Ameresco, Inc. (AMRC) Earnings Call Transcript & Summary

Great. So welcome to this Infrastructure Investor Webinar on renewable natural gas. This is one of many sessions that are part of the Infrastructure Connect series, which deep dives into an assets profile and delivers insight on timely subjects within the industry. The Connect program is one of the many benefits of being an Infrastructure Investor member. But for this session, we've opened it up to all people, non-members, to join, learn and connect. However, if you would like to have more information on becoming a member, after the session, please do get in touch. I'm Emily Domange, Head of Infrastructure Investor Network at PEI Group. And this webinar has been made in association with the next upcoming members-only meeting, which is the Infrastructure Investor New York Conference taking place December 6 and 7, where sustainability, energy security and the energy transition are key pillars of the event. And other themes at that conference include legislative and regulatory views, data center performance opportunities, expanding beyond mega funds, and updates from the Infrastructure Investor investment and jobs act, digital infrastructure and investor manager relationships. If you do want to find out more about attending this conference, let me know at the end, and I can send through some more information. Before I introduce our superb guest speakers, we have 3 housekeeping points for today. First of all, this is an interactive webinar. It's your opportunity to ask our speakers any and all questions around renewable natural gas. So please do fire your questions using the Q&A button at the bottom of your screen, and we'll work through them towards the end of the webinar. The session is being recorded so that any members unable to attend live can do it on the membership platform. And finally, we have a few polls throughout the sessions. Please do answer them quickly. Your answers are anonymous, but your honest answers will help shape not only the discussion but the Connect program moving forward. So now, to introduce you to today's webinar speakers, we've got Doran Hole, CFO, Ameresco; and Mike Bakas, EVP of Distributed Energy Systems at Ameresco. I'll let the speakers do a brief introduction of themselves and Ameresco's role within the RNG market, and then we'll get going with some of our questions.

Great. Thank you, Emily, and I'll start. Doran Hole, Chief Financial Officer at Ameresco. I joined the company in the middle of 2019, just as we were really ramping up a lot of the hard core development of some of the renewable natural gas assets we now have under construction. It's a very exciting sector, and very happy to be here with you.

Emily, thanks again for having us. My name is Mike Bakas. I'm actually -- I was part of the founding management team of the company, so I've been here for over 22 years and have been developing biogas projects from our inception. So we've been in the space for 22 years, implementing these projects where we went live with our first project for RNG in 2010. So we have been operating RNG assets now for 12 years, and my main focus is on the asset side of our business.

Perfect. Yes, we've got some very good knowledge on this on this webinar today. So let's start, first of all, with the practical uses of -- and for renewable natural gas. So where and -- where and how you can kind of see it being used in the market currently?

Look, in -- when we first started developing RNG projects in particular, there really wasn't much by the way, of a transportation sector mandate. And our first project that, as I mentioned, we took commercial in 2010, we were actually transporting the gas from San Antonio, Texas to Southern Cal, where it was being used as a green fuel source for cogen plant to make green electricity and green thermal. Flash forward ahead the last number of years, it's -- the gas have been primarily used in transportation sector as vehicle fuel. Matter of fact, in the last 5 years alone, we've seen the space grow by almost 230%, 240%. Where in 2021, 64% of all on-road fuel used in natural gas vehicles was actually RNG. So it's really come a long way in terms of making a dent in the transportation sector. But what I would suggest is that with the global focus on the negative impacts of climate change, what we're starting to witness is a tremendous interest in consumers seeking out renewable fuel sources for their everyday activities, so this is from using your stove or heating your home or business. And I think what we'll see over time is that the addressable market will really expand into that non-transportation sector.

Great. Perfect. So within that, kind of what does the current RNG pipeline look like? And what is the sort of the current U.S. regulatory support in place?

Let me talk a little bit about the pipeline, and Doran can pick up on a lot of the governmental support that's been [ recent ]. Look, when we did our first project, it was, I think, less than 30 projects. As a matter of fact, it was only maybe less than 4 or 5 developers in this space. Now, in operation, there's almost 270 plants in operation. There's almost 100 developers in the states developing biogas projects. I think there's like another 100 plus that are in construction, and there's another 140 that are in the planning stages. So we've seen our capacity, back in 2021, the capacity was about 74 trillion BTUs and projections are that by 2040, we could see that morph into over 500 trillion BTUs. So the pipeline is very robust. It's being supported by a climate change or a drive to decarbonize. And then, as Doran will elaborate on, a lot of governmental support.

