UK 'green gas' tariffs reliant on carbon credits as biomethane, certificates supply remains short

Gas suppliers have made renewable natural gas a central part of their pitch when offering end-users "green" tariffs, but there are still roadblocks to achieving truly "green" retail gas tariffs.

The UK government recently shared concerns that some energy suppliers are overstating the environmental credentials of their products as it launched a consultation on green electricity tariffs, which also revealed that green gas retail offerings are on its radar.

Renewable natural gas, or biogas, is commonly produced by anaerobic digestion of organic matter from sources such as landfills, animal manure, food scraps and wastewater sludge in an anoxic environment. Biomethane is a portion of biogas free from CO2 and small quantities of other gases, and therefore considered a green gas. It can be injected into the gas grid, contributing to decarbonization of gas supply.

In the UK, the Green Gas Certification Scheme (GGCS) is the main registry for Renewable Gas Guarantee of Origin certificates (RGGOs), dealing with 80% of the total liquidity.

RGGOs are a type of energy attribute certificate that represents the environmental attributes of a unit of renewable energy and is traded separately to the energy it relates to.

Faced with limited production of renewable gas to back "carbon-neutral" or "green gas" tariffs, British gas suppliers are increasingly choosing carbon credits as an alternative to RGGOs, as the former are far cheaper than the latter.

How RGGOs work

The GGCS labels each registered kilowatt-hour of green gas electronically with a unique identifier RGGO certificate, rounded to the nearest kWh. This identifier contains, for each kWh of green gas, information in code form about the technology and feedstock from which it was produced.

It also records the month and year in which the gas was produced, the part of the UK in which it was produced (England, Wales, Scotland, N. Ireland), the registered producer and the kWh number, part of a sequence or range relating to that producer's green gas injected into the grid that month. Each unit of green gas injected into the grid displaces a unit of conventional gas.

The GGCS tracks each unit of green gas from its injection into the distribution grid, to any trades, to its sale to a consumer, or group of consumers. It tracks the contractual rather than physical flows to ensure there is no double-counting from production to end use.

In the UK, a biomethane contract operates on a 39-month contract basis, while in most European countries the contracts expire after one year, the exception being Germany where the expiry date is 99 years (essentially unlimited).

Limited green gas supply

The UK government is backing increased biomethane production through its Green Gas Support Scheme (GGSS), which will provide financial incentives for new plants, with funding coming from a Green Gas Levy on licensed gas suppliers. The scheme is due to launch in late 2021. In the meantime, production has been growing but from a low base.

According to the GGCS 2019 report, at the end of that year, the scheme had 61 biomethane producer members and RGGOs were issued for 1,900 GWh of gas injected into the existing natural gas grids over the year. The number of biomethane producers rose to 67 in 2021, with total RGGOs reaching 2.592 GWh in the end of year 2020.

GGCS scheme manager, Jesse Scharf said: "Gas suppliers are free to offer tariffs where part of the supply is green gas backed by RGGOs and the other part is "carbon neutral" gas backed by offsets. Ofgem does not yet regulate green tariffs but the suppliers' license conditions and the GGCS scheme rules require that tariffs are communicated in an honest and transparent way."

Typically, any large supplier offering a green gas or carbon neutral tariff will rely on offsets to some extent, as the volume of biomethane production—and therefore RGGO certificates—is still very small, significantly lower than the demand from customers on green gas tariffs.

"If a tariff was offering 100% green gas supply backed by RGGOs that would probably equate to between GBP 60-100 [annually] for a typical household at today's RGGOs prices. Most green gas tariffs offer a lower percentage so the impact on a supplier's costs if RGGOs prices rise is less significant," according to Scharf.

"At the end of 2016, there were around 20 plants operating. Now there are over 80, but demand has also gone up a lot which has led to prices rising over that time," Scharf added. "Every customer has a price point that they are comfortable with and as prices have risen some consumers have left the market. However, higher prices are good for biomethane producers and [are a] sign that there is a consumer out there willing to pay that price."

According to Cornwall Insight analyst, Luke Ansell, suppliers' green gas tariffs typically provide around 5-10% of RGGO-backed biomethane, while the remaining 90-95% of natural gas is offset using carbon credits, to provide a ‘carbon neutral' gas tariff.

