INTERVIEW: EU biomethane market beginning to emerge, regulatory hurdles remain: ENGIE

There is significant potential for Europe to develop a well-functioning biomethane market, but there remain regulatory hurdles that need to be overcome, a senior official from France's ENGIE said in an interview.

Jerome Malka, executive committee member at ENGIE's Global Energy Management (GEM) business unit, told S&P Global Platts that the market is now beginning to emerge, with the current European players on the natural gas market set to play a central role in the market design.

ENGIE GEM is already active in buying and selling biomethane and associated guarantee of origin (GO) certificates across Europe and has been testing the regulatory set-up by arranging cross-border transactions.

The revised Renewable Energy Directive issued in 2018, which member states are required to transpose into national law by July 1, articulates the conditions for a biomethane trading market to develop, but there are still some regulatory uncertainties.

In particular, countries are currently able to interpret the sustainability criteria laid out in the RED II in different ways, while member states also differ when it comes to the interlink between GOs for biomethane and CO2 emissions allowances.

This means there is not yet a level playing field across the EU for how biomethane and its associated GO certificates can be traded.

Biomethane is largely produced from biogas through the processing of agricultural and other biomass waste, meaning the agricultural sector will have a role to play in the development of the sector.

"But the agricultural sector will not by itself define the European gas market of tomorrow. We need the traditional players who are already playing an important role in the emergence of a green gas market," Malka said.

"The market for green gas is starting to emerge and will hopefully be dynamic and active in the future. It will certainly be built and largely designed by the actors of the current gas market," Malka said.

Regulation is also key in helping the market evolve. "The RED II directive is in our view going in the right direction," he said.

"But we also recognize that there is still a lot to be done in order for this concept to become a reality," he said.

The European Commission is currently drafting new proposals for further reform of RED II, which are expected to be presented on July 14.

"We hope each step will get us a little closer to the minimum that is necessary for the market to emerge," Malka said.

Seamless trade

While July 1 is meant to be the date that GOs for green gas should be able to move seamlessly across borders in Europe, the fact that some EU member states still have not set up registries to issue the GOs means obstacles will remain.

Around 12 member states have so far set up registries, including Germany, Denmark, Austria, France, and the Netherlands, while some member states -- including Spain and Italy -- are yet to take the step.

For GOs to be issued EU-wide for each MWh of biomethane that is injected into the grid and for those GOs to then be circulated, the registries will need to be operational across the bloc and able to connect with each other to allow for cross-border movement.

Another area where there is a lack of clarity is on sustainability criteria for biomethane production.

The RED II does identify the criteria for being able to classify gas as green, but the devil is in the detail, meaning different member states may disagree on what meets the criteria and what doesn't.

"The sustainability criteria and their link to GOs are open to national interpretation, and that remains a challenge when you're looking at it from the market angle," Malka said.

He said ENGIE was testing the system to see what is needed by individual countries. "We need to be sure that the lack of sufficient harmonization of sustainability criteria does not get in the way of transferring GOs," he said.

ETS link

Another important element of the directive is the link between GOs and the EU Emissions Trading Scheme (ETS).

In some countries -- such as Denmark -- companies can be excused from surrendering their EU CO2 allowances if they have a GO to show their gas is green. The Netherlands is also considering to implement such rules by early 2022.

However, in others -- for example in France -- the authorities do not yet allow buyers of biomethane GOs to value them for exemption purposes with regard to their EUAs.

"This connection between the markets is important to the economic dynamic," Malka said. "Today we are in a non-market from that perspective because there are distortions from one country to another."

It would also send a price signal to the market if EUAs can be exempted using GOs.

"The gas industry is advocating for clarification, is advocating for the link between GOs and ETS," Malka said.

"If an industrial user that is burning gas is willing to overpay to switch to biogas, it's for a reason. They want to reduce their CO2 footprint. But if it remains subject to the ETS, they wouldn't see that in their CO2 accounting," he said.

"If biomethane represents real decarbonization potential at European scale, then GOs are a good tool for consumers to remunerate producers and to decrease direct financial support stemming from feed-in tariffs," he said. "Linking with the ETS or not will have an influence. If only one country has a link to ETS, there will be a pull in this market to GOs."

Malka said there was the potential for the European biomethane market to total in the 100s of TWh, but it would depend on the conditions for creating the market.

"Biomethane is one important tool in the box, and it's an interesting tool too because it is methane, so you don't need to retrofit infrastructure," he said. "Biomethane has this advantage in that it is readily usable in the existing industrial set-up."