Anaerobic Digesters

The following purchases are exempt from sales and use tax:

• Equipment used in ADs, and services to install, construct, repair, clean, alter, or improve ADs.
• Items that become an ingredient or component of an AD, such as piping, concrete, fans, and generators, and services to install, construct, repair, clean, alter, or improve those items.
• Equipment used to process biogasA blend of gases produced from anaerobic digestion, including primarily methane and carbon dioxide. or digestateA wet, nutrient rich mixture that is produced from anaerobic digestion. that result from anaerobic digestion, and services to install, construct, repair, clean, alter, or improve the equipment.

Preference initially focused on ADs that treat dairy manure

The Legislature enacted this preference in 2001 to encourage entities to develop and operate ADs that treat dairy manure. The preference was extended in 2006 to include digesters that use non-dairy livestock manure.

2018 legislation expanded preference and specified the intent to promote the production of renewable natural gas and marketable coproducts

The Legislature stated its intent to stimulate investment in the production of renewable natural gas (RNG) for heat, electricity, and transportation fuel, as well as other usable coproducts.

The existing anaerobic digester preference was expanded to apply to:

• Digesters that use any type of organic material, not just livestock manure. This includes ADs at wastewater treatment plants, food waste recycling centers, and other facilities that use organic materials to generate RNG.
• Equipment used to process biogas into RNG and other marketable coproducts, such as fertilizer and compost.

The legislation directed JLARC staff to determine the preference's effectiveness by evaluating the number of public and private anaerobic digesters producing renewable natural gas in Washington, and the extent to which they use the preference.

The same legislation also included a separate sales and use tax exemption for equipment and services used at landfills to process biogas and a separate six-year property tax and leasehold excise tax exemption for properties where ADs are located.

Preference is set to expire January 1, 2029

The preference took effect June 13, 2001, and is scheduled to expire January 1, 2029.

JLARC staff are also reviewing a livestock nutrient management tax exemption in 2020

The Legislature enacted a sales and use tax exemption for livestock nutrient management equipment in the same 2001 legislation that established the anaerobic digester preference. JLARC staff are reviewing that preference in a separate 2020 report.

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The Legislature initially enacted this preference to encourage dairies to build anaerobic digesters (ADs) that treat dairy manure. In addition, the state and federal governments provided several other incentives to encourage building ADs, and utilities and other entities purchased AD coproducts from the dairies.

There were no dairy anaerobic digesters in Washington prior to the 2001 preference

The Legislature enacted the preference in 2001 to help dairies treat the manure generated by their operations. At the time, there were no dairy anaerobic digesters in Washington.

By 2012, eight dairy-based digesters were built with the help of multiple incentives and earned income

The Department of Commerce estimated the costs for these original projects ranged between $1.2 million to $4.5 million per project.

Dairies were eligible for multiple state and federal incentives between 2001 and 2012:

• Federal income tax credits. A dairy could choose to receive either a production or an investment tax credit. Production credits lasted for 10 years and were based on the amount of kilowatt hours generated and sold by the facility. Investment credits provided a 30% credit on the costs of constructing an AD.
• State and federal grant programs.
• Limited property and leasehold excise tax exemptions and this sales and use tax exemption.

Dairies earned income from utilities, businesses, and other entities between 2001 and 2012:

• Contracts with electric utilities to purchase electricity produced by the ADs. Utilities actively sought contracts with dairies after voters passed Washington's Energy Independence Act (I-937) in 2006. The Act required utilities to meet targets for using renewable energy sources, such as solar, wind, and anaerobic digesters. Targets for renewable energy sources went from 3% in 2012 to 9% in 2015 and to 15% in 2020. The contracts between utilities and ADs lasted between 5 and 20 years.
• Income earned from selling AD coproducts, such as compost, fertilizer, and animal bedding.
• Payments known as "tipping fees" received from other businesses. Instead of dumping organic feedstock like chicken fat and other waste at a landfill, businesses would pay dairies to take and use their organic materials in their anaerobic digesters. Mixing extra feedstock with dairy manure helps to improve the biogas yield in the AD.

Appendix A shows that livestock and dairy-based ADs are located in almost every state in the U.S.