"A supplier can reduce their proportion to 0% and use entirely carbon. Though I am not aware of a supplier currently taking this approach, a look at suppliers' green gas offering's usually will reveal these details," Ansell said.

Energy supplier Bulb said in a blog post in 2020 that it provides 100% carbon neutral gas to all its members through a mixture of carbon offsetting and green gas. Bulb said it offset emissions from the gas it supplied by supporting carbon-reduction projects around the world, and 4% of its renewable gas come from of food or farm waste.

"What we have heard in recent conversations with market participants is that certain suppliers have moved from a fixed proportion of RGGO-backed tariff (say at 10%), to a variable proportion, and thereafter increased their proportional use of carbon offsets, Ansell said "Due to the small size of the RGGO market, even a small percent change will reduce demand for producers."

While high RGGO prices may limit the proportion used in a green tariff, RGGO certificates continue to be attractive to suppliers due to their transparency, while there are well-documented concerns around the traceability and effectiveness of carbon offsetting, according to Cornwall Insight.

Over 52% of respondents in Cornwall Insight's April market survey reported that demand had increased in the last 3 months, highlighting greater demand from corporates and a recovering economy as demand drivers. These trends are likely to continue in the future, particularly the former, the report said.

Carbon credits, currently priced around GBP2.80/mt ton CO2 are both abundant and around twenty times cheaper than RGGOs. The renewable gas certificates a few months ago reached GBP10/MWh and continue to remain within the range of GBP7-GBP10/MWh. Although the market is illiquid there are a couple of bids and offers on the market in a week, but a trade happens around every two weeks, according to market participants.

Currently, there is no regulation that governs the use of green certificates in green gas (or green power) tariffs, so the proportional use of RGGOs is up to the individual supplier.

Consultation on green electricity tariffs framework

UK's Department for Business, Energy and Industrial Strategy in August launched a public consultation on designing a framework for transparency of carbon content in energy products that underpin green electricity tariffs, and some wider environmental carbon accounting schemes.

The consultation initiated by BEIS is set to close on Dec. 6, 2021. It poses questions about the key drivers related to the green energy revolution and includes a market analysis of green electricity tariff availability and pricing.

It provides a summary of how green tariffs work and potential areas for consumer harm within the current framework and introduces the accounting mechanisms used to "match" green energy claims—this is currently done on a retrospective annualized average—while considering whether there is a role for a more frequent time-based accounting system to better reflect the time at which energy was generated and consumed.

The call for evidence also includes green gas tariffs in a set of broader future considerations for this type of framework.

"We would like to request views and evidence as to whether we should include gas tariffs within the scope of our activity. There is an emerging market for ‘green gas' tariffs. Should our work consider any interventions to include these within the tariff regulatory framework[?]" BEIS asked.

The ready availability of cheaper carbon credits, and their widespread use to back green gas tariffs, could be seen as hindering growth of renewable gas demand and use, but is the current reality owing to fundamentals of supply and price.

"While the use of carbon offsets to provide a carbon neutral gas tariff could be considered a loophole by some, in practice it is necessary for any large supplier to be able offer a carbon neutral gas tariff due to the very low volume of biomethane in the market (<1% of total GB market)," Cornwall Insight's Ansell said.

"In other words, there simply aren't enough RGGOs to meet the demand for green gas. The considerably lower cost of carbon offsetting will also factor into the proportions of RGGOs a supplier chooses to provide in their green gas tariff.

"Ofgem, the Competition and Markets Authority and the newly formed Green Investment Advisory Group have all signaled their intent to tackle ‘greenwashing' in industry. Whether this leads to tighter regulation of green energy tariffs remains to be seen," he said.

"Suppliers may use RGGOs to make claims about the sustainability of their gas tariffs," said Ofgem spokesperson Stephen Roberts.

"Such claims would be subject to our overall rules on supplier conduct, which require that suppliers are open and transparent and not misleading when engaging with consumers."

Although current regulations offer suppliers a lot of leeway to make "green" claims, the latest BEIS consultation suggests the issue is now on UK authorities' radar. Meanwhile, the launch of the GGSS could help further cement the role of biomethane, providing increased supply to feed into green tariffs.