Understanding the impact of a European Guarantee of Origin market for biomethane

What is the impact of a European Guarantee of Origin market for biomethane on the development of the sector across the EU?

In this blog, we look at the current biomethane market; the implications of its development for energy producers, policy makers and energy-intensive industries in Europe; and how Ricardo helped a natural gas distributor to understand the biomethane market.

In 2018, the EU’s Renewable Energy Directive recast (RED II) came into force. Its aim was to keep the EU as a global leader in renewables and help it meet its emissions reduction commitments under the Paris Agreement. RED II set a target that requires the EU to fulfil at least 32% of its total energy needs with renewable energy by 2030 and required all EU Member States to have it transposed into law by 30 June 2021. 

Driven by RED II and the need for heat decarbonisation, Ricardo has assisted clients in the UK and in Europe understand the biomethane certification and green gas Guarantee of Origin (GoO) market.

For this case study, Ricardo was contracted by a major gas distribution company in Europe which manages the distribution of natural gas from the larger transport network to each end consumer – work which is governed by the state. The company was seeking to understand how a pan-European biomethane registry for GoO could affect the market and what opportunities and risks this posed to the organisation.

A background to biomethane and Guarantees of Origin

A key source of renewable energy is biomethane, a low carbon gas that can be used alongside or as an alternative to natural gas. This gas is generated from agricultural, sewage and landfill feedstocks and municipal solid waste (MSW) via a range of different technologies. Most often, the biogas produced is upgraded to biomethane and is then injected into the existing gas network in a process called biomethane injection.

Guarantees of Origin (GoO) are certificates that detail the origin of renewable electricity or fuel. In principle, they allow for the transparent and confident trade of renewables. However, the standards for biomethane GoO are inconsistent across different nations. Therefore in reality, the export and import of biomethane between countries is often time consuming and costly. RED II requires that harmonised processes and procedures for trans-boundary trading of biomethane must be put in place by Member States. It is thought that a standardised European GoO registry could allow for the enhanced generation and cross-border trade of biomethane.

How Ricardo’s experts investigated the current state of the biomethane market in Europe

Because of our extensive knowledge of energy systems and policy, we were asked by a European-based gas distribution company to investigate the current state of the biomethane market across 10 European countries. This investigation involved modelling scenarios to evaluate how the biomethane market may evolve given certain changes to international trade and GoO.

We provided a comprehensive review of the state of the market and paired this with targeted technical stakeholder interviews across the EU to produce a detailed understanding of where biomethane is generated, traded and consumed across 10 European countries.

We interviewed a number of people who represented national registries, shippers and suppliers (who already trade biomethane or have the potential to do so), and energy companies (who are aware of the trade in biomethane and whose customers may be interested in using biomethane). The purpose of these interviews was to obtain an understanding of the market as it stands and how it may develop in the future.

Following this, we developed several scenarios and produced models to assess the potential future of the biomethane market. The scenarios utilised different assumptions about cross-border trading mechanisms, availability, price and markets for cross-border traded biomethane.

The results of this modelling work were then used to provide the gas distribution company with a unique insight into the effects the market change could have on its business. 

What were our findings on the European biomethane market?

Our research showed:

• Over the past five years, the number of biomethane plants has increased by more than 50% with 61% of these sites in three countries (Germany, France, the UK).
• Although biomethane production is increasing across Europe, only an estimated 2% to 15% of this gas was traded across borders.
• The Swiss market is the biggest driver for biomethane trade with demand served by biomethane certificates from Denmark, the UK and Germany.
• In recent years, Germany was a key market for importing biomethane certificates, mainly from the UK, Denmark and the Netherlands.
• Over the past 5 years, bilateral agreements have been established between other European nations, such as the UK and the Netherlands, and Sweden and Denmark. This demonstrates that bilateral biomethane trade is already part of the gas market and that there is room for expansion.
• Eight of the ten countries reviewed for the study had an established GoO registry for managing internal trade, though these registries did not aid the management of cross-border trade. Many of these registries are interwoven with subsidy schemes, which means making changes to them will be more challenging. Conversely, the registries in the Netherlands, Denmark and the UK are more easily adaptable to cross-border trading as they have been developed to realise the ‘green premium’ that voluntary end users are prepared to pay for biomethane and are not legally tied to national subsidy schemes.
• Finally, technical interviews with stakeholders indicated there is a desire to enhance cross-border trade and harmonise GoO across different nations.

Based on our extensive research, we concluded that for a European biomethane GoO system to be successful it would require:

• A mass-balance system.
• Acceptance that the EU gas system is one interlinked system for biomethane cross-border trade.
• Acceptance of harmonised technical and sustainability standards between trading countries.

Helping the gas distribution company understand its position in the market

The collective expertise of Ricardo’s specialist heat and biofuels team provided a comprehensive assessment of the market. This included modelling scenarios to present the impact of each situation to the organisation in terms of:

• Administrative burden.
• Changes to current sustainability and technical requirements for biomethane in France.
• Price and availability of biomethane for cross-border trading.
• Key players in the European biomethane market.

We recommended the gas distribution company to actively engage in discussions around the biomethane market to ensure that its concerns are taken into account and to enable it to take advantage of the opportunities offered by easier access to cross-border trading.

Our informative and well-considered direction and advice to the company meant that our support played a key role in helping it to understand the potential of biomethane and the policy instruments required to support its development. Awareness of this larger picture was crucial for the organisation to understand its position within the shifting European biomethane market at the time, which has since then expanded.

The support we provided for the company has proved to be invaluable, given that significant progress has since been made towards developing pan-European registries for GoO and many countries will be trading biomethane across the EU and beyond.