One new dairy AD was developed between 2012 and 2018

One new dairy-based AD began operating during this time period. It does not have a power purchase contractContract between a utility and a dairy that pays for AD-generated electricity put into the energy grid. with a utility, but does supply electricity into the energy grid. Uncertainty with utility prices and changes to other incentives may have discouraged dairies from establishing new ADs between 2012 and 2018:

• Utilities met their renewable energy targets (mostly from solar and wind energy) and some contracts with dairies expired. When utilities renegotiated contracts, they began offering lower prices for AD-generated electricity than were offered previously. Industry sources report that some dairies shut down their ADs due to the drop in income from sales to utilities.
• Federal production and investment tax credits lapsed several times before Congress extended them retroactively. Also, the production credit for anaerobic digesters was 50% less than what was provided for other renewable energy sources, such as solar or wind.
• State property and leasehold excise tax exemptions for ADs expired.
• Some existing AD facilities were starting to require renovations and replacements. Roofs collapsed on two dairy digesters.

The 2018 Legislature expanded the preference to promote renewable natural gas production

In 2018, the Legislature expanded the preference to apply to ADs using any kind of organic material. The stated goal was to produce renewable fuels and other usable coproducts. After the change, Department of Revenue data shows an increase in use of the preference.

Exhibit 3.1: Annual sales of tax-exempt equipment and services for ADs have increased and declined over time

Source: JLARC staff analysis of Department of Revenue tax return deduction detail, fiscal years 2009 - December 2019.

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In 2018, the Legislature directed JLARC staff to determine the number of public and private anaerobic digesters producing renewable natural gas (RNG) in Washington, and the extent to which they use this preference.

As of March 2020, JLARC staff identified two facilities that produce pipeline-quality renewable natural gas and one that is preparing to do so

Under current law, all three facilities qualify for the sales and use tax preference. However, data on use by specific entities is not disclosable.

1. King County South Wastewater Treatment Plant (WWTP) in Renton: Staff in King County report that this plant has produced pipeline natural gas for 32 years.
   
2. Tacoma Central WWTP in Tacoma: Staff in Tacoma note that the plant currently produces RNG that does not meet pipeline grade specificationsBurned off into the atmosphere through a release pipe.. In early 2020, Tacoma Central finalized a contract to sell their RNG to Puget Sound Energy. Two steps remain: the plant needs to install equipment to ensure the RNG meets pipeline grade specifications, and a connection must be built between the WWTP and the main natural gas pipeline. The estimated completion date for these is June 2021.
   
3. George DeRuyter and Sons Dairy AD in Granger: This privately financed venture was in development for nearly eight years. An existing dairy AD that was not operating due to a collapsed roof and an expired electricity purchase contract was retrofitted in order to produce pipeline-quality biogas. DeRuyter began trucking RNG in December 2019 from its production facility to a nearby national pipeline connection. According to project officials, they plan to build a connecting pipeline, but they have been delayed due to construction cost increases. Industry sources note that other dairy ADs are monitoring the project to see if it eventually is profitable.
   

These three facilities are within close proximity to the natural gas pipeline. Washington's other dairy ADs do not currently produce RNG, but do produce heat and electricity that they use for their own operations and many also provide electricity to the energy grid. Additionally, WWTPs may produce biogas but not process it into RNG.

Exhibit 4.1: Washington's dairy-based ADs and WWTPs are located close to the national gas pipeline

Source: JLARC staff analysis of Washington State Department of Agriculture data on dairy AD locations; King County and City of Tacoma staff interviews. Pipeline detail provided by Washington Utilities and Transportation Commission staff.

Cost estimates vary for building or retrofitting an AD that can produce RNG

A 2018 Department of Commerce report identifies three potential estimates for the costs of constructing an AD that produces RNG. The estimates are $7.5 million, $18 million, and $25 million, including costs for connecting and injecting RNG into a pipeline. Costs vary depending on many factors, including the number of milk cows (volume) at the location, distance to the natural gas pipeline grid, and equipment needed to condition the raw biogas to meet natural gas quality standards. The report estimates that annual operating costs are between $325,000 and $2.2 million a year.

