Academic: Higher carbon price needed to ramp up EU biomethane production

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This article is part of our special report Biogas in the EU.

The price of CO2 credits on Europe’s emissions trading scheme needs to rise to around €50 per tonne in order to drive the long-term development of Europe’s biomethane industry, says Marc-Antoine Eyl-Mazzega, a French researcher.

Marc-Antoine Eyl-Mazzega is the director of the Centre for Energy at the French Institute for International Relations (IFRI). He spoke to EURACTIV’s energy and environment editor, Frédéric Simon.

INTERVIEW HIGHLIGHTS:

  • In Germany, incentives were cut because biogas was considered too expensive for the taxpayer – and environmentally questionable due to the sector’s over-reliance on dedicated energy crops.
  • But other countries like Denmark have successfully developed biomethane based on agricultural waste and livestock manure to the extent that it now represents 10% of what’s injected into the country’s natural gas grid.
  • Even if biomethane is more expensive than natural gas, solar and wind power, it also has a number of positive externalities that are currently not taken into account – including avoided CO2 emissions, rural development and circular economy benefits.
  • If added up, those benefits result in a price of biomethane in the range of €35-55/MWh, down from €95/MWh currently, which is not far from the price of natural gas, and compares well to the current average wholesale price of electricity.
  • Biomethane development also has to be seen in conjunction with hydrogen, because part of the equation is what to do with the existing gas grid infrastructure.
  • Guarantees of origin (GOs) have to be harmonised at EU level in order to drive growth of  biomethane and other low-carbon gases like hydrogen.

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Who are the leading countries in Europe when it comes to developing biogas? Are there any best practices worth highlighting?

One has to distinguish the very mature biogas industry and the newly developing biomethane industry which consists in upgrading biogas to biomethane – basically CH4, which can be injected into the gas grid.

The leaders clearly are Germany and Denmark. Germany especially has developed the biogas industry in the last 10 years.

Germany is currently the biggest producer in Europe, correct?

Yes, Germany has 9,500 or so biogas plants, more than half the total currently in operation across the EU. The key about Germany is that biogas was developed at small scale installations that were designed to produce mostly electricity combined with heat. And the inputs into the biogas plants were mainly agricultural crops.

And this scheme has developed very successfully – the feed-in tariff was good, and the support scheme led to the industry’s development. In 2018, biogas accounted for 14.2% of the country’s electricity generation from renewable sources.

But this has now come to an end, mainly because the assessment was made that this was getting too costly for the German taxpayer. And also because using agricultural crops to produce biogas was not considered optimal. In 2017, an auction model and annual growth target for biomass (including biogas) were introduced as a way to incentivise cost reduction. As a result of these tariff reductions, the commissioning of new biogas plants has significantly slowed down.

Another excellent example is Denmark. Denmark’s biogas production started in the 1920s, at wastewater treatment plants, and the first manure-based biogas plant was built in 1975. Following the adoption of the “Energy Agreement” in 2012, they developed biomethane to the extent that it now represents about 10% of what’s injected in the natural gas grid, which is a lot.

But the scheme in Denmark was a bit different because the Danes opted to basically use agricultural waste and especially manure waste rather than dedicated crops. And that led to the development of a very mature industry, which is probably a European leader.

But, here again, the Danish government is not going to let this grow further. As in Germany, a tender-based system for new biomethane plants will come into force in 2020.

Why is that? For Germany, it was a question of cost, did Denmark reach the same conclusion?

The system is considered too costly for the taxpayer. In Germany, from the government’s perspective, you already have the burden of solar and wind deployment plus the grid development, and then on top of that, you add the biogas costs.

And that’s why it came to a halt. A decision was made to basically reduce biogas measures and move to an auction-based system, with price ceilings, which really slows down the level of investment.

Is it because production levels in Germany had reached some sort of limit, with regards to the land available or the agricultural crops available?

Yes and no. The objective in Germany was not to complement natural gas – it was to produce electricity and heat. That’s different from Denmark, where the objective was to have less natural gas imports and more domestic greener gas production.

