20 February 2023
Turbulence in commodity markets has sharpened Europe’s focus on energy security, resulting in a wave of even more ambitious energy transition plans. One such initiative is the European Commission’s Biomethane Industrial Partnership (BIP) – a collaborative initiative between industry and regulators created as part of the broader REPowerEU plan.
The BIP commits to increasing Europe’s annual production and use of biomethane to 35 billion cubic metres by 2030.1 In late 2021, total European biomethane production capacity was 3.6 billion cubic metres2 – just over 10 per cent of this goal – and total European gas consumption was 412 billion cubic meters.
For production to grow ten-fold in less than a decade, the region’s biomethane industry will need to expand at an unprecedented pace. The European Biomethane Association (EBA) estimates that the industry will need investment of €83 billion by 2030 to build the 5,000 new plants necessary for Europe to reach its biomethane production target.3 So, with biomethane poised for a tipping point in the next few years, what opportunities could this open up for investors and the energy transition alike?
Thanks to anaerobic digestion (AD) technology, Europe is already turning its existing waste products into viable fuel supplies – biogas, a mixture of carbon dioxide (CO2) and methane (CH4). “What's different about this form of energy is that you are also addressing circular economy requirements around food and organic waste,” says Ben Glover, Head of Sustainability and Waste in Macquarie’s Specialised and Asset Finance division.
While biogas producers have historically focused on purpose-grown energy crops as a feedstock, they are shifting to use products like manure, agricultural residues, and organic food waste which would otherwise end up in landfill. Through a process that upgrades raw biogas, these products can generate a concentrated fuel – biomethane – that is around 99 per cent methane.
Glover believes that this is where the opportunity lies.
With only five per cent of biogas plants in the EU having a registered biogas upgrading unit required to produce biomethane,4 we see a significant untapped opportunity in the market to increase delivery of biomethane into the gas transmission network.”
Head of Sustainability and Waste
Macquarie Specialised Asset Finance
"In many respects, the market has been waiting for this moment – the introduction of the BIP – when the political focus has shifted toward recognising the untapped value”, he says. For those at the frontline, the anticipation of market expansion could provide much needed public awareness and further action. “All farm and organic waste should be treated in some sort of anaerobic digestion process,” says Patrick Ottersbach, the Head of Private Credit Europe in Macquarie Capital’s Principal Finance team.
By expanding the footprint of the Adapt Biogas Platform, purchased by Macquarie Capital in early 2021, Ottersbach has gained first-hand experience of the partnerships and community engagement required to fast-track the biogas opportunity.5
“Biogas plants are their own ‘micro’ economy. They are each a living and breathing thing,” he says. People are needed to look after plant operations. For feedstock and digestate, you need to find and continue to work closely with the suppliers to bring their waste to your plants, and others to take the products you produce.”
To create a local circular economic system like this, and have it work effectively, requires significant problem-solving to identify the appropriate local suppliers and offtakers. Ottersbach cites a cider mill in Somerset eager to partner with his team’s nearby AD plant – in exchange for the cider mill’s waste products, the AD plant provides it green gas, injected into the gas grid, and residual CO2, that is generated as a by-product in the biogas upgrading process. Food grade CO2 is becoming a scarce commodity for the European food and drinks sector – and is another example of a shared benefit in this circular economy. “This is a great example of economically monetising a waste product and feeding into the local circular economy,” says Ottersbach.
From 2023, new local authority regulations are expected to unlock further household supplies in the UK as it mandates separate collection of organic kitchen waste. “We welcome this development,” says Ottersbach. “It could unlock around 1.5 million tonnes of extra food waste to convert to energy.”
Based on the growth of other renewable energy markets, the upward trajectory for biomethane seems clear. “As energy markets rapidly transition, we are witnessing an emerging demand to be able to produce a green gas domestically and at a fixed marginal cost – which is broadly where Europe could get to with waste-based biomethane,” asserts Glover.
Currently, land and ocean transport are the most primed to use this type of fuel. “Biomethane provides a credible immediate near-term solution for that sector,” Glover explains. The shipping sector has already made a 30-year decarbonisation commitment which impacts procurement decisions today. “You cannot be buying fleet now that can’t accommodate future fuels, as the fleet will be obsolete before the end of its useful life. So we're seeing a lot of interest.”
The big advantage we see with biomethane is that it’s a flexible product and a drop-in replacement to fossil gas.”
Macquarie Green Investment Group
“It has multiple end uses. It can do heating, it can go into transport, buildings, industry, and power – there's a whole range of sectors which can be served using existing distribution infrastructure,” he notes. McCaffery predicts this flexibility will see biomethane evolving into new sectors over time, providing decarbonisation solutions for multiple end-users.
Glover meantime believes Europe’s biomethane market will quickly mature, as the gap between the delivered and wholesale price of green gas reduces, and as public policy support renews. This should help bring a host of marginal biogas projects online. “I think you will see a wave of projects come to market, because there is more clarity on long-term value.”
Macquarie Asset Management is no stranger to the industry, with its Green Investment Group recently acquiring BayWa r.e.’s bioenergy platform - a growing biogas portfolio that provides biomethane and power to local energy companies, industrial companies, and energy traders.
The acquisition comes at a time where investors are increasingly seeking a market-ready strategy. “There is a lot of available capital, but there's not a lot of people trying to translate the underlying asset into something that's accessible and investable,” says McCaffery.
McCaffery sees a time in the future where, from a gas perspective, Europe can utilise a mix of biomethane and hydrogen: “I certainly see a world where those two are going to coexist and we shouldn’t be looking at this as a binary, winner-takes-all approach to the energy transition. That's how Europe can decarbonise,” he says.
As of now, biomethane is growing strongly with a 20 per cent increase in European biomethane production in 2021.6 “This growth combined with the growing number of plants that continue to come online, is evidence of the contribution biomethane will make in Europe. Biomethane is proven, it’s commercial – and it's dealing with decarbonisation and the energy transition now,” says McCaffery.