I think on the government side, so there's 2 different types of programs that, first and foremost, the EPA's program for what is the equivalent of a renewable energy credit but for green gas, which I refer to as RIN. The government sets a volume obligation for the transportation sector that they're required to blend cellulosic biofuels like renewable natural gas into the natural gas fueling that's used for transportation. And that RIN has a value to it, and that actually drives a good amount of the revenue stack when you're thinking about owning a project that produces renewable natural gas. Secondly, on the federal side. In the most recent bill, the Inflation Reduction Act, that bill has investment tax credit for this type of biogas. And while we're pushing and waiting for treasury guidance to add some definition around the way that legislation is going to be implemented, we're quite excited about the investment by the federal government in expanding this particular sector. And look, going beyond the federal government, state and local governments, and Mike can probably comment on some of the other ones, the biggest, California, with its low carbon fuel standard, which has a kind of almost a local REC value to the MMBtus of renewable natural gas that are injected into the pipeline system there. And once more, there are several other states that are considering their own programs and starting to implement those. I don't know, Mike, if you want to touch on a couple of the new ones?

Yes, I think there's about 34 states doing right now that are either doing something or getting ready to promote. I mean, you mentioned California. California actually enacted the first of this kind in the country, and that was essentially a thermal RPS that requires utilities to procure a certain amount of green gas by some date certain. So there's definitely the movement. And if you look at all the plans like the CARB's recent plan and all those in terms of gain from that 0, RNG is very prominent throughout 2050. The other thing that I failed to mention that Doran hit upon. On the RIN side, at the federal level, where our expectation is we're Godly optimistic that on November 30, the EPA will announce an EV rent program. As you are familiar with in the states here, there's a -- where -- we have a huge push to electrify. And the government is looking at using RNG as a fuel source to create green electricity to tie it into electric vehicles and to incentivize that. If that happens as we expect, that would just further expand the opportunity for RNG use.

Right. So why has renewable natural gas been a kind of middle market favorite recently? And just to touch on that from the inside point of view?

Sure, Emily. I mean I can tell you, just observing the capital markets, I think that the type of investors going into clean tech, they're constantly looking for new technologies and new areas to invest across the clean tech universe. I think that there has always been a little bit of comfort associated with the idea that assets of long-term recurring revenue streams carry strength. That's certainly been helpful for Ameresco over the years because we are an asset owner, not just renewable natural gas but other types of renewable energy generation assets as well. And I think if I think back to kind of when the real uptick in SPAC activity happened, that's kind of a natural public equity market entry point for some of these companies on the renewable natural gas side that maybe weren't really ready to be public companies themselves, and so they could use that SPAC vehicle as a way to kind of really nudge them along and set them up with people who organize the SPACs, who really understand what it means and what it takes to be a publicly-traded company. And so I think that's what drove some of the interest in this space, sort of just general ESG themes, looking for other alternatives to the kind of technology companies on the solar module or inverter side or electric vehicle, et cetera, and moving into some of the more project-based companies but still kind of coming out in that mid-cap market sector. I think that's kind of what was driving it. It has been interesting. It will continue to be interesting to see what transpires, obviously, with the recent BP acquisition. That's kind of taking one of those parties out of the public market sphere, so -- but from our perspective, I think that we were -- we were pleased to see the activity because, number one, it sort of supports valuations of the assets, many of which we have under development. And then secondly, just the level of interest and activity in renewable natural gas overall. You're getting a lot more eyes on it. It's -- that contagion has gone into the lender community, most certainly, where we're seeing a lot more interest from lenders in participating in these projects as we bring things to fruition. So it's overall good for the market because it's going to help us continue to develop, continue to drive down costs, and be able to set the stage for delivering this renewable natural gas to the non-transportation market going forward. More capital means more efficiency.

Perfect. So I guess, kind of expanding on that point as well, so what scale do you think renewable natural gas can realistically get to as a way of contributing towards the energy transition?

So look, you have -- when I think about the net 0 puzzle, I don't think it's the panacea, but I think it's an important piece of the puzzle. You've got different bodies of government that have speculated what the growth could be. You've got international energy agencies suggest it could represent as much as 20% of all the gas in the pipeline by 2050. You've got another study out there from [ IFCC ] that suggests 28% by 2040. I think the truth lies somewhere in between. But if you look at a lot of the stats, the expectation is that when you build a solar, it could represent maybe the entire residential sector in the U.S., which is a tremendous, tremendous impact to climate change for the positive. So I think it has the ability to play a key role along with other technologies, whether it be hydrogen or solar or wind or anything else.

