How the biomethane market works

Biomethane is a sustainable alternative to fossil natural gas, which is produced by the anaerobic digestion of organic matter such as animal and plant material, manure, sewage and organic waste. CO2, a by-product of this process is either removed to produce pure biomethane or captured to generate an additional revenue stream. Biomethane is chemically identical to fossil-derived natural gas and can be used in all the same applications such as electricity generation, water and space heating, cooking, and as a renewable vehicle fuel. The main difference to fossil methane is the calorific value (CV), which – depending on the grid injection location – is often enriched with propane to meet GB gas grid requirements.

How the biomethane market works

The biomethane market has been stimulated by the introduction of the Renewable Heat Incentive (RHI) Scheme (2011-2021) and is receiving continued support through the more recent Green Gas Support Scheme (GGSS) (until 2025). The subsidy schemes provide a guaranteed tariff payable per unit of biomethane produced that is injected into the gas grid. The tariff is a fixed unit rate indexed to inflation and guaranteed for 20 years for the RHI and 15 years for the GGSS. For each unit of verified biomethane from a sustainable feedstock, the producer is awarded a tradeable commodity called a Renewable Gas Guarantee of Origin (RGGO), typically known within the industry as a green gas certificate. Each unit of biomethane that the producer injects into the grid is monetised as agreed in the terms of a Gas Purchase Arrangement (GPA) between the producer and an Ofgem-licensed gas shipper.

A shipper is mandatory in the supply chain as the producer will only be awarded a Network Entry Agreement (the contract allowing them to input biomethane into the grid) when a GPA is in place with a shipper. The combined value of the tariff from the subsidy scheme, the green gas certificate and the gas is the main revenue stream received by the producer.

Fluctuating prices

Prior to the energy crisis, the RHI subsidy dwarfed the wholesale price of gas. The subsidy was necessary to stimulate the development of the biomethane market by making an AD plant commercially viable. The energy crisis has substantially altered the dynamics of valuing biomethane, with wholesale gas prices now much higher and in cases at similar levels to the subsidy.

The GPA sets out the terms for the services that the shipper will provide to the producer. This will set pricing arrangements for the gas that the shipper will buy from the producer, generally including floating and fixed price options.

Floating prices provide a risk-free hands-off approach for the producer. Although the producer is susceptible to daily market price fluctuations, typically there are no penalties for failing to produce. This approach to selling gas produced from AD is generally better suited to new plants ramping up or those with unreliable production. Fixed prices provide price and revenue certainty for the producer, although the producer may face penalty payments should they fail to inject sufficient gas to fulfil agreed fixed quantities. Since the beginning of the energy crisis, fixed price transactions have grown in popularity among producers as they look to secure additional value, relative to their project forecasts, from the price peaks experienced over the last twelve months.

Security of supply concerns remain across Europe, but wholesale gas prices have slowly been retreating from their peak late last Summer as the global gas market adjusts to reduced flows of Russian pipeline natural gas into Europe in the wake of the invasion of Ukraine. Producers looking to fix forward quantities to secure a guaranteed price must consider the risks and benefits. For example, despite current downward trends, prices may rise above the level at which the producer transacted There are also other factors that impact the profitability of AD sites, principally the fluctuating cost of feedstock. Securing a “good” price for the biomethane needs to reflect feedstock contract costs to ensure minimal price risk is introduced. A producer might be better off taking a flexible approach which combines fixed and floating prices, providing a partial hedge against feedstock or gas prices rising or falling.

The value of proof of origin

RGGOs are issued for a retrospective batch of injected biomethane, typically following verification under the RHI or GGSS. RGGOs can then be sold once the certificates are in the producer’s possession. As gas sales are typically settled monthly in arrears, the disparity in settlement periods has historically led to RGGO sales being unbundled from gas sales. Large corporations increasingly require a bundled supply of biomethane (a product of the gas and the RGGO being sold together) from specifically identified AD plants to fulfil their net zero commitments. A specialist shipper can facilitate such bundled transactions. Producer and shipper participation in a voluntary accreditation scheme, such as International Sustainability and Carbon Certification (ISCC), will further demonstrate and validate the chain of custody and add further value for the producer through a price premium.

Producers have benefited from a significant increase in the price of RGGOs since mid-2021, in line with the increase in the price of the overall energy mix. The increasing price of carbon offset credits, renewable electricity, and the increasing corporate commitments to achieve net zero have seen a large increase in demand for RGGOs which has in-turn increased the price of RGGOs. RGGOs are broadly classified in two categories of waste and crop depending on the verified feedstock used.  The average value of an RGGO (average price for a crop & waste certificate) was £6/MWh in mid-2021. At the time of writing, the average price is £28/MWh, with a further premium for ISSC or similar accreditation to complete bundled certificate and gas deliveries. Although the price rally has slowed since the start of 2023, end users, including ever more new market entrants, remain interested in purchasing certificates at these elevated prices.

Biomethane subsidies

The ability to use biomethane within the Renewable Transport Fuel Obligation (RTFO), (which may be done for a given quantity of biomethane instead of claiming under the RHI or GGSS) has presented an alternative route to market for producers, especially those with a stream of biomethane produced from a non-crop feedstock which qualifies for the 2x biomethane multiplier of Renewable Transport Fuel Certificate (RTFC). Historically, the net value of an RTFC to a producer has outperformed the combined value of the second-tier premium under the RHI subsidy tariff and the price of an RGGO. 

The RTFC price is market-driven when compared to the guaranteed value of the RHI and GGSS subsidy scheme, so existing producers registered with RHI or GGSS must actively arbitrage between the alternative revenue options to maximise the value of their biomethane. The RTFO may also be an attractive option for producers currently generating electricity under a Feed-In Tariff or Renewables Obligation that is due to expire or where the RTFC price is simply more lucrative than their tariff. A specialist shipper will be able to assist a producer in facilitating an RTFO transaction.

The energy crisis has increased volatility in the RTFO market. RTFO demand for GB-produced biomethane has increased as eligible biomethane from mainland Europe has become more expensive relative to GB. Conversely, lower fuel demand and cheaper biofuels have reduced the demand, and subsequently the price for RTFCs. The commercial viability of the RTFO option for producers receiving subsidy under the RHI and GGSS schemes is being tested by a recent slide in RTFC prices. The RTFC market’s volatility means this could change swiftly, and there are commercial strategies that can mitigate or remove price risk for biomethane delivery into road transport.

The future is biomethane

A quarter of the gas in Denmark’s grid is now biomethane, with plans afoot to take that figure to 100 per cent by 2034. While there are different challenges within the GB gas market, it is not unreasonable to aim similarly high in GB. With proven commercially viable options available and specialist shippers ready to provide the expertise to cater to their needs, there has never been a better time for biogas producers to explore the opportunity offered by injecting biomethane to the grid and for new investment to enter the green gas market space.

This feature was originally written by Resource Media for the REA's Organics Recycling and Biogas magazine. The Association for Renewable Energy and Clean Technology (REA) is the UK's largest renewable energy and clean technology body, representing around 550 member companies.