The post below was first published on our Energy blog

The UK boasts a growing biomethane industry with 108 plants currently producing gas capable of being injected into the gas grid and a total installed capacity of 85,000m3/hr, equivalent to the gas demand of Edinburgh. The sector injects over 2.1TWh of biomethane into the grid each year, enough to heat more than 170,000 homes. The displacement of fossil fuel equivalents, coupled with prevention of methane emissions by organic waste breaking down in the open air, abates around 5.1 million tonnes of CO2 per year, equivalent to taking 2 million cars off the road.

The green credentials of biomethane make it a promising component in the decarbonisation of heating of homes, businesses and industry, a sector currently responsible for around one third of the UK’s greenhouse gas emissions. The Government has recognised that, in order for the UK to meet its target of net zero carbon emissions by 2050, there will need to be a fundamental shift in heating, towards carbon neutrality.

As foreshadowed by the Chancellor in the March 2020 Budget, the Government sees this shift being achieved through a mix of green gas, heat pumps and heat networks.  Since the Budget announcement, the Department of Business, Energy and Industrial Strategy has launched consultations on the Green Gas Support Scheme and Green Gas Levy, the successor to the renewable heat incentive (RHI), which has been a key programme for incentivising the reduction of carbon emissions in domestic and non-domestic heating. Copies of the consultations can be accessed here and here and an outline of the measures is set out below.

The primary aim of the Green Gas Support Scheme is to support the decarbonisation of the gas grid by the injection of biomethane, thereby increasing the proportion of green gas in the grid.

Summary of initiatives

Green Gas Support Scheme

  • Aims to support the injection of biomethane into the grid
  • Applies only to biomethane production from anaerobic digestion
  • Takes the form of tiered payments to biomethane producers linked to production, with the first tariff tier increasing to 60,000MWh of eligible biomethane (from 40,000MWh under the RHI)
  • The Government has assumed a 15-year tariff period but is seeking views on periods of 10 or 12 years, with either an annual or midway review
  • Expected to launch in Autumn 2021

Green Gas Levy

  • Gas suppliers would initially be levied at a flat rate per meter supplied
  • The Government intends that the levy would change to being based on volumetric gas usage from 2024/5 or as soon as possible after that
  • Costs would be passed on to end users
  • The levy will be collected from April 2022 and the Government is consulting on the best approach to the delay between the launch of the two schemes, including backdating payments
  • Would be subject to budget control mechanisms, including a tariff guarantee budget cap or annual budget caps for biomethane
  • Suppliers will be required to lodge credit cover for their levy payments

What does this all mean? See here.

Green Gas Support Scheme

A tariff-based mechanism to financially support biomethane production is proposed with payments directly linked to the volumes of biomethane produced. It is anticipated that the tariffs, as with existing RHI payments, will be based on a tiered system, although the first tariff tier would increase from 40,000MWh of eligible biomethane (as it is under the RHI scheme) to 60,000MWh. Tariffs would be subject to review, either annually or once midway through the scheme.

The Government hopes that the increase in the first tariff tier will encourage larger production facilities and is seeking feedback on the proposed length of any tariff support. The Government has assumed a 15-year tariff period, but has sought views on tariff lengths of 10 or 12 years.

A tariff guarantee mechanism would also be introduced to provide investment certainty, in a form similar to the mechanism already in place for the RHI scheme. Biomethane producers would also be eligible to claim certificates under the Renewable Transport Fuel Obligation scheme as well as receiving financial support under the Green Gas Support Scheme.

The Government is also keen to promote the use of waste feedstocks in the biomethane production process rather than energy crops and is looking at how other government policies may assist with this (for example, through the proposed Environment Bill, which would require that all households and businesses in England have a separate food waste collection). At the other end of the production process, the Government is seeking views on how commercial demand for digestate, the by-product of anaerobic digestion, could be strengthened as well as reducing the ammonia emissions which occur from the storing or spreading of digestate.

