ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading by CTRM Center

WHITE PAPER

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

Sponsored by

INTRODUCTION Energy systems in Europe and around the world are undergoing a green transition - a shift from fossil fuels to renewable energy sources. When discussing renewables, most people think of wind and solar power, which indeed represent the largest share of renewable energy production. In some European countries, these sources can contribute more than 50% of total electricity generation in some time periods. However, wind and solar have a critical characteristic that poses significant challenges for energy systems: they are intermittent. This means that grids with a high share of wind or solar generation require flexible assets to compensate for power shortages during periods of low wind or sunlight. While traditional flexible assets, such as those powered by fossil fuels, can meet this need, their use contradicts zero-carbon goals. Renewable fuels / renewable natural gas (RNG) can be an important component in efforts to de-carbonize. RNG can reduce the carbon footprint of natural gas in power generation and heating as well as renewable fuels in combustion engine-based transportation including trucks, ships and aircraft. Especially in regions lacking electrical infrastructure, usage of batteries has today very limited viability, but renewable fuels/ gases can often be used directly. They represent a carbon reducing flexible option and therefore warrants attention from policymakers. Firstly, RNG-fired power plants are renewable energy sources and offer the same level of flexibility as conventional gas-fired plants. They can play a vital role in stabilizing the grid and compensating for fluctuations in wind and solar output. Secondly, renewable gas can

be used to produce compressed natural gas (CNG) for usage in transportation. Additionally, RNG maintains the same properties as conventional gas, meaning it can use existing natural gas infrastructure for transport, storage, and distribution. Furthermore, RNG can be blended with natural gas, enabling a gradual transition where the proportion of RNG increases over time. Another key driver for RNG adoption is the geopolitical risk associated with the price volatility of conventional fuels such as natural gas. Especially in Europe where the large share of natural gas needs to be imported, the risk of geopolitical dependency on non-European gas producers is high and the push to reduce the consumption of natural gas altogether is strong. RNG reduces the dependency on imported gas while also reducing agricultural and landfill waste, making it a circular economy resource. The strategic importance of RNG has been recognized by both European and US authorities. The global RNG market was valued at $58.23 billion in 2022 and is projected to reach $86.71 billion by 2030, with a compound annual growth rate (CAGR) of 5.2% from 2020 to 2030. The European biomethane market is expected to grow even faster, at a CAGR of 7.7%.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

Both Europe and the US have developed robust regulatory frameworks for RNG. These frameworks support sustainability and transparency and play a growing role in achieving greenhouse gas (GHG) emission reduction targets. They also strengthen the economic viability of new production capacity. However, these regulations also introduce complexity. They establish links between the production, purchase, and sale of RNG and various types of certificates that demonstrate compliance with sustainability criteria or verify fuel origin. Further complexity results from the fact that renewable and traditional fuels need to be managed in parallel and are mixed or blended along the value chain. In other use cases like CNG in the North America’s transportation section, RNG intended for this purpose must be kept separate from non-RNG gas along its path to the CNG plant. In both situations,

A ComTechAdvisory Whitepaper

ETRM systems need to have flexible tracking capability, managing the portion of renewable commodities as part of a blended or separated stream within processing, consumption or final sale. In Europe regulations exist at national and EU levels and differ significantly from those in the US with state level variations. As a result, ETRM systems managing RNG and renewable fuels must handle the added complexity of modeling certificate trading, tracking, and retirement schemes across different jurisdictions including crossborder trading as well as the relationship between fuel characteristics and the associated certificate quantities. The next chapter will explore this complexity in greater detail.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

A ComTechAdvisory Whitepaper

BUSINESS REQUIREMENT FOR HANDLING RNG AND RENEWABLE FUELS IN ETRM RNG contracts in their life cycle are similar to natural gas in many aspects. There are longer term production or delivery contracts including complex pricing with different types of volume contractual, forecasted, nominated and actual - which all may differ, RNG is transported by pipe together with natural gas and stored in a gas storage. However, there are important differences. The RNG contract has different certificate components in addition to the gas component, as well as additional tracking values like origin, production batch identifiers, carbon intensity, underlying production process, and others. The certificate components differ in their purpose and rules for trading, tracking, and retirement, depend on location of the gas and particular regulation they are designed for. This chapter does not aim to describe all these rules and regulations in detail but only provides the reader with a high-level overview. To begin with, an RNG business will often deal with more products and different supply chains than the traditional natural gas business. For example, if the RNG is based on manure from a dairy farm the trading solution needs to support truck-based logistics in addition to the expected gas pipeline logistics. If the intent is to keep the RNG pure, the solution will have to ensure it is not coming across its supply chain and storage lifecycle together with natural gas. Furthermore, the diversification of gas products is becoming increasingly necessary: in addition to standard natural gas, there’s now a need to incorporate RNG, CNG (especially when derived from RNG), and various blends of RNG sourced from feedstocks such as dairy manure and landfill waste. The landscape of RNG gas tracking relies on multiple

