Why asset owners are eyeing European biomethane

Biomethane, the EU’s favourite renewable gas, is growing in popularity among investors.

The European Biogas Association (EBA) claims that European biomethane will receive €25 billion in private investments by 2030, a 30% increase compared to last year’s estimates.

Billed as a sustainable, carbon-low alternative to fossil gas, biomethane has the added advantage of being compatible with existing fossil gas infrastructure.

The REPowerEU Plan calls for 35 billion cubic metres (bcm) per year of biomethane production by 2030, up from 6.4 bcm today, a testament to the significant role the gas is expected to play in meeting EU clean energy targets.

Investors heed the call

Last year, MAPFRE, the most prominent insurance company in Latin America and Spain, launched Europe’s first dedicated biomethane fund, aiming to raise €100 million for 20-25 biomethane plants in Spain over a five-year period.

Dutch pension giant ABP has poured €250 million into bioenergy infrastructure firm BioticNRG via its asset manager APG.

APG’s senior infrastructure portfolio manager, Iulia Grosu, said: “Investing in biogas and biomethane offers a promising solution to mitigate climate change, reduce waste, and provide renewable energy solutions while contributing to carbon negative practices.”

In Denmark, KK Invest, DBC Invest, and Copenhagen Infrastructure Partners, whose investors include several of the largest Danish pension funds, acquired a majority share of Sindal Biogas, a biogas plant in North Jutland.

Biomethane accounts for the vast majority of biogas investments.

Energy transition infrastructure manager White Summit Capital is buying a majority stake in Ferbgas Renewable, a Portuguese biomethane producer.

Last year, Goldman Sachs Asset Management established Verdalia Bioenergy, a new business focused on developing, acquiring, building and operating biomethane plants across Europe.

Matteo Botto Poala, the investment giant’s managing director in the infrastructure business, called biomethane “one of the most compelling segments in the energy transition for infrastructure investors”.

“We see an awful lot of biomethane opportunities landing on our desks,” said Martijn Olthof, portfolio manager at the ABP Netherlands Energy Transition and Biodiversity fund (ANEB). “Various kinds of funds are looking very seriously at these opportunities. This wasn’t the case a few years ago.”

ANEB recently bought Methaplanet, which turns horse manure into energy pellets that boost biomethane production in anaerobic digesters.

Why the interest?

Olthof cited strong regulatory and geopolitical tailwinds as the two main reasons for investor interest.

“Any technology that helps the EU reduce its reliance on Russian gas and contributes to the energy transition is welcome,” he said. “The EU’s strong targets and policy support for biomethane reflect the bloc’s commitment to clean energy and energy security.”

Even before Russia’s invasion of Ukraine, biomethane was seen as advantageous for its ability to use the same infrastructure as natural gas, he added.

Hydrogen – another “renewable gas” – on the other hand, requires an entirely different infrastructure and huge CAPEX investments from its developers.

Europe reached a total of 1,322 biomethane plants in April 2023, up from just 483 plants in 2018, but it’ll need another 950 plants to hit the 2030 target, according to EBA estimates.

“It’s lovely to see biomethane plants mushroom across Europe,” said European Commission bioenergy expert Biljana Kulisic at a biomethane forum. “However, this is still a modest first harvest. Let’s see if we can accelerate investment.”

Regulation that creates markets

EU policy, though favourable, is still in “implementation phase” with its effectiveness depending on the individual country, according to Olthof.

Perhaps the most powerful policy tool is the “blending obligation”, which requires energy companies to include a certain amount of renewable gas in the gas supply mix.

“The blending obligation is an excellent example of regulation creating a market,” said Olthof.

While EU lawmakers like the blending obligation because it doesn’t require any subsidies, one negative side-effect is that it could make gas more expensive for consumers.

“There’s often a trade off in the energy transition,” said Olthof. “Do nothing, and you depend on Russian gas. Do something, and you may make gas more expensive.”

Nevertheless, the blending obligation forces gas suppliers to purchase renewable gas, whatever the cost, which provides a degree of security for biomethane investors

EU member states still have the freedom to decide which tools they wish to use to support biomethane. Not all of them have gone for blending obligations.

While regulation and geopolitics are the main drivers, the circular economy components of biomethane production – converting waste agricultural products into useable gas – was also a major attraction for Olthof.

“ABP recently updated the ANEB mandate to include circularity and biodiversity,” Olthof explained.

What’s the catch?

Perhaps the main criticism is that biomethane is costly to produce and still not competitive vis-à-vis fossil gas.

“Biomethane yields from a small scale digesters are not very high,” said Olthof. “Big digesters make the process more efficient and scalable but they are expensive and don’t guarantee optimal production.”

Feedback EU, a green campaign group, has called the EU’s 35 bcm of biomethane by 2030 “both unrealistic and unsustainable”.

The campaigners warned that the rising volumes of agricultural feedstocks that would be needed to meet the objective – such as maize, straw, food waste and manure – may come with unintended consequences, such as encouraging more livestock production or driving competition between food, feed and fuel.

Annette Kroll, head of regulation at ENGIE Renewable Gases Europe, notes five major barriers to overcome: demand and willingness to pay, policy and regulation, feedstocks, by-products and externalities, and public acceptance.

It is also worth remembering that biomethane still emits carbon dioxide when burnt.