Great. Doran, have you got anything to add to that?

Nothing to add there, that's...

No worries. So on the similar -- like, on a very kind of similar note as well. We sort of touched on it, but the role of RNG in terms of kind of both energy, security and resilience where -- yes, how are you guys kind of seeing that from first-hand experience?

I like the concept because it's interesting, and I'll talk about security in a minute. But when you think about resiliency, it's this complex, right? So resiliency is really the ability to withstand a multi-day outage. And typically, to do that, I think intermittent resources will struggle to be able to provide that kind of resiliency, whether it's solar or wind, even when it's coupled with storage. And RNG is a baseload dispatchable resource that can add sustainability to resiliency, and I think that's really cool. On the security side, look, for any country, especially the states, energy securities are having local resources, preferably renewable, available to meet the energy consumption needs of its people. And renewable natural gas plays a critical role in providing that energy security for the circular economy. When you think about it, society creates waste, waste creates half of biogas. We then take advanced technology and transform that biogas into a clean fuel that can then be a beneficial resource back to that society that created the waste in the first place. So I think from an energy security standpoint, it can play a tremendous role. As a matter of fact, if you go back to how the RFS program was somewhat created out of the Clean Air Act, it was George Bush, I think, who looked at it and said, look, we need to create a domestic supply and stop relying on overseas for our energy resources. And that's kind of what started the whole process on the RFS program.

I would just add on the resiliency side. So battery technology is improving. But currently, with the intermittent resources of the wind and solar on the grid and -- continue to proliferate, the battery storage kind of capping out, call it, a 4-hour batteries, is not quite enough to really provide the resiliency that many customers need, and that's where gas [indiscernible]. And with the technology for renewable natural gas already here and the ability to supply those back-up generation systems with renewable natural gas, then you've got, as Mike described, kind of renewable resiliency in hand at the moment. And I think that's going to take -- we are watching battery technologies advance more in a big installer and designer battery systems, so we watch and we pilot new technologies and new chemistries pretty consistently. But we see a pretty long road toward the really long-duration batteries that could ultimately, potentially substitute for gas-fired backup generation. And so for quite some time here, we're going to need natural gas fed resiliency, and I think that that's where renewable natural gas comes in as a clean fuel to power those systems. I think it's pretty critical. And just looking at what Mike said about the local production of the gas from a security perspective. With the ability to create renewable natural gas from landfills, from wastewater treatment plants, from agricultural resources, all 3 of which really fit well into the circular economy that Mike was mentioning, the resources there and the developments underway, it's going to be an important part of energy security in terms of being able to produce all of this domestically.

I think another thing to think about too, Doran, is the space constraint. I just think of like the major cities, whether it's Boston, New York, whatever have you, to be able to create local resources and provide resiliency, I mean, where are you going to put all the solar you need? What is it, is it a megawatt, 45 acres? I mean, where are you going to put it to be able to provide renewal security, even if it was not intermittent? And the beauty of RNG is it reuses existing infrastructure. You don't have to do anything. So it's not just great from resiliency, but even to take it one step further, if you think of a lot of folks that have the end-use devices, so how about the retiree that has a gas stove? Now if you electrify everything and get rid of the gas, those folks have to figure out how they're going to go pay for it and get the replacement or their gassing system. And RNG, and I think down the road, green hydrogen, is going to be a way to reuse existing infrastructure, not throw it away, and allow those folks to continue having the end-user devices they have. And that's why when you look at a lot of the analysis on a dollar per tonne reduced basis, RNG is extremely competitive. And that's where I think society will end up. You think about corporations. If they're viewing carbon as a risk on their balance sheet and they want to get from whatever tonnage of carbon they have to 0, they're going to evaluate technologies on $1 per ton CO2 reduced basis, and they'll pick the most cost-effective and efficient way to achieve that net 0. And RNG, I think studies have shown RNG as maybe $250, $300 a ton CO2 reduced, whereas electrification can be $500, $600, $700 per ton. So I think that's another thing that will be factored in over time.

Great points. And then, linking those into the next question. So if we're looking to other industries such as the agricultural sector, how can the renewable natural gas kind of aid the decarbonization of other sectors and big producers of emissions? And what's the general expandable market for renewable natural gas kind of within all different industries that contribute to climate change?

