ampCNG Thesis: BTU Arbitrage

In 2010, I was looking for renewable-energy ideas and projects to invest in. I was working with the team at Carbon Solutions Group and learning about the market. To start out, I made a couple investments in traditional solar, which worked well (although the timing was bad as panel prices collapsed just afterward). My original intent was to look at power projects, the idea being that power was going to be much more distributed and smaller scale (In fact, ampCNG’s original name was Aggregated Micro Power, or AMP). Led by the efforts of friends and investors in the UK, we adopted, in part, the same name and set out to pursue power projects as AMP Americas.

At that time, the US energy market was undergoing a profound shift. Natural gas, which traded as high as $12/MMBTU in 2008, was down to $4/MMBTU. At that price point, nothing is really competitive on a pure cost basis, with maybe the exception of coal. I had also watched the carbon markets whip around and eventually collapse due to the lack of a clear governing policy, so I told myself that our projects had to be profitable in the absence of subsidy. Given those constraints, we couldn’t find much that worked. We looked at biomass, visiting pellet plants and learning about the economics of growing organic material. We considered various waste-to-energy projects — gasification, torrefaction, and pyrolysis.

The problem was that nobody had a system that worked at any kind of scale in any real-world environment, at least not that we could find. We also started looking at anaerobic digestion, which is the production of methane (or natural gas) from waste, often food and manure. I found myself on farms throughout the country, at one point standing on a tarp suspended by only the methane from the 20-feet-deep pit of manure below. The problem with many of these projects, though, was that if they were producing power, they had to rely on incentives, but where incentives weren’t necessary, a power purchase agreement (PPA) from the utility was, and acquiring one of those often took years, if you could get it at all.

Then, through a friend, I was introduced to Fair Oaks Farm, a dairy farm on I-65 in Indiana led by Mike McCloskey. Mike, an industry leader for decades who has invested tirelessly in sustainability through anaerobic digesters and other innovations, wanted to run his dairy trucks off of the natural gas that he was producing from manure on the farm. As we dug into it, we saw that it made sense: diesel fuel was expensive and dirty, and the use of natural gas, especially renewable natural gas, was clean and cheap. After a lot of trips to the farm and Excel spreadsheets, I partnered with Mike and invested in two compressed-natural-gas cleaning stations, a gas-cleaning skid, and a fleet of trucks.

That was two and a half years ago. Today, that project runs 42 trucks on natural gas, most of which is delivered from the anaerobic digester on the farm. We’ve run well over 10 million miles on compressed natural gas and developed a unique knowledge base from being an early adopter. We’ve expanded the network, recently opening stations in Perry, Georgia, and Orlando, Florida. Through our joint venture with Trillium (a subsidiary of TEG), we’re building a dozen more throughout Texas and the Midwest. Natural gas is below $5/MMBTU in most parts of the country. In each MMBTU, there is 7.2 diesel gallon equivalents, which means that $5/MMBTU of natural gas is the equivalent of $0.70 of diesel fuel. Now a lot has to happen to make that natural gas usable — it must be compressed to high pressure and distributed to trucks, and the trucks have to be upgraded, for example — so what you end up with is a price closer to $2-2.50 per diesel gallon or a savings of more than $1.50 per gallon in most cases.

We’ve made progress, but the problem is big. The US burns 41 billion gallons of diesel a year — 28.5 billion of those go into trucks running 173 million miles a year. If the industry built 5,000 stations selling 1M gallons of diesel gallon equivalents we’d replace 5B gallons of diesel or about 17% of the trucking market or about 12% of the overall diesel market. We could do this while consuming just under 3% of our current natural gas production (65.7 bcf in 2013 per EIA). It would save shippers over $5B annually and considering that every gallon of natural gas burned would have little to no NOx or SOx and a reduction of 20-30% in CO2, the impact would be big.

So compressed natural gas makes sense from an economic standpoint, it makes sense from an energy standpoint, and it makes sense from an environmental standpoint (methane, especially renewable methane, is much cleaner than diesel). The big lessons that I’ve learned throughout this process are, to name a few few, (1) that I need to be willing to pivot (in our case, from power to fuels), (2) that turning a project into a company is a way to de-risk a business and an investment, and (3) lastly, if you’re building anything, make sure you are okay (financially, psychologically, etc.) if it takes twice as long and costs 20% more than expected.

The math:
65.7bcf a day of natural gas x 365 days = 23,981 bcf annual production of US
5 billion gallons of diesel * 139,000 BTUs / 1,000,000 BTUs = 695M MMBTUs of energy
695M MMBTUs of energy / 1M MMBTUs per BCF = 695 bcf
695bcf / 23,981bcf = 2.89% of US natural gas production

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