Europe's biomethane market is set for substantial growth in the coming years on the back of the bloc's drive for energy independence and willing investors, but is likely to fall short of production targets due to evolving use cases and uneven distribution of current projects and regulatory challenges.
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REPowerEU -- the European Union's plan to wean itself off Russian gas -- includes a target to ramp up production of biomethane, sourced from agricultural waste and residue, to 35 Bcm by 2030 from 3 Bcm today.
"Europe has great potential for producing biomethane, a green alternative to natural gas. In the current energy supply crisis, we cannot allow this potential to go to waste," EU Energy Commissioner Kadri Simson said in September 2022 as the European Commission, together with biogas industry players, launched a Biomethane Industrial Partnership to deliver on the target.
The 2030 target could also make biomethane an increasingly appealing asset class and in a recent milestone for the sector, oil major Shell acquired Danish biogas and biomethane producer Nature Energy Biogas for $2 billion.
However, a 35 Bcm target is steep, requiring 11-fold growth from today's level, and Europe is not on track to get there, according to an analysis by S&P Global Commodity Insights.
Some of that growth could be met by upgrading biogas used in power and heat generation to biomethane, Deborah Mann, senior director of gas, power and climate solutions at S&P Global, said in the report. But this would only account for half of the target at best, Mann added.
Biogas is a composition of several gases including methane and carbon dioxide, whereas biomethane is purified in a process that removes any CO2, the toxic gas hydrogen sulfide and water from the original biogas composition.
In Europe, biogas and biomethane are typically a small part of utilities' strategies compared to other more conventional renewables.
France's Engie is targeting 10 TWh/year of biomethane production by 2030. Italy's Snam is planning to spend Eur500 million on its Bioenerys business, which is tasked with growing the utility's footprint in the market by 2026, chiefly through conversion of biogas to biomethane.
"Biogas is the province of farmers or sewage treatment companies generally. Managing manure is going to be right out of the comfort zone of utilities and energy majors," Mann said separately via email. "Those that have got involved, [such as] TotalEnergies or Shell are partnering with, or buying up, existing specialist companies."
Security of supply effort
Support for renewable natural gas from European governments was, until recently, mostly targeted at power generation. This led to the direct use of biogas, without upgrading it to biomethane, Mann said. Now, the aim is for biomethane to replace natural gas in sectors that are hard to electrify, such as transport.
"In the case of power and heat, the replacement will probably need to be dispatchable and storable, and could be solid biomass; but if not managed carefully, this could also lead to more gas demand from elsewhere," Mann said.
Biomethane business cases vary across the EU, also because of a patchwork of regulatory approaches. Some countries such as Germany, France, Denmark and the Netherlands offer feed-in tariffs or feed-in premiums, while Finland offers investment support.
Italy has one of the most generous subsidy programs, with a September 2022 governmental decree introducing a 40% capital contribution for investments and an incentive tariff for biomethane produced, according to a briefing from the law firm Bird & Bird.
Snam wants to ride this wave of support, according to Marco Ortu, CEO of the company's Bioenerys unit. The new law will facilitate the conversion of biogas plants to biomethane, as well as support the construction of new sites, Ortu said in an interview.
The focus on homegrown energy sources at the EU and national level has also strengthened the case for biomethane, which "is a niche [sector] but it's an existing niche ready for production," Ortu said. "We cannot solve the security of supply [problem] but we can definitely and immediately contribute to it."
Biomethane is "not a technology that can jump on command," said Zoltan Elek, CEO of Germany's Landwärme, one of Europe's largest traders in the market. "This is a technology that just needs time. It is a medium-term solution."
Elek argued that the European Commission's target is achievable but that the 35 Bcm goal is not enough to spur the necessary investments. "It is not rocket science. I consider it technically possible, though the time is increasingly tight because the regulatory frameworks are not yet brought underway," Elek said.
In most markets except Denmark, biomethane production is scattered across agricultural sites, local sewage treatment sites or biorefineries. Plans for larger greenfield projects often face local opposition, Elek said, limiting the scope for investors with big ambitions.
"Even if I have the money, I won't find the sites," he said.
Feedstocks: volume, price, location
The potential of biogas and biomethane is chiefly driven by the availability of feedstocks, such as animal slurry, biological waste and plant waste. For a business case to stack up, it needs feedstocks in "correct volumes, correct prices, correct locations," Ari Suomilammi, head of production at Finnish gas producer and trader Gasum, said in an interview with S&P Global.
Gasum runs 17 biogas plants in Finland and Sweden and also has an import arm. In 2022, it produced and imported 1.7 TWh of renewable gas, which it plans to ramp up to 7 TWh by 2027.
Feedstock such as grease is also in high demand because it is also used in biodiesel, Suomilammi added.
In Finland, biogas producers receive investment subsidies but the business case is driven by the gas price. Biomethane also goes into the transport sector as fuel.
The executive also pointed to a dynamic regulatory picture that goes far beyond energy policy, for instance because byproduct digestate is covered by EU fertilizer regulations. "Agricultural, energy, environmental regulations -- they are overlapping... and all of these things have to function at the same time," Suomilammi said.