Well, I'll hit upon the ag side, I don't know, because you're picking on the ag side right now. And you're absolutely right. I mean right now, I think, again, the IEA estimates that about 25% of all global emissions was actually the ag industry. And the beauty about RNG is essentially incentivizes these dairy farmers to capture those emissions, those methane emissions, and essentially sell the methane as a revenue source to replace natural gas. So if you incentivize folks like them to do that, you're going to now start capturing a lot of those emissions and you should see those emissions come down. And I think that's going to be the case in any of the industries.

Okay. Doran, did you have anything to that question?

No, I was going to just simply say that the agricultural operations do tend to be much more distributed versus some of the other feedstocks that are used for renewable natural gas. And so I think that we, as a company and as an industry, are hoping to continue to see technological advances. And frankly, just production system advances, transportation advances to allow for more of the agricultural operations to participate in renewable natural gas. But that's going to require some advances in terms of efficient digestion systems, transportation of gas or methane, 2 cleaning systems, sort of hub-and-spoke operations that are going to kind of really bring that to bear with the agricultural systems more broadly. I mean, it's easy to say there's economic rationale to put together a renewable natural gas plant somewhere where you've got some extremely large, concentrated agricultural operations. But as we all know from driving around the country, a lot of these agricultural operations are spread out all over the place. And we need the technology to kind of advance to allow that to kind of really participate, but it's quite promising.

Doran, you bring up a fantastic point. When I think of the solar industry, when we first started doing solar, it didn't have much visibility and cost per watt was very high. And as the market evolves and there's a lot more visibility of projects happening and the government's incentivizing people to put solar in, we saw a lot more investment in the technology space that ultimately allowed for efficiencies to improve and costs to come down. And I think what we're seeing and when we were developing biogas projects 20-plus years ago, it was a very small industry. No one even really knew what we did. And I would say, over the last 3, 4 or 5 years, because of the huge uptick in interest level and the visibility, we're seeing so many more improvements in technology. We will see, over time, enhancements on efficiency and costs coming down. That will allow us to capture some of these smaller outlying farms or landfills or wastewater treatment plants. I mean, even wastewater treatment plants, there so many municipals that own very small wastewater treatment plants that by themselves might not be economic today, but will likely be in the future.

Yes. It's a great point. And this kind of goes back to the point about the mid-cap markets. When you look at the technological advancements and the companies that are developing the technologies that are producing the equipment that we use to process the gas, we are starting to see interest from straight up the private equity chain into some of these technologies. And not too unlike solar modules or inverters or other technologies in the renewable space that kind of have hit the clean tech mid-cap market -- public markets, it will be interesting to see if we can attract that capital to the renewable natural gas technology space, apart from the kind of development and asset operations space.

Fantastic. I just want to remind the audience to get your questions in, as we'll be moving to audience questions in a few minutes. But first, Doran and Mike, for companies looking to invest in RNG and expand their clean tech portfolio into this space and sort of adding these funds to their portfolio, what sorts of challenges and risks should they expect to see, especially when starting out? And what are some of the sort of solutions to combat these that you guys have experienced? Some sort of brand solutions for all your [Indiscernible]?

Yes, sure. So I think the investment opportunities are pretty right, as you might expect. Development is picking up, so you've got multiple categories of places to invest. And it all depends on appetite for risk, right? So in the first instance, there's the development side, right? And that tends to be smaller private investors looking to help people develop projects in areas where they think that ultimately, you can get a project permitted and you can get a project built and operating. Ameresco does quite a bit of development on its own. We develop things from scratch. However, we see a lot of peer companies out there which are purely in the development space, and then try to find someone like Ameresco to come and buy their projects at the time when they're ready to be built. The risks that you face on the development side really come down to viability of sites, the ability to find feedstock, the ability to get projects permitted. Those are kind of the big ones. The offtake, as Mike and I described, between the transportation market and the voluntary market, you're going to see plenty of demand for the gas once it's there. However, it's a matter of connecting the dots like where is your plant located versus where is the demand, right? And how do you get gas from point A to point B? Well, oftentimes, that requires some physical interconnection to the natural gas pipeline system, which the alternative is to trunk the gas, and that's another consideration. So there's definitely some risk to be thought about when investing in the development process. When you move past that and into the asset ownership side of things, there's -- the opportunities there about, as you've seen, many of the large companies are getting into the space. Certainly, Ameresco is big into the space and we continue to invest in our development pipeline and construction pipeline. The risks really kind of narrowed down to the stability of the feedstock once the projects are operating. One of the reasons why we like landfill gas is because of the stability of the feedstock. That's something that when you measure the amount of gas generated by landfill, for a company like Ameresco who's been working on landfills to create electricity, as Mike said, for the last 20 years, we've got a really good view of what the gas supply is going to look like from a landfill. And I think that we like that stability. So that's one element that folks can think about when they go to look at investing in the operating side of things. But I mean, up and down the spectrum, we're seeing money come in, as I mentioned, BP and NextEra has made a move into that as a large IPP. You have a lot of private credit funds that are getting really interested in this space as well. So the investment vehicles are -- the availability is becoming wider for people to kind of put money to work even away from the public equity markets.

