Role of biomethane in the green transition

January 2024  |  SPECIAL REPORT: ENERGY & UTILITIES

Financier Worldwide Magazine

January 2024 Issue

Biomethane is increasingly important to the energy transition. At present, Italy has 85 biomethane plants and is well placed to reach the production target set forth under Directive 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, as recently amended by Directive 2023/2413 of the European Parliament and of the Council of 18 October 2023 (RED III) of 35 billion cubic metres by 2030.

Current incentive scheme for biomethane in Italy

In the context of the National Resilience and Recovery Plan (NRRP), the green and ecological transition is a key pillar for the development of the Italian economy. And almost €2bn has been allocated for the development of biomethane.

By implementing the NRRP, the Ministerial Decree of 15 September 2022 (Decree 2022) provided incentives for new biomethane production plants fuelled by agricultural or organic waste feedstock and the total or partial conversion of existing agricultural biogas-fuelled electricity production plants to biomethane. Besides a capital contribution of 40 percent for the capital expenditure relating to the development of a plant within established thresholds, Decree 2022 applied a feed-in-tariff (FIT) to net biomethane production.

The new incentive scheme is based on two different FITs. The first is an all-inclusive tariff for plants with a production capacity equal to or less than 250 standard cubic metres per hour (Smc/h). The amount of the tariff is equal to the reference price established under Decree 2022 reduced by the percentage discount offered and accepted during the tender procedures and includes the economic value resulting from the sale of natural gas, as well as the value of the guarantees of origin (GOs). For such plants, GOs are issued to the applicant and simultaneously transferred free of charge to the Energy Manager Authority (GSE) and they remain within the GSE, which is also in charge of the sale of any biomethane withdrawn from the plant.

The second scheme is a premium tariff (contract for difference) for plants with a production capacity of more than 250 Smc/h, or plants with a production capacity of less than 250 Smc/h opting for this tariff. The amount of the tariff is equal to the difference between the reference tariff established under Decree 2022, the percentage discount offered, the average monthly gas price and the average monthly price of GOs. If this difference is positive, the GSE will pay the relevant amount. If this difference is negative, the GSE will set off or request the producer returns or pays the respective amount. In this case, the sale of biomethane is the responsibility of the applicant. For such plants, GOs are issued to the applicant and remain at its disposal.

The main difference between the new incentive scheme set forth under Decree 2022 and previous incentive schemes is that GOs are not an alternative to the FIT but are part of the incentive mechanism. This is in line with the provision of RED III whereby GOs are regarded as a key tool for consumer information, as well as for the further uptake of renewable energy purchase agreements.

The first two auction procedures launched by the GSE between January and July 2023 have registered low participation rates. On the one hand, the timing for construction of the plants was challenging, but the main reason for a low appetite is that the FIT is deemed uncompetitive, taking into account rising construction costs for plants due to the supply of energy and raw materials. In this context, GO trades may play a key role in making investments in biomethane plants appealing.

Promoting biomethane will involve development of a market for GOs. RED III explicitly envisages extending the GO scheme currently in place for renewable electricity to gas, at the discretion of each member state. This would allow suppliers to provide evidence of the origin of renewable gas (including biomethane) to final customers, facilitating the cross-border trade of biomethane. To develop the biomethane sector, the Italian government will simultaneously promote GOs in the gas sector.

To this end, Ministerial Decree of 14 July 2023 no. 224 (Decree 2023) defined the rules for the issuance, transfer, acknowledgment and annulment of GOs in relation to renewable sources (including biomethane and hydrogen) in compliance with RED III through a register managed by the GSE. In addition, on 15 November 2023 the Energy Market Authority adopted guidance enacting the rules for trading GOs. The Italian government intends these rules to facilitate the cross-border exchange of GOs.

Obstacles to an EU market for GOs

At present, an obstacle for the effective trade, transfer and use of GOs across member states is that there is not a uniform system with appropriately standardised certificates mutually recognised throughout the EU. In a guidance document drafted by the European Commission on 17 October 2022 in relation to biomass issues in the Emissions Trading System (ETS), the compatibility of the platforms available to member states and the lack of a common EU trading platform were identified as issues that have made it difficult to exchange GOs across the EU.

On 3 November 2023, the GSE adopted guidance on the GOs system which clarified that cross-border trade of GOs is possible only using the Association of Issuing Bodies (AIB) platform and only when issued in connection with plants not incentivised by Decree 2022 and other decrees, and thus making them fully merchant plants. Though the Decree 2022 expressly provides for the possibility of trading GOs abroad, in the absence of a unique EU platform for their exchange, those GOs issued in relation to non-incentivised plants are not tradeable abroad.

In addition, whether another member state might allow GOs issued in Italy to be traded depends on whether that member state acknowledges the mechanism for issuing GOs in that member state. For example, in Germany it has only been possible to apply for GOs to produce biogas or biomethane since January 2023. Previously, this was only possible for electricity from renewable energies. The corresponding register for biogas GOs is not due to go live under the German Federal Environment Agency until January 2024. In practice, even though trading GOs between Italy and Germany would be possible, a lack of common rules and platforms prevents it.

Overcoming obstacles

RED III provided for the creation of a common platform which, by 21 November 2024, should enable liquid and gaseous renewable fuels and recycled carbon fuels to be traded, under the Union Database.

To this end, member states must ensure that economic operators enter accurate data into the Union Database in a timely manner. As a result, they will be able to access the Union Database to monitor and verify that once GOs are transferred to the Union Database they are cancelled after the consignment of renewable gas is withdrawn from the EU’s interconnected gas infrastructure. Such GOs, once transferred, cannot be traded outside the Union Database.

To comply with this requirement, member states may establish national databases taking into account stricter national requirements in relation to sustainability criteria or employ an existing national database linked to the Union Database via an interface, provided that the national database complies with the Union Database, including in terms of data transmission speed, typology of transferred data sets, and the protocols for data quality and verification. Data entered into the national database must be instantly transferred to the Union Database.

Conclusion

Unlike prior incentive schemes that did not provide for GOs to be issued for already incentivised plants, under Decree 2022 GOs may be a good investment for plants opting for the premium tariff, as they may benefit from a tradeable asset in contrast to fluctuating gas prices. Experts believe GO prices are set to climb due to rising demand driven by the war in Ukraine, a dry summer and stricter corporate environmental, social and governance (ESG) criteria. There is an increased willingness to pay for verified renewable energy.

 

Arturo Sferruzza is a partner and Stefania Casini is a senior associate at Norton Rose Fulbright Studio Legale. Mr Sferruzza can be contacted on +39 (02) 86359 481 or by email: arturo.sferruzza@nortonrosefulbright.com. Ms Casini can be contacted on +39 (02) 86359 405 or by email: stefania.casini@nortonrosefulbright.com.

© Financier Worldwide

BY

Arturo Sferruzza and Stefania Casini

Norton Rose Fulbright Studio Legale

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.