Denmark committed to carbon neutrality by 2050 and this requires replacing natural gas with biomethane and other renewable gases. Because biomethane can be produced at a steady pace and can be stored as well, it is seen as a pillar in Denmark’s future integrated energy system. Yet, concerns over subsidy costs remain high.

Obviously, you could have grown this industry much bigger by using more dedicated crops. But you have to look at the entire carbon footprint of that system – for example, the trucks and tractors running on diesel that are needed to transport the crops to the biogas unit. And then there are leakage problems and the overall cost challenge.

So overall, the decision was made to slow this down, or at least require significant cost reductions for new projects. And that decision was made at a very high level, which is why the German example is remarkable.

Today, the two interesting cases are France and Italy. In Italy, the biogas industry has been working for 10 years and it is very mature. But the decision was made in 2018 to really push for biomethane production, and use it to help decarbonise the Italian transport sector where renewable energies currently play a marginal role.

Italy already had 1 million cars running on compressed natural gas (CNG). And so they decided to have an integrated strategy focusing on the agricultural and food sector, the gas sector and the transport sector. And part of it will also be connected to the gas grid. All this was aimed at basically creating new demand for biomethane.

And that is considered a successful policy?

We’ll see because this is now only one and a half years old. But if you look at the number of projects that are being developed – over a thousand – and the overall scheme that was put in place, everything is there to make it successful.

A key feature of the Italian support scheme is that it is based on biofuel blending obligations, which avoids creating an additional burden on electricity and gas consumers. But it’s too early to judge, we have to wait for another two, three years.

What about France? You recently published a study looking at the biogas sector in Germany, Denmark and Italy, but not France. Why is that?

The reason is that France’s strategy was still in the making in the field of biomethane.  And France has very little biogas production so far, it’s almost non-existent. So France decided to go directly to biomethane, skipping the biogas phase.  This is why we didn’t cover France in the study, because there was nothing to write about.

Now, the key thing about France is that the French government has been pretty hesitant about biomethane to say the least. Clearly, the industry wants to develop biomethane, and the agricultural sector too. The gas industry in particular is very pushy, because it wants to use its existing infrastructure in order to avoid stranded assets as the country moves to complete decarbonisation.

But the government also saw the cost. Because if you compare the cost per unit, biomethane these days is five to six times more expensive than natural gas. That’s also because natural gas prices at the moment are probably the cheapest we’ve ever seen.

And so the French government said they were ready to support the sector, but slowly, in the form of start-up aid and cost-efficiency targets. This is mainly because the government realised that biomethane helps the agricultural sector and has a number of positive externalities such as territorial development, agro-ecological transition, job creation, and so on.

But, but the cost issue is still tremendous. And so the French government said the support will depend on the industry’s ability to reduce costs very quickly.

And that’s the key point. The industry says it can reduce costs by around 30% – moving from about €95 per megawatt hour (MWh) to about €60/MWh. But they say they need 10 years to do it, not 3 or 4 years like the French government wants them to do.

And so that is the key problem we now have in France. The industry says it doesn’t have enough time. And the government says further support is conditional on real results in terms of cost reduction.

And the fundamental problem is how do you assess the costs and benefits? Because even if biomethane is much more expensive than natural gas, solar and wind, it also has a number of positive externalities. And if you take those into account, its production costs need to be decreased by a number of things, which have to be valued.

  • The first, of course, is the CO2 that is not emitted.
  • The second is the jobs that are created in territories, where there are little chances of employment.
  • The third is related to the circular economy aspects, which in France is to use agricultural waste not dedicated crops. And maybe a few intermediary crops, which do not interfere in the usual agricultural production for food and export.

What we see now increasingly in France is that you have basically a biomethane plant that will be integrated in a system whereby it will supply a fuel for the local city buses, and school buses and logistics companies that are located nearby. And so this circular economy aspect is being closed by the opportunity to use the digestate from the biomethane as fertiliser.

