Jay Morrod, renewable gas analysis team lead at STX Group, identifies the challenges and opportunities.
Biomethane is emerging as a crucial energy source for decarbonising hard-to-abate sectors such as transportation, chemicals, and heavy industry. This renewable natural gas, derived from organic matter like agricultural and food waste, sewage sludge and other biodegradable materials, offers significant reductions in CO2 and methane emissions.
Biomethane can achieve carbon footprints lower than minus 100g CO2/MJ, exceeding 200% savings of CO2eq emissions compared to fossil fuels. This is demonstrated by proof of sustainability documents issued by RED voluntary standards such as ISCC and REDcert.
Biomethane is a small component of the gas mix in both the UK and the EU as it is a relatively new technology, but strong decarbonisation credentials and abundant available feedstock is allowing biomethane production to scale fast.
European biomethane production surged by 20% in 2022 to over 37 TWh, meeting around 1% of total European natural gas demand. The European Commission has a target of 35 bcm biomethane production by 2030, under REPowerEU. According to Gas Infrastructure Europe, 1,548 biomethane-producing facilities were operating in Europe by June 2024 compared to 1,322 in April 2023.
This growth is a strong signal of the industry’s efforts to scale up production and reach ambitious targets. However, the policy landscape remains uncertain, particularly with the impending implementation of RED III and the Union Database PoS tracking system, which could introduce changes affecting market prices and trade flows.
With few member states on track to implement RED III on time, project viability is at risk.
The UK was the fourth largest producer of biomethane in Europe in 2023, with around 5 TWh of installed production capacity. Initiatives like the Renewable Heat Incentive (RHI) and the Green Gas Support Scheme (GGSS) have driven this growth. The new Labour government’s focus on tackling climate change through renewables presents an opportunity to expand green gas production, create jobs, reduce reliance on imported fossil fuels and utilize waste streams for energy.
The UK must address financing and permitting hurdles to scale up biomethane production and meet its 2050 net-zero ambition. Traditional financial institutions have struggled to provide the necessary support, highlighting the need for innovative private sector solutions. Companies like STX have developed financial mechanisms and partnerships to facilitate capital flow, crucial for advancing biomethane growth in the UK and across Europe.
Financial and regulatory challenges
Financing remains a critical bottleneck for the biomethane industry. High upfront costs for production infrastructure and the need for extensive logistics and distribution systems pose significant challenges. Innovative financing options, such as green bonds and public-private partnerships, are needed to stimulate investment in biomethane projects. For instance, STX Group recently entered into a financial partnership to increase biomethane production capacity by at least 80 GWh annually.
Regulatory barriers also impede the development and expansion of biomethane plants. Lengthy permitting processes and unclear guidance from regulatory bodies delay essential infrastructure. In the UK, regulatory gaps concerning non-waste anaerobic digesters (AD) highlight the need for streamlined procedures and clearer guidance to catalyse industry expansion.
Policy implications and market stimulation
To unlock biomethane’s full potential, both the UK and the EU require holistic strategies to navigate these obstacles effectively. Mandated demand policies, such as setting a minimum percentage of renewable gas blended into the natural gas grid with financial penalties for non-compliance, could incentivise market uptake and secure revenue streams for project developers. Simplified regulatory processes and reduced barriers are essential to create an environment conducive to increased investment and accelerated deployment of biomethane infrastructure.
The alignment of GHG Protocol’s guidance with EU regulations adds another layer of complexity, emphasizing the need for stable and supportive policies. Production subsidies are crucial for new projects, with around 55% of all European production capacity receiving support in the form of either a feed-in-tariff or feed-in-premium. However, unnecessary trade barriers could put downward pressure on certificate prices and threaten plant margins, slowing investment in new plant projects.
UK vs EU development
While both regions show promising growth trajectories, the UK and the EU face distinct challenges and opportunities. The EU’s policy uncertainty, particularly around RED III and the Union Database PoS tracking system, contrasts with the UK's more stable policy environment but highlights the urgent need for streamlined planning processes and supportive policies.
Germany, once the largest producer of biomethane in Europe, saw new capacity installations fall dramatically after 2015 due to reduced interest in the EEG subsidy scheme. Germany's subsidies are all at the point of consumption, so there is a lot of uncertainty for projects seeking offtake agreements. One of the Germany's largest biomethane traders recently filed for insolvency due to the significant drop in German biofuels ticket prices. Some of the offtake agreements with biomethane producers might be unwound as the economics no longer make sense, which in turn will hurt investors in the biomethane space. This highlights how important it is for governments to bear some of the investor risk, which they can do by providing production subsidies directly to producers at the point of production, which largely eliminates this default risk for producers.
As a result of only having consumption subsidies, Germany’s project pipeline is underwhelming, and few new plants have been commissioned since 2015. This illustrates the critical impact of policy frameworks on industry growth.
Unlocking the full potential of biomethane in the UK and the EU demands concerted efforts in innovative financing, regulatory facilitation and market stimulation. By addressing these challenges, both regions can cement their positions as leaders in sustainable energy transformation. The new Labour government in the UK has a unique opportunity to drive this sector forward, ensuring that biomethane plays a pivotal role in the decarbonisation of the British economy. Through strategic policies, streamlined regulations and robust financial support, biomethane can become a cornerstone of sustainable energy strategies, contributing significantly to global efforts to combat climate change.
“Overcoming financial and policy challenges will enable growth in biomethane production capacity”