I would add to that a little bit. When you think about what I said earlier, when we first -- when we did our first RNG project 12 years ago, there was only about 4 or 5 of us doing this type of work. And today, you've got nearly 100, and that's really -- the growth of that number has been growing in the last couple of years. I would suggest that these projects are -- they're complex and they can be challenging. And so as an investor, I think you want to make sure that the group you're investing in has the experience and historical performance to actually execute on these projects. The other thing I would suggest as an investor is that you know where the market is today, but where is it heading? And as we've discussed, we believe it's going to be going to the non-transportation sector. The non-transportation sector is over 440x the size of the transportation sector. And while the non-transportation sector has done a great job on the electric side of the carbon footprint equation through solar and wind and efficiency, they are now trying to look at how do they deal with the thermal side, which typically represents more than 50% of their common footprint. And that's where I'll put a plug-in for Ameresco, where I think we're in a great position in that. We are not a pure-play RNG company, we actually have a tremendous presence in the non-transportation sector, looking at the entire carbon footprint of our -- for our clients to help them reduce their carbon risk. And it's an easy add for us to include RNG as part of that solution, and I think there's a lot of value in that.

Great. I'm going to ask a couple of these audience questions now as these -- a few have come in. So from an investor's perspective, so not an operator, how important do you think vertical integration is across RNG?

How important vertical integration is in the...

Across -- Yes, across renewable natural gas.

Well, I think you got to be careful. I think -- so we've always -- we started the company, and I hope I'm answering the question correctly or have interpreted the question correctly. When we started the company, one of the things that our CEO was admin about, our founder, was he wanted to remain an agnostic -- technology agnostic company. And so we purposely have held back from necessarily being a manufacturer of technology or locking ourselves into one particular vendor or technology. And the reason is that it's evolving exponentially, and what is -- what is the state of the art today is not necessarily state of the art tomorrow. So the way we've looked at it, at least, is we're very vertically integrated in terms of the people resources to take a project from greenfield to operations. And that involves development, permitting, compliance, construction, engineering, commissioning, et cetera, but using best available technology that's in the market at that time. So I think I would caution that you don't necessarily want to be completely vertically integrated. I think even you're seeing some of the larger energy companies get into the space. I think there's a benefit of not being -- having everything under one roof. So consumer, I should say.

Yes. I'll tell you, Mike, I agree with kind of where the bookends are for vertical integration, the way that Ameresco looks at it, right? We get to the point where we become a producer of the gas, and then we inject it in the pipeline system and we sell it. But we're not going downstream any further than that. We're not trying to put fueling stations all over the country and own those. That is a very different business model than the development in construction and operation of a plant that converts methane out of a landfill, or a wastewater treatment plant into methane that is chemically equivalent to natural gas. Similarly, when you go upstream further into the feedstock space, we have no aspirations to become a landfill owner. We have no aspirations to become dairy farmers. We don't want to go to that point where we're owning the feedstock either, so there's limits to the vertical integration. I think vertical integration, incorporating development with construction, with operation, and operation and maintenance of plants, there are tremendous amounts of synergies across that because the expertise on every element of the development process, through the construction, through the operations, there's a substantial amount of interconnectedness in the skill sets of the people, et cetera. If you look at the way Mike's team is set up, we've got -- you're borrowing from skill sets all the way through that vertical integration. But the minute you flip into something that's got a completely different set of unit economics, I mean, manufacturing the equipment, that's R&D, that's manufacturing processes, that's raw material procurement, that there's a variety of things that are vastly different than what Ameresco does in the development of construction of [indiscernible] operations, right? And so I think that that's where the natural boundaries of vertical integration lie.

Right. Permitting was -- has just come up as a question. In terms of how does permitting risk compared to other renewable technologies, such as wind, solar, et cetera? So on average, is it easier or harder to get permitted?

Mike, that one's yours.