Now, that’s the theory. What we still see though, is that there’s a number of fundamental issues that need to be addressed.

The first is what you put into your biomethane plant. If you mix certain types of industrial waste and municipal waste without sufficient quality controls, obviously you end up with digestates that will not be fit at all as fertiliser. That’s the first point.

The second point is that you have to have very strict and competent expertise on the site, to manage the installation on a daily basis. And what we’ve seen in different places is that obviously, there’s still a big learning curve here. Because you cannot operate a biomethane plant without the right skills, without the right expertise. And that is especially the case to avoid leakage of methane, which as you know, is a very potent greenhouse gas, about 70-80 times worse than CO2.

Another very important aspect related to methane leakage is that you need a lot of water in order to test whether the infrastructure is sealed and watertight. And here, there is clearly an environmental issue that has to be addressed.

And lastly, what really matters is that you have the right scale of installations. Not too big because otherwise you will tend to collect the substrates from a very wide distance to put into your production unit, and that increases your carbon footprint. But not too small either, because otherwise, you don’t have the benefits of economies of scale. Also, you really have to make sure that the biomethane units are located close to the natural gas grid or that there are filling stations for vehicles on-site, for example. Because these connection costs can be very expensive.

Now, the other key issue to have in mind is that the biomethane industry is only starting to grow in Europe. So far, the whole industry produces only about 2 billion cubic meters (bcm) of gas per year. And total EU gas consumption currently stands around 470 bcm per year.

So at the moment, it’s nothing, it’s peanuts.

But as more and more projects are being developed (an average project costs around €7- 10 million), with the growing competition that is coming, the more there will be interest from the industry to reduce the cost of purification that’s needed. And the costs can be expected to decrease slightly.

However, this is not a technology where you can expect to see the same cost decrease trajectory that happened with solar and wind. And that has to be very clear. You can’t say that in 5 years, the costs will be 70% less than what we have now, this won’t happen.

This is because the whole production process is more complex, I guess. You need to have clean inputs which are hard to come by…

Yes, it’s more complex, and one has to have a real system approach to that.

It’s kind of odd that France is not a leader in developing biomethane because it’s the biggest agricultural country in Europe. Is it not also the place where the potential is highest?

Yes, absolutely. The potential is tremendous in France. But this has to be put in a wider context. France has been slow on every possible renewable energy technology – be it offshore wind, solar, hydrogen, and now biomethane.

So you can be surprised, but this is typical of France’s insufficient strategy towards supporting low-carbon energy technologies.

Which is probably due to France’s obsession with nuclear, right?

No, I don’t think so. EDF, for example, is very involved in solar and wind. It’s more because of the overall budgetary situation of France, which is not good. Too much debt has piled up over the last decades, without enough reforms. And as a consequence, there’s not enough money available for developing biomethane.

And lack of government will maybe as well?

Yes, absolutely. Clearly, the money goes elsewhere, it goes first to repaying our past debt. Then it goes to the military, and other priorities. Let’s also see the big picture, France doesn’t have the same spending structure as other EU countries.

But the key issue here, though, which must be said, is that France does not have the same pressure than Germany or Denmark to decarbonise its electricity system.

And that’s thanks to nuclear.

Yes, thanks to nuclear, of course.

You were referring to the cost issue in Germany. Do you think the cost of biomethane or biogas has any chance of reaching parity with natural gas at some point?

No, it’s impossible. But still, what is possible is that by integrating all these externalities, and having a higher price for CO2, then clearly it will make more sense to produce biomethane locally rather than importing natural gas.

What kind of CO2 price do you think is needed to incentivise biomethane production?

We are now around €26-27 per tonne of CO2 emitted. And clearly, anything around €50 per tonne would clearly help biomethane.

But if you value all the externalities of biomethane, assuming that everything’s done spick and span, you can probably come to a value in the range of €40-60 per cubic meter.

