Europeans confront biomethane cost reduction challenge

Biomethane production costs are expected to fall in the coming decade as more biogas plants come on stream. But analysts warn that massive cost reductions like in the solar and wind power sector are unlikely and policy measures will be needed to prop up this fledgeling renewable energy industry.

Try bringing up the issue of biomethane production costs and the comparison with cheap fossil gas inevitably comes up.

“No, it’s impossible,” energy expert Marc-Antoine Eyl-Mazzega replies when asked whether biomethane has any chance of reaching cost parity with imported natural gas, whether coming from Russia or Norway.

What is possible, he adds, however, is that biomethane becomes an attractive alternative to imported fossil gas – provided all the wider economic, social and ecological benefits of biomethane are taken into account.

But that requires policy support and a much higher price of CO2 on the EU carbon market – around €50 per tonne – or about double the current price, he argues.

Positive externalities

Eyl-Mazzega is energy director at the French Institute for International Relations (IFRI), a think tank. Earlier this year, he authored a study looking at the biogas sector in three EU countries – Germany, Denmark and Italy.

And his assessment on production costs is unwavering. “If you compare the cost per unit, biomethane these days is 5 to 6 times more expensive than natural gas,” he says, partly also because gas prices are currently near historical lows.

Over time though, the balance is expected to shift gradually in favour of biomethane as policymakers support locally-produced sources of renewable energy over imported fossil fuels. As more projects are being developed, and with growing competition coming from Chinese companies, the costs can be expected to decrease slightly, Eyl-Mazzega says.

But will that be enough to make biomethane competitive with imported natural gas? The answer very much depends on policy.

According to Eyl-Mazzega, the current production costs of biomethane hover around €95 per megawatt hour (MWh). However, these costs do not take into account the wider benefits of biomethane, such as rural development, local job creation, and avoided CO2 emissions, which he evaluates at around €40-60/MWh.

If those are added up, the overall price of biomethane could fall to around €35-55/MWh, which is close to the current average wholesale price of electricity, he says. “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,” he points out.

“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”.

However, even industry sources admit there is little chance of bringing costs down spectacularly, like in the case of the wind and solar power sector.

“Looking at the production costs, it’s really difficult to bring them down so much because of the feedstock costs,” says Susann Pflüger, secretary-general of the European Biogas Association (EBA). “Biogas is expensive, also in comparison to most other renewables,” she says.

The main question nowadays focuses on the support measures that could help drive costs down for the industry. And EU policymakers in Brussels will be able to draw from a wealth of experience collected at the national level.

In Germany, the biogas sector saw a boom around ten years ago thanks to a favourable feed-in tariff for renewable electricity that helped support Combined Heat and Power (CHP) generation. The scheme allowed the sector to develop successfully: in 2018, biogas represented 14.2% of the country’s renewable electricity generation, Eyl Mazzega says.

However, support for the sector came to a halt in 2014 after criticism mounted over the costs and environmental impact of the scheme, which relied almost exclusively on dedicated energy crops – mainly maize.

“The system is considered too costly for the taxpayer,” says Eyl Mazzega. “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.”

As soon as the feed-in tariff was removed in 2014, the commissioning of new biogas plants started slowing down. “So yes, we have still around 10,000 biogas plants in Germany but the number is not really increasing and Germany doesn’t have big ambitions for biogas or biomethane in the future,” Pflüger says.

“On gas, Germany is more looking at hydrogen,” she points out.

Multiple cost-drivers

The cost-drivers of biomethane are indeed numerous. To start with, there is a wide range of inputs potentially making their way into biogas plants, which can take feedstocks from dedicated energy crops like maize, but also agricultural wastes, sewage sludge, biodegradable wastes or wood residues coming from industry, households or commercial uses.

The gases produced from these different feedstocks have varying degrees of quality and often contain large amounts of CO2. Therefore, they need to be treated and purified before they can be injected into the gas grid or used as fuel in trucks.

But with increased biogas production in China, there is now growing interest from the industry to reduce the cost of purification. In May, Beijing announced plans to produce 30 billion cubic meters (bcm) of biogas from agricultural waste and manure by 2030, hoping this will reduce the country’s coal consumption by 50 megatonnes, and clear out some of the smog from its polluted cities.

