Dairies, wastewater treatment plants, and others have used the
preference to build and operate anaerobic digesters. It is too soon to know if it will
encourage more production of renewable natural gas.
Updated July 24, 2020
Sales and use tax exemption for anaerobic digesters
Entities are exempt from paying sales and use tax on materials, equipment,
and labor used to build, repair, and operate anaerobic digesters (ADs). They
also are exempt from paying sales and use tax on qualifying equipment and
services used to produce marketable coproducts from the digesters.
ADs use organic materials to produce heat, electricity, fuel, and other
coproducts.
The preference took effect July 13, 2001. It is scheduled to expire January
1, 2029.
Dairies and others have used the preference to build and operate ADs. It is too
soon to know if it will encourage more renewable natural gas production.
The Legislature enacted this preference in 2001 to help entities develop and
operate ADs that treat dairy manure on dairy farms. The preference was later
extended to digesters that use non-dairy livestock manure.
In 2018, the Legislature again expanded the preference to apply to ADs using any
kind of organic material, including food waste and wastewater. This expansion also
covered equipment and services used to produce marketable coproducts from the
digesters.
2018 Stated Objective
Results
Stimulate investment in the production of renewable natural gas for heat,
electricity, and transportation fuel.
Unclear. The preference has been used by dairies, wastewater
treatment plants, and others to develop and operate anaerobic digesters.
Currently, two facilities are producing pipeline-ready RNG and a third
is preparing to do so. However, these facilities began RNG production
activities before the Legislature expanded the preference in 2018. It is too
soon to know whether the 2018 change will encourage additional production of
renewable natural gas and other marketable coproducts.
Recommendation
Legislative Auditor's Recommendation: Continue and monitor future use
The Legislature should continue the preference and monitor its future use.
The preference has been used by dairies, wastewater treatment
plants, and others to build and operate ADs. It is too soon to determine if
legislative action in 2018 and 2019 will encourage additional investment in
anaerobic digesters or renewable natural gas production.
The Legislature should continue the preference at this time and
review use of the preference closer to its January 1, 2029, expiration date to
determine if use has increased.
Sales and use tax exemption for building, repairing, and
operating anaerobic digesters and producing marketable coproducts
An anaerobic digester (AD) is a closed, oxygen-free container that works to break down
organic materials. As the materials decompose, biogasA blend of gases produced from anaerobic digestion, including
primarily methane and carbon dioxide. is released, which can be used
to generate heat, electricity, and renewable fuels.
Preference is for materials and services used to build and operate 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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
REVIEW Details
2. ADs break down organic material
Anaerobic digestion is a natural process where microorganisms
break down organic matter into energy, fuel, and other usable products
Anaerobic digesters (ADs) use bacteria in a closed, oxygen-free container to break down
various organic materials, like manure, food scraps, fats, greases, sewage, or
wastewater. As the materials decompose, the process produces biogasA blend of gases produced from anaerobic digestion,
including methane and carbon dioxide. and other coproducts.
Anaerobic digestion produces biogas and other usable products
The process of breaking down organic materials in an oxygen-free environment takes
about three weeks. When the decomposition is complete, the result is a blend of gases,
known as biogas, and a nutrient-rich mixture called digestate.
Biogas is a blend of gases that is 40% to 70% methane, as well as carbon
dioxide and other gases. Biogas can be burned to generate heat and electricity. When
it is further refined or "scrubbed" to remove carbon dioxide and other gases, it
creates a gas known as biomethane or renewable natural gas (RNG).
RNG
is usually 96% to 98% methane, the same methane composition as refined fossil
natural gas that is extracted from reserves in the earth and can be inserted into
gas pipelines. RNG with slightly less methane content (90% to 95%) can be used as
transportation fuel.
Digestate is the non-gaseous material left after anaerobic digestion occurs.
Digestate is a wet, nutrient-rich mixture that is usually separated into solids and
liquids. It can be used to make marketable products like compost, fertilizer, and
animal bedding.
Exhibit 2.1: Anaerobic digesters use organic material to create heat, electricity,
fuel, and other coproducts
Source: JLARC staff analysis of Department of Commerce and U.S. Energy Information
Administration information.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
3. Preference helps reduce costs for ADs
The preference is one of several state and federal incentives
that helps to reduce the cost to build and operate anaerobic digesters
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
productionor 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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
4. Three ADs in WA currently produce renewable natural gas
Two facilities – a wastewater treatment plant and a dairy
digester – are producing pipeline-ready renewable natural gas. Another treatment plant
is preparing to do so.
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.
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.
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.
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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
5. Estimated beneficiary savings: $778,000 for 2021-23 biennium
Estimated beneficiary savings are based on DOR tax return detail
from sellers
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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
6. Preference one of many factors impacting AD project viability
Market, regulatory, and other factors can impact viability of an
AD project
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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
7. Applicable statutes
RCWs 82.08.900, 82.12.900
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.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Review Details
Appendix A: ADs located throughout U.S.
Livestock and dairy-based anaerobic digesters are located in
nearly every state
Anaerobic digesters (ADs) that use dairy or livestock manure as a primary feedstock
are located throughout the U.S.
Exhibit A1: Federal data shows concentrations of ADs in California, Wisconsin, New
York, and Pennsylvania
Source: JLARC staff analysis of U.S. Environmental Protection Agency AGSTART data,
as of January 2019.
Preliminary Report: Anaerobic Digesters
July 24, 2020
Recommendations & Responses
Legislative Auditor's Recommendation
Legislative Auditor recommends continuing the preference and
monitoring future use
The Legislature should continue the preference and monitor its future use.
Preference has been used by dairies, wastewater treatment plants,
and others to build and operate anaerobic digesters. It is too soon to determine if
legislative action in 2018 and 2019 will encourage additional investment in anaerobic
digesters or renewable natural gas production.
The Legislature should continue the preference at this time and
review use of the preference closer to its January 1, 2029, expiration date to
determine if use has increased.