What are the potential pricing and supply risks associated with sourcing RNG from food and wastewater facilities in California?

Pricing Risks – RNG derived from food‑processing and wastewater treatment plants is still a niche commodity in California, so its price is largely driven by contract‑by‑contract negotiations rather than a transparent, liquid market. The limited number of qualified feedstocks means that any shift in feedstock availability (e.g., a crop failure, seasonal changes in food‑waste volumes, or stricter wastewater discharge regulations) can create price spikes. Moreover, RNG must compete with both conventional natural gas and other low‑carbon credits such as California’s Low Carbon Fuel Standard (LCFS) and Renewable Identification Numbers (RINs). If LCFS credit prices falter or federal tax credits (e.g., Section 45Q) are altered, the revenue premium that makes RNG economically viable can shrink, compressing the spread that Southwest Gas expects to capture. Traders should watch the “RNG‑to‑gas” basis spread and LCFS price trends; a widening spread signals upside, while a narrowing spread raises the risk of under‑performance relative to the procurement price.

Supply Risks – The food‑waste and wastewater RNG supply chain is still early‑stage and heavily dependent on a handful of facilities that must install or upgrade anaerobic digesters, capture equipment, and pipeline interconnections. Project delays, permitting bottlenecks, or unexpected operational outages (e.g., mechanical failures or stricter effluent standards) can curtail the volume Southwest Gas expects to receive under its CPUC‑approved procurement agreement. Additionally, the “take‑or‑pay” clauses typical in RNG contracts can expose the utility to stranded cost if the feedstock stream underdelivers, forcing it to purchase more expensive conventional gas on the open market. From a trading standpoint, maintain a position bias that reflects a modest premium over Henry Hub‑linked natural gas futures, but hedge the RNG exposure with LCFS futures or options to mitigate credit‑price volatility. Monitoring California’s waste‑diversion policies, digester construction pipelines, and the upcoming Senate Bill 1440 implementation schedule will provide early warning signals of supply squeezes that could impact price stability.