And so that’s interesting because the current production cost is around €95 per megawatt-hour (MWh). And if you take out these €40-60/MWh of benefits that you can get, you come to a price which is around €35-55/MWh. And that compares well to the current average wholesale price for electricity. And that is not far from the natural gas prices, which currently are historically low. It also somehow compares with some of the wind breakeven prices that are out there.

So you would say it’s worth pursuing?

Yes, it’s definitely worth pursuing. But I think we need stronger regulation, stronger oversight. And we need to go through the learning curve.

What kind of stronger regulations are you talking about?

I think we need regulation related to the injection of biomethane into the gas grid. Rules on who has access to the grid, what is the obligation on the gas transmission system operators, rules on gas quality, etc.

We also need rules on how the units should be maintained and operated in terms of safety standards, environmental standards, and so on.

And lastly, very importantly, I think we need a real general system for guarantees of origin. And that is something that needs to be harmonised at EU level in order to create a clear, EU-wide opportunity for biomethane development.

These guarantees of origin would also apply to the whole range of gases – including hydrogen and synthetic gases, right?

Yes, this is really a missing piece of the puzzle. And I’m very confident that work is being undertaken at the European Commission’s energy directorate to clarify this.

Now the question is whether there will be a fourth gas package, or whether that will be diluted in different policy streams.  My take is that a fourth gas package, right now, is not the biggest political priority for the Commission. Following the European elections, and the drive towards carbon neutrality, there are clearly other areas to work on.

Guarantees of origin are meant to ensure that the gas – whether biogas or synthetic gas – is environmentally-friendly. But there are also sustainability criteria, which have been added to the renewable energy directive. Wouldn’t that be sufficient? Or are those criteria too vague in your view?

That is a tricky question because you can produce biomethane from any possible type of waste.

But clearly, some pose a number of issues. In France for example, there were public protests related to the odorous pollution related to a few units. And that pollution comes when improper intakes are put into the biomethane units. A second type of problem comes when the biomethane units are not properly operated.

And obviously, here, looking into environmental performance, economic performance, and social acceptance, that is something that needs to be looked at as well.

Do you think targets for biomethane or biogas, like for electricity coming from renewables, would be desirable?

No, I don’t think targets are desirable. If you start putting targets for biomethane, then you’ll also want to put targets for Blue Hydrogen, Green Hydrogen, Grey Hydrogen, and so on.

And then you end up with a system that is probably not going to be optimal. Because, it may be that France and Italy are the best-suited countries for biomethane, but Slovakia or the Czech Republic might not be, for different reasons. So targets would be very tricky to do, and I wouldn’t go for it.

But putting a carbon price on biomethane under the ETS system, and further expanding carbon pricing to transport and buildings – I think that would make sense. It would send a signal to the automotive industry, for instance.

You know, let the member countries develop their own strategies towards achieving carbon neutrality. Some will want to put all the emphasis on biomethane and less on offshore wind. These are national choices to be made.

The industry says targets are needed in order to give a boost to the sector…

I know, the industry claims it could go up to 50 billion cubic meters (bcm) of biomethane by 2030.

But frankly, we are now at 2 bcm per year. And, do we need 50 bcm to have 10% of the EU gas market? Well, by 2030 total gas demand in the EU could be much less – it could be around the 420 bcm or so.

The second thing is, let’s not put targets, let’s just set the right conditions for the market to decide which technology to invest in, what is more appropriate given the local circumstances, while making sure everybody plays by the same rules.

My take is that we could reach around 20 bcm of biomethane production by 2030 in the European Union. That’s assuming the UK stays in the EU, of course. Without the UK, it would be slightly less.

That’s already huge…

It’s quite a lot, yes. But I believe these 20 bcm are possible, if we have clear strategies of sector coupling, for example for use in transportation. And in that case, I think we can reach that level.

Local acceptance is also a strong hurdle for biogas development in many countries and rushing to meet overambitious EU targets could actually strengthen social resistance.