Estimates to retrofit existing ADs for RNG production range from $4.1 million to $5.4 million for capital costs and $230,000 to more than $1 million for annual operating costs.

Some costs may be offset by income earned from sales of RNG

Federal and state renewable energy credit programs can provide ADs with several sources of income. These are specific to ADs producing RNG:

• Federal renewable identification number credits (RINS) used to comply with the federal Renewable Fuel Standard program. The federal standards require a certain volume of renewable fuel to replace or reduce the quantity of petroleum-based transportation fuel, heating oil, or jet fuel sold in the US. ADs that produce RNG can potentially sell the RINS they earn to other fuel producers that are not yet meeting their renewable energy requirements.
• Low-carbon fuel standard credits (LCFS) paid by California and Oregon. Fuel producers in these two states must meet annual targets for reducing greenhouse gas emissions from transportation. RNG producers in Washington can earn credits by selling their RNG into the regional pipeline grid. RNG from dairy ADs can earn more credits because their RNG production also reduces the amount of methane released into the atmosphere.

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JLARC staff analyzed Department of Revenue tax return data from sellers of equipment and services that are used to build and operate anaerobic digesters. Fiscal year 2020 is an estimate based on use of the preference between July through December 2019. The estimated biennial savings for 2021-23 biennium is $778,000.

Exhibit 5.1: Estimated direct beneficiary savings

Biennium	Fiscal Year	Estimated Qualifying Sales	Estimated Total Beneficiary Savings
2017-19 7/1/17-6/30/19	2018	$1,540,000	$127,000
	2019	$3,732,000	$308,000
2019-2021 7/1/19 - 6/30/21	2020	$4,700,000	$389,000
	2021	$4,700,000	$389,000
2021-23 7/1/21-6/30/23	2022	$4,700,000	$389,000
	2023	$4,700,000	$389,000
	2021-23 Biennium	$9,400,000	$778,000

Source: JLARC staff analysis of Department of Revenue tax return deduction detail July 2018 through December 2020. No future growth is estimated due to the volatility of documented past use and unpredictable future development.

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There are many different factors that impact the feasibility of building anaerobic digesters (ADs) that produce renewable natural gas (RNG).

Fossil natural gas prices can be lower than renewable natural gas production costs

Fossil natural gas has been less expensive to produce and purchase than RNG.

Exhibit 6.1: Recent fossil natural gas prices have averaged below $4.00 per MMBTU since 2016

Source: JLARC staff analysis of Energy Information Administration, CitiGate annual average fossil natural gas prices.

Estimated costs for renewable natural gas vary widely. Various studies have estimated the cost per MMBTUOne million British Thermal Units (BTUs). BTUs are a measure of energy content in fuel. between $3 and $30.

Stakeholders have noted other factors that can impact viability of projects to produce RNG

Other barriers may impede the development of additional ADs and RNG production in Washington:

• Federal policies and regulations.
• Uncertainty of transportation market.
• Construction and operating costs.
• Minimum volume requirements.
• Access to pipeline infrastructure.
• Inconsistent utility pipeline quality standards for RNG.

Unclear what impact the state's 2019 clean energy legislation may have on demand for anaerobic digesters

In 2019, the Legislature passed the Clean Energy Transformation Act (SB 5116) to support the transition to a clean energy economy. The legislation established a statewide policy for electric utility sales to Washington customers: electricity must be carbon neutralRemoving as much carbon dioxide from the atmosphere as is going in. by 2030 and 100% carbon freeNo carbon dioxide emissions released into the atmosphere. by January 1, 2045.

Also in 2019, the Legislature passed HB 1257, requiring Washington's four regulated natural gas utilities to offer RNG purchase options.

In the 2000s, electric utility power purchase contracts helped to offset costs to build and operate dairy ADs. However, as the initial contracts expired, the prices offered by utilities in recent years are at lower levels.

At the time this report was prepared, it is unclear what, if any, impact the clean energy goals will have on electric utilities' interest in AD-generated electricity.

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Exemptions - Anaerobic digesters.