strict requirements. Compliance markets, such as the EU RED, require sustainability tracking via certificates and aligned sustainable RNG balance tracking, creating the need for linkage and combined management of the fuels and the certificates. Renewable power markets in Europe and US use a so called book and claim system, where “Book” refers to the recording of a certificate when it is issued to a producer who has generated a unit of green energy and “Claim” refers to the right of a buyer to claim the environmental benefits of that unit, even if they don’t physically receive the renewable product. In other words, the certificates can be traded independently from electricity after the certification of renewable generation. In the case of certificates related to RNG or renewable fuels the book and claim principle is not always applicable depending on the type of certificates.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

Let us consider European regulations first. As mentioned above, the EU legislative framework regulates RNG through Guarantees of Origin (GO) and Proof of Sustainability (POS) certification, supporting RNG capacity development and incentivizing the use of sustainable low carbon feedstock. POS is used to prove compliance with The Renewable Energy Directive (RED) regulation, the GOs are used for disclosure of the renewable energy share in accordance with RED to the end consumer. The GO workflow for RNG is similar to handling GOs known from renewable power business. There are national registries issuing the GOs to the RNG producer’s accounts. GOs can be traded separately from physical gas between producer/trader/ end-user accounts in the national registry according to the “book and claim principle”. Cross border transfer between the registers is possible. These rules together with the interface to specific national registers need to be translated into specific requirements for ETRM. Otherwise, implementation of GO related workflows is similar to the functionality already implemented for power GOs in most ETRM systems. The situation with POS is different. POS cannot be separated from physical gas. For any RNG transaction it is not permitted for a trader to buy or sell a sustainability declaration (POS) for RNG without the link to the respective amount of physical RNG being sold or purchased. When physical gas flows from one balancing area to another occurs, POS flow as well with the amount not exceeding physical inflow into the same balancing area. This is the main idea behind socalled “mass balancing mechanism” which is applied for calculation of the certificate volume in dependence

A ComTechAdvisory Whitepaper

of physical gas. Independent trading of RNG and POS is not possible and inflow of RNG needs to be always greater or equal in comparison to outflow for the mass balancing reporting period. Requirements for mass balancing become more complex when applied for renewable fuels. For RNG as for natural gas there are balancing areas and cross border capacities which traders need to buy to enable the gas flow from one balancing area to another, physical gas flow needs to occur to allow POS transfer across regions. In the case of renewable fuels, the proof for the POS transfer needs to be shown throughout the whole transportation chain, from the fuel producer to storage to delivery and final use. This is a more cumbersome process than the tracking requirements for RNG POSs. But this is not yet all the complexities ETRM implementation is facing when dealing with RNG and renewable fuels. A key driver of RNG certificate values in Europe is feedstock carbon intensity (CI), which is usually agreed contractually but may appear different in actual values. In this case the settlement of the corresponding POS certificate depends on the difference between contractual and actual CI. Tracking CI values and calculation of corresponding volume of POS and the final settlement are important requirements for an ETRM system. The next point is the difference between US and European requirements. In the US there are multiple programs regulating the certification of RNG and renewable fuels: the Environmental Protection Agency (EPA), Renewable Fuel Standard (RFS), California’s Air

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

Resources Board (CARB), Low Carbon Fuel Standard (LCFS) and Oregon State and Washington State LCFC requirements. The EPA Renewable Fuel Standard (RFS) which includes RNG based CNG helps to scale up the RNG market and drive emissions reduction in the transport sector in the US. The LCFS standards apply across industries and in addition reduce or offset carbon emissions from factories, farms, buildings. With LCFS, the credits are always traded independently, but initial positions could be derived from various carbon reducing investments, from fuel reduction to tree planting. RFS uses RIN (Renewable Identification Number) certificates. In the case of CNG derived from RNG, RINs are created at the point of compression into CNG, detached from the underlying CNG and can be traded independently. The same project in an LCFS state, like California, can generate both LCFS and RIN certificates associated with the RNG for CNG conversion. For LCFS related to fuel, there are the carbon intensity (CI) benchmarks for baseline transportation fuels (gasoline/diesel), which are designed to decline over time to meet the emissions reduction target. If the CI value is higher or lower than the benchmark LCFS deficit or LCFS Credit will be generated which then need to be bought (short position) or could be sold (long position). While low carbon fuel can be produced in one location to generate LCFS credits and a buyer at