I’m also convinced that biomethane has to be seen in conjunction with hydrogen. Because part of the equation is what to do with the existing gas grid infrastructure. And so clearly, biomethane would also have to be looked in conjunction with the forthcoming development of hydrogen injection into the natural gas grid.

What do you think should be put in place to achieve 20 bcm by 2030? What are the main ingredients to do this in your view?

First, the industry has to show that technically and environmentally, the plans that are now being developed, are working properly.

Second, we have to see a decrease in the cost of deployment for those installations. And clearly here, scale will help because there will be growing competition from different suppliers. An important element here is that Chinese companies are increasingly coming into that segment. Because there is a serious ambition to develop biomethane in China.

Thirdly, the carbon price has to increase and decarbonisation targets for 2030 have to be strengthened, above 40%.  And this is the ambition of Ursula von der Leyen, the incoming President of the European Commission.

Biomethane development is also related to the future of the Common Agricultural Policy. Because, let’s be frank, biomethane support schemes are also meant to support the agricultural sector. In France, for example, there are already support measures in place via the energy sector, allowing farmers to put solar roof panels on their hangars and to cash-in a very high feed-in tariff.

And that raises a fundamental political question: do you want to push biomethane further because you consider that this is an efficient support measure for the agriculture sector that has other benefits? Or do you want to use another form of support scheme – for example, direct subsidies to buy new tractors?

So this is a related debate, but which is important in my view. And this debate will have to take place because the Common Agricultural Policy is one of the issues that will be looked into by the next European Commission.

Good, so that’s the perspective for 2030. Do you have any idea about biomethane projections for 2050?

Well, no. My take is that 2030 is the right horizon because obviously, there’s not an unlimited potential for biomethane. One needs to avoid the mistakes that were made when coal power plants were switched to take in wood pellets. In the South of France, we came to a situation for example, where loads of wood were imported from Brazil to the Port of Marseille and transported for burning in an electricity plant.

That is the same issue that Europe had with biofuels, right? With deforestation in places like Indonesia and Brazil. Do you think the same risk looms with biomethane?

Yes, of course there is a risk. But this is a broader question because you also have the same issue with plastic waste. The localisation aspect will be key in that regard.

And the size of the plants will be important too. You need infrastructure that is not too small in order to have economies of scale but you cannot have super-large infrastructure either. One has to look at the optimal size: not too small, but too big might carry a risk in terms of imported deforestation.

This is why I think 2030 is the right target to look at. And much of the potential, I think by then can be already fulfilled.

If I understand you correctly, biomethane has to be seen mainly as a local source or energy, depending on the local agricultural production, and the local transport, electricity and gas infrastructure. Is that the main message you would have for policymakers looking to develop the biomethane industry in order to avoid the past mistakes made with biofuels?

Oh, yes absolutely. Biomethane is to a large extent about local territorial development.

Your 20 bcm projection for 2030, how did you come up to it?

First, we looked into existing plants and their current production. We then looked at the number of plants that are being developed, and we made an assumption about how many are going to be realised or not. And that’s how we came up with this number.

So basically it’s qualitative in the sense that we didn’t take into account how countries are going to transform their subsidy scheme, and so on. And still, we came out with that 20 bcm figure.

That’s a lot less, of course, than what the industry came up with…

Yes, but it’s still 10 times more than what we have now, which is a real step forward.

Anything you want to add?

I think the biomethane debate has to be seen in the context of the wider greening of gas, which includes hydrogen. And a lot of support schemes will also go to hydrogen. It’s not like biomethane is the only technology option available, there are also others. So it’s part of the solution.

It’s a small part of the solution, though…

Yes, but there is no big part of the solution. That has to be understood. It is a small part of the solution, like CCS, like hydrogen, etc. The bigger parts of the solution are energy efficiency, wind, solar, and nuclear.

So that’s clear, biomethane cannot be a big part of the solution. But it’s a very important small part because if you don’t have the small parts, then you don’t have the energy transition.

[Edited by Zoran Radosavljevic]

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