Yes, gee, thanks, Doran. What I would suggest is that we develop solar and wind products, and they have their own bucket of challenges on the permitting side. A lot of it has having to do with nimbyism. What I would suggest on the renewable natural gas side, especially when you're evolving landfill permits and such and wastewater treatment plant permits, there is a tremendous amount of challenges. It's definitely far more complex and challenging than your -- some of the intermittent resources I mentioned. I was just tallying one particular project that we're developing now, we're actually building in California. And I think the total permits required were close to 30 permits, each individual permits, each with their own challenges. In some cases, some of these permits can take over a year to secure. And so -- but that's why, if you go back to my original statement. For, as an investor, make sure you're investing in companies that have a proven track record and have done it successfully. It's been a bit of challenges, but we've never run into a project that where a permit has prevented us on the biogas side for being able to move forward into construction operations.

Perfect. Another question here. How do you see green hydrogen and RNG working together? Do you see RNG as a feedstock to make it, and do you see RNG and green hydrogen in purpose for natural gas -- in repurposed natural gas pipelines?

Yes, absolutely. Yes, yes and yes. I mean, look, at the end of the day, 95% of all the hydrogen produced currently is -- in the states is from SMR technology. It's not electrolysis. And I'm not suggesting electrolysis won't play a critical role, but it is also tracking a lot of molecule. And I would suggest in some states in the country, we have water supply challenges. It's an easy step to take RNG, use existing pipeline infrastructure, and with SMR technology, produce hydrogen. As a matter of fact, we were recently awarded a pilot project where we're going to -- we're looking to do exactly that, where we have an RNG plant in Phoenix, and we're developing one in Los Angeles. And I would then connect those plants through the I-10 corridor and try to use that RNG and SMR technology to produce hydrogen for our fueling stations along that I-10 corridor, which is a great space for the long haul trucking. So I do think it's going to play a role. And again, the only challenge I think, right now is that hydrogen is still a little bit uneconomic. I know the government is trying to subsidize it. I do -- I personally believe it's coming and I think it's coming faster than people realize, but I think we're still a couple of few years off from seeing a tremendous impact on that.

And Mike, can you take 2 seconds and just define SMR for folks?

Yes. I mean, it's steam methane reforming. It's essentially using the steam to crack the methane molecule and separate hydrogen and repurpose it for using as a fuel source. Unlike electrolysis, which is using essentially electricity to crack the raw molecule.

Right. I think that's one of the critical pieces there, is that it's not as heavily reliant on electricity, and it's certainly not reliant on water the way electrolysis is. I mean we, of course, are following electrolysis in the technology and the costs associated with it because it ultimately is going to become important for clean tech overall. And as a clean tech integrator, we need to make sure we know exactly what's going on. But for our own RNG production, this gives another example of how great it is to be an asset owner when you've got optionality for what to do with your output, right? I mean, we're selling renewable natural gas into the transportation sector. We see potential growth in the RNG voluntary buying sector. Certainly, as costs come down and the price comes down, that's going to impact the amount of uptick in that sector for RNG. But now, having yet another way to use the RNG to create hydrogen, which is going to be another alternative fuel that's going to -- that everyone expects to really take off, is it's just -- it's -- as a developer, owner operating our RNG plants now, we've got a lot of choices in the way we sell our output. And not too dissimilar to when we were doing landfill gas to electricity, and we got at least one plant that was converted off of -- landfill gas is being used for direct use into production of RNG, right? And so you've got optionality on these plants when you own them. I think hydrogen is presenting a really interesting case. And by the way, on the voluntary uptick, when you looked at the way that solar and wind took off, especially on the solar side, the economic value proposition for solar was always to purchase solar for less than what you're paying for electricity off of the grid, right? With renewable natural gas, it's a little bit different because the value of renewable natural gas is actually -- or the price of renewable natural gas is actually higher than just regular brown natural gas, right? And so I think that you're going to see the uptick in demand come from those participants in the market who are really looking at that carbon reduction equation that Mike referred to, as opposed to straight up economic savings. I don't know, Mike, if you have anything to add to that?

No, no. I think you're right on track. So as we move to a carbon-free society, fossil fuel will no longer be an option. So it's going to be hard to be comparing costs of RNG to fossil fuel because the goal is to get rid of it, right, not use it. And that's why I keep saying people will be looking at, really, the costs on a CO2 ton reduced basis, and that's where our RNG plays -- is very competitive. You also brought up a good point, Doran, about the power generation side. As Doran mentioned, we own and operate a number of biogas to power generators across the country. And if there are opportunities for electrolysis, we'll obviously look at using those resources as well to create hydrogen. I think the goal is to have a portfolio mix of technologies and investments that give you flexibility to grow as the market evolves.