The Green Gas Support Scheme is expected to launch in Autumn 2021 and be funded by a Green Gas Levy.

Green Gas Levy

In its consultation on the Green Gas Levy, the Government proposes that gas suppliers would be levied at a flat rate per meter they supply and it is anticipated that gas suppliers would pass on the cost of the levy to their customers. The intention is for the levy to move to a volumetric approach based on gas usage in 2024/5 or as soon as possible after that. This approach would involve gas suppliers being levied according to the amount of gas consumed by their customers and would more closely align the costs of the levy with actual gas consumption. While this is likely to reduce the amount domestic customers would pay, it will be of particular interest to non-domestic customers, as non-domestic customers would pay substantially more under a volumetric approach.

The first collection of the Green Gas Levy would not occur until April 2022 so there would be a gap between the commencement of the Green Gas Support Scheme and payments to biomethane producers. In its consultation on the levy, the Government is seeking views on whether this gap is appropriate and whether it gives sufficient certainty to developers to proceed with deploying biomethane plants. In an attempt to provide this certainty, the Government proposes to backdate levy payments, but developers will be keen to provide their views on whether this goes far enough.

Aware of the need for cost control measures to provide certainty to gas suppliers and minimise the impact of the levy on customers’ gas bills, the Government has proposed budget control mechanisms including:

  • a tariff guarantee budget cap which, if met, would halt new tariff guarantee approvals until circumstances changed. This would ensure there was no need to increase the levy in response to increased deployment beyond certain limits, helping control bills; and
  • annual budget caps for biomethane against which to measure scheme expenditure, with an ability to close the scheme if needed due to a forecasted risk of overspend. This would ensure that levy costs cannot continue to rise if biomethane deployment exceeds the budget cap.

The Government is consulting on whether to publish in advance of launch of the scheme the maximum amount that the levy could collect in any one year or the maximum possible levy rate. These figures would be based on the budget cap.

The Government also proposes that suppliers be required to lodge credit cover with Ofgem as assurance that they can cover their levy obligations for each quarter. This process would be administered by Ofgem and could include a cash payment or a standby letter of credit from a bank. If levy payments remained overdue after a given date, Ofgem would recover these by drawing down from the credit cover.

EU Methane Strategy

The EU has also recently published its EU Methane Strategy (available here) in which it focuses on tackling methane emissions in the agricultural and waste sectors through:

  • better emissions reporting,
  • development of mitigating technologies and
  • harnessing any of its energy gains.

This approach is encouraging news for the biomethane industry.

What it all means

Importantly, the Government has proposed that the Green Gas Support Scheme be limited to biomethane production from anaerobic digestion, and is not initially considering any other production methods or alternative sources of green gas (such as hydrogen). It has adopted this position as anaerobic digestion is the only biomethane production method currently used in the UK and the Government is seeking to encourage continued investment in this sector and ensure that the end of the non-domestic RHI scheme in March 2021 does not result in a cliff edge for the industry.

While the Government’s approach is understandable given the current state of the market, it is unlikely that biomethane from anaerobic digestion alone will be sufficient to decarbonise the gas grid. In this respect the proposed form of the Green Gas Support Scheme appears a transitory measure that will need to be modified or replaced in the longer term to encompass broader technologies and other green gas fuels such as hydrogen, in order to further decarbonisation of the gas grid.

The Government appears to acknowledge this as the Green Gas Levy consultation seeks views on what longer term green gas support might be appropriate, including regulatory intervention through the imposition of a green gas supply obligation on suppliers and the use of contracts for difference. It will be interesting to see how the Government responds to consultation feedback and whether this impacts on the Heat and Buildings Strategy that the Government proposes to publish alongside the Energy White Paper at the time of the Autumn Statement.

Watch this space.

Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679
Sarah Pollock
Sarah Pollock
Partner, London
+44 20 7466 2786
John Williams
John Williams
Of Counsel, London
+44 20 7466 2392
Oliver Grabowski
Oliver Grabowski
Associate, London
+44 20 7466 2545