Biomethane certificates allow the biomethane producer to divorce the “green” value of their product from the more easily priced commodity gas (methane) price. The commodity gas is relatively easy to price as there is a deep and liquid market price for the commodity. However biomethane has additional value by virtue of being produced from energy sources that do not involve the release of fossil carbon into the atmosphere. The fact that biomethane is produced from environmentally occurring carbon i.e. carbon already in the environment, means that it is intrinsically an ultra low carbon fuel – very little “new” (i.e. fossil) carbon is released in its production process. This is important, as much of the economic value of Biomethane Certificates (BMCs) is as a direct result of the carbon saving that is achieved by using biomethane rather than fossil gas.
Uniquely, BMCs can be traded separately from the physical commodity gas. This allows the certificate owner to transact the physical commodity at the market price for that product whilst seeking the highest economic value for their BMCs.
In practice the buyer of the physical commodity gas may not be the best buyer of the “bio” or “green” rights which the BMC represents; the fact that the BMC allow for two separate transactions, one in the physical gas and one in the green rights, means that the biomethane producer should have the ability to identify and transact the different elements with the most suitable buyer.
The BMC allows a “brown”, fossil gas buyer to decarbonise their gas supply without having to buy a specific green tariff. The BMC has been designed to be a European Energy Certification Scheme (EECS) compliant certificate, which allows the buyer to evidence their “green gas” purchases, without the need to change any contractual arrangements as regards their existing gas supplier.
The BMC is unique in that it has a sustainability factor as part of the certification data. This is akin to the “carbon saved” criteria which is certified on EECS compliant certificate. This allows a “true” carbon value for the biomethane to be established, which is the key to its use as a potential offset.
The sustainability factor seeks to ascribe a “lifecycle” carbon value to the gas produced; simply stating on the certificate that the owner of the certificate has avoided 184kg of CO2 emissions per MWh by buying it doesn’t answer one of the key questions surrounding biomethane – it is clearly a low carbon fuel but not zero carbon fuel – how low is low?
The BMCS methodology ascribes a carbon input value to the construction, operation and decommissioning costs of the producing plant, as an audited carbon value for the energy produced. This acknowledges that all biomethane processes are not equal in terms of their sustainability and their carbon cost; however once known it is an important price driver for the value of certificates.
Once a biomethane plant can calculate the process cost of carbon for its gas it is possible to certify this on the BMC as the “true” carbon value for that energy. This allows purchasers of BMCs to have an audited comparison for the carbon value of the biomethane they have purchased as relative to the known carbon value of fossil gas (184kg CO2e per MWh).
Biomethane as a transport fuel in heavy transport fleets is arguably the best use of the product. Its low output of airborne pollutants relative to diesel makes it increasingly likely that Government will use environmental policy to favour biomethane as a transport fuel in the coming years. This is in addition to the simple economics of the likely continuing divergence in the price of oil and gas in the coming years. The UK Government is very focussed on its carbon reduction commitments and it is very likely that the fuel duties imposed upon CNG and LNG will remain favourable for an extended period of time.
The ability for transport operators to use BMCs is a key driver of their price. The ability of operators to buy BMCs and to use them to offset their carbon footprint presents the operator with the ability to retain their existing grid gas supply contracts and use BMCs to decarbonise.
The fact that many biomethane producers sell their production directly to transport operators at local sites, without going via the gas grid is the key driver as to why the BMCS also certifies biomethane that is compressed or liquefied as a transport fuel. Biomethane suppliers already are disadvantaged by the relatively low level of subsidy provided by the RTFO relative to the RHI; the aim of including CNG and LNG in the scheme seeks to redress this, at least in part.
The growing requirement for Corporate and Social Responsibility (“CSR”) criteria in UK business is an important use of BMCs.
Fundamentally, the creation of a multi-source, homologous certificate which divorces the certificate from the physical gas supply allows a deep and liquid market to develop, which gives a security of supply to the CSR buyer which an individual bi-lateral purchase agreement with a biomethane plant will never allow.
The creation of a private sector, market determined price for biomethane certificates is a key contributor to the overall economics of biomethane production. Given the likely digression over time of the support that will be available via the RHI for new AD plants, it is vital, if the UK is to meet its renewable energy targets production, that all sources of revenue are maximised.
Creating a liquid market for BMCs allows an open and transparent price to develop for the “green” element of biomethane. The market price of fossil natural gas is easy to value as it is a highly traded liquid product – it is the combination of a liquid market for both the bio element and the methane element of biomethane that ensures that this premium product is properly valued by the market.
The fact that BMCs are tradable separately to the physical methane is key to price transparency developing. Private, bi-lateral off-take agreements for biomethane as a “bundled” product of certificate AND physical gas, do nothing to aid price discovery. The fact that BMCs can be traded on an exchange in 1MWh certificates is fundamental to raising awareness of biomethane and ensuring the development of a broad and transparent market in biomethane.
The nascent market for biomethane will only develop if potential buyers understand that as a product, it is available, cheap to transact, and properly audited. The advantage to the UK of having a well developed pricing mechanism for biomethane is the longer term ideal to transfer (in part) the need for public subsidy for the industry to the private sector. Willing buyers exist for the product if it were more widely available; liquidity and access are the keys to unlocking this demand.