheese per year to sell to Western states and Mexico. Cheese wastewater is pumped across the cow stalls to flush the manure into canals. (Manure from the open corral areas is not used, as it contains too much dirt.)

Three machines located around the farm separate manure from water. Then the manure enters the digester: a covered 7-acre pond where bacteria decompose the manure into methane. The methane is piped out of the lagoon and sent through a scrubber, which removes hydrogen sulfide via iron oxide-impregnated wood chips that absorb sulfur.

The gas then travels 1 mile via an underground pipe to the cheese plant, where it is burned to power one of two generators that provide electricity for the plant. The heat from the generators also is captured to produce steam for the plant, which reduces propane use. The leftover water irrigates alfalfa, corn and oats, which the cows eat.

The financial benefits are theoretically threefold: The farm reduces its propane consumption to the tune of 400,000 gallons per year. It can also make money by selling carbon credits generated by the methane destruction, and it sells a small amount of electricity back to the local utility, Pacific Gas and Electric Co. (PG&E), through California's net metering tariff, usually on Sunday afternoons.

But Gallo is only about breaking even right now. The system cost upwards of $3 million to install. A second digester that it's in talks with PG&E to install at a slightly smaller farm down the road is going to cost about $2.3 million due to new regulations, namely a water rule from the Central Valley Regional Water Quality Control Board that mandates the settling pond be lined with plastic instead of clay. That regulation will raise Gallo's expenses by about $900,000, Morris said.

Gallo has also gotten bogged down in trying to gain credit for its reductions on the voluntary offset market, reflecting a rapidly changing industry that is hard for outsiders to understand.

Morris wouldn't say how much Gallo expected to receive for its credits, but the farm has been waiting for more than a year to go through the verification process.

'Mind boggling' changes in the offset market

Navigating the offset market is daunting, Morris said.

"We've been in it since 2004, and the changes are just mind-boggling," he said. "It's a totally different market from when we first started out. We'd never heard of a carbon credit when we first built the digester." But there are economies of scale: "We're anticipating our next [project] will be similar to the first one; they already know us, so it'll be cheaper and easier."

Gallo saves about $400,000 per year in electricity costs, and is expecting to save more once it installs the second digester. With two scrubbers, the farm will be able to keep one online at all times, saving the $2,500 per day in electricity that it now has to buy.

The technology is far from standardized; there are versions for most types of dairies. Gallo benefits from using already-warmed cheese water, which accelerates the decomposition process. And while the water-intensive technique is good for dairies in the Central Valley, almost all of which grow feed crops, farms in Southern California don't use as much water; they use a technology called "plug-flow" that heats thicker manure in a tank.

But of the roughly 1,750 dairy farms in California, fewer than 20 have methane digesters, according to Neil Black, chief operating officer of California Bioenergy, which signed a contract with the utility earlier this month to build a digester at a dairy farm in Kern County. PG&E wants the carbon credits for its ClimateSmart program, in which customers voluntarily pay about $5 per month to subsidize offsets.

Might methane digesters be seen as a more reliable offset than forestry projects, which are more prone to fires and other disruptions?

"PG&E's take on its ClimateSmart GHG emission reduction projects is that we want a project portfolio that is diverse as possible for our enrolled customers," said utility spokeswoman Katie Romans. "All projects offer different benefits, and investing in a mix of projects offers greater stability."

But obstacles still remain.

Coupled with the poor economic climate and traditionally rising land values in Southern California, environmental regulations are pushing dairies out of California at an increasing rate, according to Michael Marsh, CEO of Western United Dairymen. The state lost 99 farms last year, and is on track to lose more than 100 this year, he said.

State funds experiments, but its regulators won't bend rules

The future might lie in partnering with municipalities to process human sewage, as well, according to the operator of one of the state's first digesters. Inland Empire Utilities Agency built a 1-megawatt digester in Chino in 2003 that provided electricity to a nearby desalination facility. By last summer, it had run up against tightening state regulations for water and air quality that forced its closure in December.

Since it was a pilot project, built with state funding, the utility thought it might be exempted from the rules, said the agency's policy manager, Martha Davis. But the South Coast Air Quality Management District passed regulations requiring all methane-fueled internal combustion engines to run on no more than 10 percent natural gas, dealing a fatal blow to the Chino digester's engine, which ran on 40 percent natural gas and 60 percent methane in order to avoid expensive treatment of the methane.