To achieve this target, China plans to build approximately 3,000 to 4,000 upgrading facilities over the next decade, according to media reports. And Chinese renewable gas companies like Xebec Adsorption Inc, are expected to grow stronger as a result, building on their domestic market to expand their operations in Europe.

France sees the opportunity…

In Europe, France has sensed the opportunity, seeing the multiple advantages of developing a national biomethane industry – both as a source of locally produced renewable energy and an additional source of income for farmers.

France is aiming for a massive increase in biomethane production by 2030, with a national target of around 90 terawatt-hours (TWh), says Susanna Pflüger of EBA. “This is huge compared to current production, which is about 1 or 2 TWh,” she told EURACTIV.

The French government set an objective of injecting 10% of biomethane into the country’s gas network by 2030, similar to what Denmark is already doing. And energy company Engie wants to bring this up to 100% by 2050, adding other low-carbon gases to the mix, such as hydrogen.

Those plans are informed by a study from Enea, a consultancy, which attempted to map all the positive economic, social and environmental benefits from biomethane production and use in France.

• High among them are rural development aspects, including local job creation.
• The study also points to avoided CO2 emissions, estimating those are seven times lower for biomethane than for natural gas.
• There are also environmental benefits for the agriculture sector, which can use digestates from biomethane production as organic fertilisers, reducing the need for nitrogen and fossil-fuel-based inputs.
• Finally, the study also points to avoided network development costs for the wider energy system. Because biomethane can easily be stored in the existing gas network, it can provide seasonal storage for winter heating needs, or sent for burning in a power plant to help balance the electricity grid.

In total, these benefits would add up to €55-€75 per megawatt hour (MWh) by 2030, according to Enea, a range that is broadly in line with estimates from the French energy regulator.

…but conditions support on cost reduction

Thanks to those measures, “most likely, France will become a leader,” Pflüger predicts. “They’re definitely a country we highlight at the moment.”

However, the government’s support for biomethane in France also came with strings attached, and is conditional on the industry’s ability to reduce production costs.

French authorities have given the industry three to four years to cut costs by around 30%, moving from about €95 per megawatt hour (MWh) to about €60/MWh. But the industry says it needs until 2030 to do this.

“And so that is the key problem we now have in France,” Eyl-Mazzega says. “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.”

The jury is still out as to whether the industry will be able to meet its production targets and cost reduction objectives. But industry sources are asking for patience, saying solar and wind power took years to become competitive with fossil fuels.

“We are asking the same for biogas – a little patience,” says Didier Holleaux, executive vice-president at Engie, saying time “will allow us to industrialise and lower production costs.”

According to Holleaux, the first thing Europe could do to support the industry’s development is to include biomethane in its green finance taxonomy, which at the moment excludes anything else than wind and solar.

Brussels could also show support by “clearly backing biogas as one of the possible futures of the natural gas network,” he told EURACTIV.

The European Green Deal announced by Ursula von der Leyen, the president-elect of the European Commission, “should contain a clear commitment to decarbonise the gas sector and develop green gas” by adopting a dedicated “gas decarbonisation target” and fixing a minimum share of renewable and decarbonised gases in networks, Engie argues.

Holleaux says France could even increase its 10% target for biomethane injection into the gas grid, provided incentives are put in place. “With the right support, we could do a lot more,” he told EURACTIV, saying network operator GRDF – which is partly owned by Engie – even proposed a 30% target for renewable gas injection into the network by 2030.

One of the policy drivers is to reconsider gas and electricity jointly as part of an integrated energy system – a concept backed by the European Commission, which sees potential for gas as a way to reduce network development costs.

Policy measures

That will require regulatory measures, including rules for the injection of biomethane into the gas grid, drawing up new obligations on gas infrastructure operators, and setting out new rules on gas quality. Regulations are also needed to ensure biomethane plants are properly operated, in line with safety and environmental standards, Eyl-Mazzega says.

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

One conclusion that stands out is that biomethane development in Europe won’t happen without a higher price of carbon on the EU Emissions Trading Scheme. The Enea study, for instance, assumes a carbon price of €100 per tonne of CO2, which is a far cry from the current price of around €26-27 per tonne.

“Clearly, anything around €50 per tonne would help biomethane,” Eyl-Mazzega says.

But ultimately, he warns that massive cost reductions are unlikely. “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 five years, the costs will be 70% less than what we have now, this won’t happen.”

[Edited by Zoran Radosavljevic]