Perfect. A question about regulation that's just come through. So do you see regulation, RN and RIN and LCFS, et cetera, changing in the medium term, say, 5 years? And if yes, where do you think it will move to?

Well, I don't see it changing -- this is just my opinion. I don't see it changing materially in the next 5 years. I mean, as I mentioned, in November 30, the EPA is supposed to issue the set rule, which will set the RVO goals for the next 3 years. So essentially, the volume requirements by the obligated parties. So I think that will continue. I think what we will see, which will be interesting, is if we start to see some of this RNG lead the transportation sector. So we're seeing some of the RNG in the States go to Canada. We're seeing some of it go over to Europe for the right program. And with that, there's only so much supply. I think as demand continues to grow, if supply is pulled off the transportation sector, you might see a spike in prices for that matter. I don't -- I think the trajectory of this fuel source as part of the net 0 puzzle is only going to continue to grow. And it might -- we might see some change in where the volume goes, but I don't think we'll see the change in demand. I think it will just continue to grow.

Perfect. Yes, there's a question here about the growth of RNG as a whole. So do you see the growth of voluntary corporate use of RNG? Is the same growth curve as the voluntary corporate use? Is it going to mirror prior growth curves within renewable energy, such as wind and solar, or do you see it being quite different?

Well, I would suggest that it's going to definitely grow because it's available today and addresses the thermal side of the equation for carbon neutrality. I would suggest that it might -- the demand might grow faster, and the reason is limited amount of supply. So when you think about other technologies like solar and wind, supply limitation is really manufacturing and space constraints. With RNG, it's feedstock. There's only so many landfills and only so many wastewater treatment plants, there's only so many farms. And that's why I think we might see a stronger demand for this, getting -- and the fact that it's a baseload dispatchable renewable supply of energy, unlike the intermittent resources. And it's kind of ironic that climate change is exacerbating the severity of the storms which is creating an uptick in desire for resiliency, and this resource can help supply sustainable resiliency.

Perfect. Couple of questions on voluntary RNG certificates. So the last one is on, could you touch on voluntary RNG certificates for corporations interested in decarbonizing non-transportation sectors?

Yes. I mean, this is evolving as we're speaking today in terms of how these certificates are going to look and how they're viewed. But traditionally, if you go back a number of years ago, clients were looking at just buying offsets. And they were cheap, they felt like they were doing the right thing. We've seen a shift now because the issue with an offset is it's an after-the-fact recording. So that client has to record a carbon footprint, and then they can go buy offsets which do nothing to lower their carbon footprint. Whereas with RNG, it's a one-for-one replacement of natural gas on your Scope 1 emissions. So it will actually help you bring your carbon footprint down so that customer can report or that client can report a lower carbon footprint. This is actually evolving as is being debated throughout industry, but traditionally, it's a one-for-one on your Scope 1 emissions.

Great. I think we've got time for just a couple more. There's quite a lot of questions coming through, which is great to see. Given the exponential increase in developers and visibility in RNG, could you speak to the range of returns for investors and what is expected, given the risk profile? And how you are underwriting a new operational development project?

I'll let Doran answer that. So...

I'll start -- I'll start with the easy part because we talk about this with the market quite often, just the way that we approach asset returns. So we're taking all of our free cash flow effectively and investing it in new assets, and renewable natural gas is one of those assets. Generally speaking, across all of our asset categories, we're looking on a portfolio basis to get mid-teens equity returns on everything that we invest in. But that's on a risk-adjusted basis, right? So when you talk about what these returns might look like, a developer model is going to look very different from maybe the Ameresco model, which will look very different than the way the lenders will look at your production, right? So your assumptions on RIN prices, your assumptions on LCFS prices or if you're going into the voluntary market, what kind of long-term fixed price contract can you get, at what price. We run a number of scenarios on a risk-adjusted basis in order to support our thesis that we've got risk-adjusted, mid-teens equity returns that we're targeting, right? And I think that when investors look at this market, certainly, if you are interested only in development, you're going to expect higher returns. That's much more speculative. It's no different than real estate development, right? If you're looking to invest in operating assets, pure operating assets with no development risk. The way we look at things, I think the return hurdles are going to end up being lower, right? When you look at buying, say, for example, assets that are operating and have a track record of operating independently -- asset-by-asset basis. Ameresco talks about its track record capabilities of developing and constructing and operating projects. I'm talking about specific asset operating history. That brings the risks down, and therefore, the returns should come down as well. But -- so there's a little bit of a spectrum. Our hurdles are kind of right there in the mid-teens on a risk-adjusted basis. Mike, I don't know if you want to...