A ComTechAdvisory Whitepaper

another location can purchase and claim these credits without purchasing the physical product, a verification process is in place to ensure that the RNG purchased is from a pipeline that is connected to a RNG supply to avoid double counting. LCFS credits do not expire, and the surplus can be banked for future compliance. RINs have a different schema. The US Environmental Protection Agency (EPA) has the authority to set RFS annual volume requirements for 4 renewable fuel categories: cellulosic biofuel (D3), biomass-based diesel (D4), advanced biofuel (D5) and renewable fuel (D6). Under the RFS program, depending upon the feedstock, RNG is eligible to generate RIN credits (D3 or D5 RIN). D3 credits are generated at a rate of ~1.7 per gallon of CNG while D6 credits are generated at rate of 1.0 per gallon of Ethanol. D3 credits can also be used to retire obligations associated with any credit (D3-D6) and this makes them more valuable than other credits. Refiners and importers of transportation fuel in the US are required to retire enough RIN credits to meet the Renewable Volume Obligation (RVO) which is calculated based on the company’s total fuel sales. Failure to comply with the annual RVO could result in civil penalty. Compliance is demonstrated annually through reports on fuel production and RIN retired. RINs are valid for two compliance years. So, a RIN generated in 2025 can be used in 2025 or 2026 for meeting obligations and thus, in 2027 loses all its value.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

In summary, managing RNG and renewable fuels within an ETRM system involves several complexities that should be taken into account: • Supply Chain Complexity: While classical and renewable fuels often share similar lifecycle management processes and can be physically blended, their distinct characteristics such as carbon intensity values and certification schemes require them to be managed separately in some workflows and jointly in others. Additionally, feedstocks for RNG, like dairy farm manure, utilize truck transportation which is completely different from the pipeline-based transportation in standard natural gas supply chains. • Product Diversity: The renewable fuels market offers a much broader variety of products compared to fossil fuels, as each type of renewable fuel often must be traded and managed individually. • Certificate Scheme Complexity: The ETRM system must support multiple certificate trading schemes, each with its own set of rules and requirements. This demands a high degree of flexibility and configurability.

A ComTechAdvisory Whitepaper

• Traceability and Reporting: Ensuring traceability of certificates along the value chain, (e.g. POS) requires sophisticated reporting capabilities. The mass balancing mechanism introduces unique challenges and must be handled with special care, especially for renewable fuels. • Operational and Financial Risk Management: Standard ETRM functionalities such as transportation, storage, and risk management become significantly more complex in the context of renewable fuels. Certificate scheme specifics and their impact on settlements must be factored into financial risk calculations. Greater operational transparency in transportation and storage is essential for effective portfolio optimization involving both physical renewable fuels and associated certificates.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

A ComTechAdvisory Whitepaper

ION Solution ION offers a range of commodity management and (Commodity Trading and Risk Management) CTRM solutions including Openlink’s Endur, RightAngle, Allegro, Aspect and TriplePoint that need to support the handling of renewable fuels, RNG and associated certificates. ION focuses on developing this functionality in multiple solutions, sharing experience and modeling approaches across ION platforms certain components, such as integration with certificate registries, can be reused across ION products. Contract management for RNG and renewable fuels captures all necessary details to automatically generate certificate trades linked to the underlying contract. This includes key attributes like carbon intensity (both contractual and actual), certificate type, quantity, position (short/long).

Certificate trades linked to RNG or renewable fuel contracts also include critical metadata, such as compliance registry account information and expected delivery timing in registry account, which could be an offset in relation to the physical commodity delivery timing.

Carbon intensity represents a critical element of the renewable fuel trade as it is crucial to derive corresponding certificate quantity and settlements. Ability to capture, track and actualize carbon intensity along the trade life cycle from contractual agreement to physical delivery (fuel and certificates) and automatically update the certificate or settlement data is important feature allowing to reconcile sustainability attributes of actual delivery against contractual agreement, escalate settlements based on deviation from agreed carbon intensity, track inventory by carbon intensity range for efficient inventory tracking and position reporting.

This integrated setup offers substantial benefits: automated booking of certificate trades, alignment of biofuel production or delivery forecasts with certificate positions, and a fully integrated certificate trading module encompassing registry interfacing, reconciliation, inventory tracking, valuation, and reporting.

By automating these processes, ION solutions can ensure both compliance and operational efficiency, while providing transparency and control over sustainability-linked trade attributes.