RCW 82.08.900

(1) The tax levied by RCW 82.08.020 does not apply to sales to an eligible person:

(a) In respect to equipment necessary to process biogas from a landfill into marketable coproducts, including but not limited to biogas conditioning, compression, and electrical generation equipment, or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving equipment necessary to process biogas from a landfill into marketable coproducts; and

(b) Establishing or operating an anaerobic digester or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving an anaerobic digester, or to sales of tangible personal property that becomes an ingredient or component of the anaerobic digester.

(2) A person claiming an exemption under this section must keep records necessary for the department to verify eligibility under this section. Sellers may make tax exempt sales under this section only if the buyer provides the seller with an exemption certificate in a form and manner prescribed by the department. The seller must retain a copy of the certificate for the seller's files.

(3) The definitions in this subsection apply to this section and RCW 82.12.900 unless the context clearly requires otherwise:

(a) "Anaerobic digester" means a facility that processes organic material into biogas and digestate using microorganisms in a decomposition process within a closed, oxygen-free container as well as the equipment necessary to process biogas or digestate produced by an anaerobic digester into marketable coproducts, including but not limited to biogas conditioning, compression, nutrient recovery, and electrical generation equipment.

(b) "Eligible person" means any person establishing or operating an anaerobic digester or landfill or processing biogas from an anaerobic digester or landfill into marketable coproducts.

[ 2018 c 164 § 4; 2015 c 86 § 202; 2006 c 151 § 4; 2001 2nd sp.s. c 18 § 4.]

NOTES:

Tax preference performance statement—2018 c 164: "This section is the tax preference performance statement for the tax preferences contained in sections [3,] 4, 6, 8, and 9, chapter 164, Laws of 2018. The performance statement is only intended to be used for subsequent evaluation of the tax preferences. It is not intended to create a private right of action by any party or to be used to determine eligibility for preferential tax treatment.

(1) The legislature categorizes the tax preferences as ones intended to induce certain designated behavior by taxpayers, as indicated in RCW 82.32.808(2)(a).

(2) It is the legislature's specific public policy objective to increase the production of renewable natural gas in Washington state. It is the legislature's intent to reinstate and expand tax incentives for certain landfills and anaerobic digesters in order to stimulate investment in biogas capture and conditioning, compression, nutrient recovery, and use of renewable natural gas for heating, electricity generation, and transportation fuel.

(3) To measure the effectiveness of the tax preferences in sections [3,] 4, 6, 8, and 9, chapter 164, Laws of 2018 in achieving the public policy objectives described in subsection (2) of this section, the joint legislative audit and review committee must evaluate the number of public and private landfills and anaerobic digesters producing renewable natural gas in the state and the extent to which they are utilizing these incentives.

(4) In order to obtain the data necessary to perform the review in subsection (3) of this section, the department of revenue must provide data needed for the joint legislative audit and review committee analysis. In addition to the data source described under this subsection, the joint legislative audit and review committee may use any other data it deems necessary." [ 2018 c 164 § 1.]

Effective date—2018 c 164: "This act takes effect July 1, 2018." [ 2018 c 164 § 10.]

Effective date—Conservation commission—Report to legislature—2006 c 151: See notes following RCW 82.08.890.

Intent—Effective date—2001 2nd sp.s. c 18: See notes following RCW 82.08.890.

Exemptions - Anaerobic digesters.

RCW 82.12.900

The provisions of this chapter do not apply with respect to:

(1) Equipment necessary to process biogas from a landfill into marketable coproducts, including but not limited to biogas conditioning, compression, and electrical generation equipment, or to services rendered in respect to installing, constructing, repairing, cleaning, altering, or improving equipment necessary to process biogas from a landfill into marketable coproducts; and

(2) The use of anaerobic digesters, tangible personal property that becomes an ingredient or component of anaerobic digesters, or the use of services rendered in respect to installing, repairing, cleaning, altering, or improving eligible tangible personal property by an eligible person establishing or operating an anaerobic digester, as defined in RCW 82.08.900.

[ 2018 c 164 § 6; 2006 c 151 § 5; 2003 c 5 § 16;2001 2nd sp.s. c 18 § 5.]

NOTES:

Tax preference performance statement—Effective date—2018 c 164: See notes following RCW 82.08.890.

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