Now, the utility is considering other options, including feeding the gas to a fuel cell.

"It may turn out to be a very interesting opportunity, because I don't think we would have gone to fuel cells as a concept," Davis said.

The state's laws mandating best available control technologies are sometimes set impossibly high, as well, said EcoSecurities' Barnes.

And on the national level, it's still too early to tell how methane projects will fare in an offset market. The rapidly moving climate bill sponsored by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.), which passed the House late last month, counts methane lagoons as eligible to fill the 1 billion tons of offsets allowed per year. But there's no telling what could happen when agricultural and Midwest interests clash against hard-line climate advocates in the Senate, said Josh Margolis, CEO of carbon brokering firm CantorCO2e.

"There's a fairly good chance that there are a number of agricultural-state interests that will be minded and attended to, and there's a probability that these projects which are creating credits will be likely to carry their credit forward into a compliance regime," Margolis said. "But there's a lot to be said and done between now and when the ink is dry. One of the things that could happen is the projects could not be recognized."

Margolis also wouldn't rule out methane reductions becoming mandatory under a federal or state program. "When you're trying to make an 80-plus percent reduction, it's hard to give any particular source a pass, because if you give one a pass, you're going to have to look to all the other sources to come up with reductions," he said. "Given it's likely we're going to see command-and-control-type regulations along with cap and trade ... every single significant source of greenhouse gases is going to be considered for control."

Meanwhile, state mandates may be in the works

If California decides to regulate dairies' methane emissions, farmers would also lose the economic edge of generating carbon credits. The Air Resources Board has issued protocols for developers wishing to get credit, but has not said whether it will make reductions mandatory. "It well might become a regulated source in a few years," ARB spokesman Stanley Young said.

The agency has signaled its intent to regulate methane from at least some sources: It recently passed regulations requiring about 200 landfills to reduce their methane emissions by 2012.

"The air board is saying, 'If we don't get enough voluntary reductions, we may well mandate them,' while air districts are saying, 'You can't turn on the generators,'" Marsh said. "It continues to be a problem where the farmer has invested a million bucks in his digester."

Davis said she would prefer that reducing dairies' methane emissions stay voluntary. "Once we figured out how to sell greenhouse gas credits, we sold 18,000 tons through an independent registry," she said. "We got about $40,000, but we were happy to do it, because we wanted to show that these digesters have significant air quality benefits."

Business plans may 'flip around' for a while

"I think the business case for it is going to flip around quite a bit," Davis said. "I think there are places, particularly in the Central Valley, where you have a combination of organics -- you need to look at it as an organics issue. Fresno, Sacramento have growing populations that will need to process their biosolids. I think it's going to be a more holistic kind of thing. There are probably some dairymen who are going to be more comfortable with simplistic setups, a tarp covering a pool, and then a few dairymen who are really interested and will have more sophisticated systems -- turnkey-style, where an investor comes in."

That's the model being pursued by the city of San Jose, which last month announced a partnership with private companies to build an organic waste digester to fuel a water treatment plant. It has no plans to process industrial agriculture waste, however.

PG&E also cited the feed-in tariff as a potential inducement: "I think that's where a lot of this is headed," said Robert Parkhurst, environmental policy manager at PG&E. "It's the contracts that will be of utmost interest." California began its feed-in tariff program in February 2008 for generators under 1.5 MW. They receive market value for their energy.

But offsets are essential to digesters' bottom line, said Neil Black of California Bioenergy, which is planning to sell 75,000 tons of carbon credits to PG&E. "Knowing that the ability to be able to sell carbon credits is essential to our economics, that's why we've spent so much time developing this relationship with ClimateSmart," he said. "Their ability to be guaranteeing the purchase of some of those credits at this stage is valuable to us, and it will also be helpful in terms of bank financing."

He sounded a note of optimism: "This has been an industry people have been talking about for a couple decades, and our view is, now it's really starting to happen. California is the biggest dairy state, and also just California's leadership because of A.B. 32 and PG&E's leadership, it's really the time that these type of projects and companies will be getting off the ground. It's an important source of revenue for dairy farmers, as dairy prices right now are really low, while costs of inputs are really high."

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