Managing certificates enables end-to-end coverage of the entire value chain, supporting the full lifecycle from issuance to retirement of obligations. A flexible modeling framework allows tracking certificates or sustainability details through production, trading, and eventual retirement. Dedicated screens support the import and monitoring of forecasted and actual production data, alongside associated compliance obligations. Transaction-level linkage with registry data facilitates seamless reconciliation receiving certificates

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

and allocation when delivering/fulfilling own delivery obligation, allowing the optimization of available certificate inventory. Key advantages of this approach include: • Consolidated P/L reporting for both fuels/gas and certificates • A comprehensive certificate module, covering transactions, static data modeling, and risk management • A dedicated pricing to simplify valuation and maintenance (mark-to-market for both fuels and certificates) • A standardized reconciliation/allocation process for registry data with optional transaction-level linkage and the ability to optimize certificate inventory. Demand for certificate trading related to RNG and renewable fuels is growing rapidly. Openlink is currently running four projects with major energy companies focused on RNG and certificate trading, along with an additional project covering both traditional and renewable fuels in the oil trading sector. As these customers operate across continents, the solution simultaneously addresses the requirements of both U.S. and European markets. To ensure a fast time-to-market, developments are being delivered within the Environmental Certificates Module, which is compatible with multiple versions of Endur. This approach allows for rapid deployment regardless of the customer’s base ETRM software version.

A ComTechAdvisory Whitepaper

The latest release - along with the upcoming July update - includes automated processes for carbon intensity tracking and settlement, as well as certificate linkage for both initial allocations and reallocations. It also supports automation of RNG and renewable fuels delivery processes, including partial deliveries and settlements. Integration with carbon and renewable credit register is an important part of ION developments. The Renewable and Regulatory Link Pro (RRL) is a flexible integration tool designed to seamlessly connect different CTRM systems with carbon and renewable credit registries, with a particular initial focus on the Union Database (UDB) and Guarantee of Origin (GoO) schemes. RRL offers dedicated initial support for these registries, enabling efficient and accurate data exchange. Its high configurability allows users to integrate external interfaces and fields, while also supporting automatic pre-population of data based on customizable business rules, even for fields not natively available in the CTRM system. This ensures a smooth and adaptable connection to UDB and GoO, streamlining registry interactions and enhancing operational efficiency. Here are main characteristics of the RRL: • Seamless Integration: RRL Pro connects any CTRM system with carbon and renewable credit registries, initially supporting UDB and Guarantee of Origin (GoO). • Highly Configurable: Allows integration of external interfaces and fields, with automatic prepopulation based on business rules.

ION Solutions for Renewable Natural Gas, Renewable Fuels and associated Certificate Trading

• Efficiency & Accuracy: Reduces manual input, ensures real-time updates, and minimizes human error. • Regulatory Alignment: Ensures consistent data formats, audit trails, and adherence to compliance standards. • Scalable & Future-Ready: Handles large data volumes and adapts to evolving regulatory requirements. • Cost & Security Benefits: Cuts labor costs, boosts operational efficiency, and ensures secure, controlled data access.

A ComTechAdvisory Whitepaper

The other ION products are also being enhanced to support RNG and renewable fuel management, allowing teams to share their experience and solution approaches and use the RRL for registry communication. The diverse requirements coming from different business areas enrich the company’s collective understanding of these processes and help to shape flexible solutions for the benefit of the entire ION portfolio.

ABOUT ION COMMODITIES We’re transforming the world of commodities through innovation. Our mission is to understand the diverse and changing needs of your energy and commodities business and meet those needs with advanced technology. Wherever you are, and whatever industry you’re in, ION Commodities solutions put you in complete control. With decades of knowledge and experience, we can provide proven solutions to the challenges you’re facing. That’s why over 30,000 users worldwide have partnered with ION to sharpen their decision-making and boost their productivity. Want to know more? Contact us at: commodities@iongroup.com commodities.iongroup.com

ABOUT Commodity Technology Advisory Commodity Technology Advisory (ComTech Advisory) is the leading analyst organization covering the Energy and Commodity Trading and Risk Management (E/CTRM) and Energy Transition technology markets. Led by Dr. Gary M. Vasey, along with affiliate analysts Dr. Irina Reitgruber and Kevin Mossop, ComTech Advisory provides invaluable insights, backed by primary research and decades of experience, into the issues and trends affecting both the users and providers of the applications and services that are crucial for success in markets constantly roiled by globalization, regulation and innovation. For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter and the ETTCenter your online portal with news and views about commodity / energy markets and technology as well as a comprehensive online directory of software and services providers Please visit the CTRMCenter at:

www.ctrmcenter.com Please visit the ETTCenter at:

www.ettcenter.com

Vyhlidalova 823/19 625 00 Brno Czechia ComTechAdvisory.com Phone: +420 775 718 112 Email: info@comtechadvisory.com