Well, the only thing I would suggest is, [ Lisa ], in our organization, we bring that analysis down on a per project basis. So when I look at one RNG project compared to another, there are no 2 the same. There are no 2 landfills the same, there are no 2 projects the same, and we evaluate all of the nuances and risk of a particular project against the return. And we might take a lower return on one project because the risk is less, and we might require high return because of more risk. So that's kind of -- that's -- we get into the weeds on a per project basis.

Perfect. And we have time for one more, I think. So how does pyrolysis compare to electrolysis and other methods to create renewable hydrogen? Is that something you guys can touch on?

The only thing I'll touch on pyrolysis, and we've looked at that technology for many, many years, is -- and it's not as much applicable to the question you're asking. We've shied away from it because in some communities, they look at it still as a form of combustion, and permitting can have its challenges. But other than that, we haven't spent any more time, at least, at our organization on paralysis, especially with regards to any other fuel supplies or alternative fuel supplies. We -- there was one organization that was actually using pyrolysis to essentially bring down waste and generate electricity from it. I will say the cost per unit produced was very high.

Perfect. And there's a very quick question here on your thoughts on renewable diesel. Is this a market that you guys have been involved in or would be looking to be involved in?

We've looked at it. Doran has spent many hours, I know with a magnifying glass going through reams of information. I think going back to what Doran said, it's not -- don't ever say -- never say never. But what we have tried to do is focus on things that we know are really good at as the market evolves, and so we're very cautious about going too far outside our development expertise right now. We have never developed an RNG plant. It's not to say we wouldn't participate with others in some fashion to do so, but right now, it's not kind of our focus.

Fair enough. So before we end the webinar, and each maybe have a sort of closing statement or some thoughts about renewable natural gas and those looking to maybe enter the space. The first poll we did said that about 29% of the audience are looking to enter the market in the next 12 to 18 months, and a further 25% considering it long term. So what sort of closing statements and advice have you got for these folks?

I'll just -- at a high level, having been in the energy sector now for over 30 years, I would suggest that the energy industry in general is going through a renaissance, and the opportunities for any investor are tremendous. What I love about this space is that it's still fledgling, right? So we haven't hit pure maturity yet. We're far from it. And so if you have the confidence like we do in the space and the trajectory of where our climate change initiatives are going, I think this is a great space to take a hard look at. And the cautionary tale is look at the depth of talent in the organization that you're going to invest in to make sure they have a proven track record, because this space is complicated and has its challenges. And for some newbies, it could be a quick lesson on how to crash and burn.

So I think the way to think about RNG markets today, it's -- I think of it bigger. I mean, we've got a question about renewable diesel, but if you think just more broadly about biofuels, the need for alternative fuels is there, it's existing, it's growing. 100% electrification is not something that's going to come in the near term, and as a result, the demand for biofuels is going to -- of all forms is going to continue to grow. So right now, we've got renewable gas, we're taking methane and converting it to electricity. We've got the possibility of hydrogen going forward. As you mentioned, there's other alternative fuels that are going to be thought about for diesel, certainly, aviation fuel, et cetera. And so the whole entire kind of sphere of biofuel space is poised to grow substantially, and I really am excited about where Ameresco sits in that space as a developer with the expertise in almost all of the feedstocks that are actually producing these types of fuels. And having the ability and the track record to figure out how to transform what is methane being produced under the ground in a landfill into something that's actually usable as a fuel, whether it's somebody's backup generator or somebody's stove. Or a renewable -- or sorry, a natural gas vehicle, we are really, really excited about the expansion in the market, and our business model being technology-agnostic and the ability to flexibly approach any of these markets, it's just really exciting. And I'm glad to hear the interest, us hoping for higher numbers in the polls, but we'll see what happens if we do this again 12 months from now.

Absolutely. So that marks us stop to the webinar, but I'd like to thank everyone so much for joining. And if there were any other questions or anything we couldn't ask today, I'm sure Mike, Doran and Ameresco will be happy to answer them on another occasion. As a quick reminder, this is one of many member exclusive sessions that deep dive into assets, trends, pipelines, risks, inflations, best practices. And our next membership activity is the Infrastructure Investor North America Conference, which is in New York, December 6 and 7. So please get in touch if you'd like to attend. And thank you so, so much Doran and Mike, for your time and your expertise on renewable natural gas.

Thank you, Emily.

Thanks. Bye-bye.