Many AD assets, established a decade ago amid a raft of subsidies, are now facing an uncertain future. Unlike other green energy assets like wind and solar building and material costs have not reduced, with ongoing expenses pertaining to feedstocks and operations remaining high in the long term.
Without proper government funding, the financial viability of existing AD assets is in question, and current facilities may be decommissioned, a process which is both expensive and carbon-intensive.
The lifespan of an AD plant varies, with mixers, engines and pumps routinely replaced over the course of 20 years, and its core (made of concrete or steel) can last for up to half a century, meaning mothballing or decommissioning it makes little sense in terms of sustainability. With proper attention and innovative business models this industry could have a bright future, especially considering the high value of biomethane as a transition fuel. It could play a big part in the UK’s energy mix as we move to a green economy and eventually Net Zero by 2050.
Presently, industry insiders present a mixed picture of the hopes for their industry and the fate of AD is far from decided.
Broadly, the UK Government has an ambition for biomethane production to grow and to avoid stranded assets in the sector; official sources from the Department of Security and Net Zero (DESNZ) and the national grid both reflect this.
Current relevant legislation is primarily the Green Gas Support Scheme (GGSS), which has been in operation since 2021. GGSS provides financial incentives for new AD plants to increase the amount of green gas in the UK gas grid. The government has announced its intention to extend this to 2028, but little is known about support going forward, and anxieties are compounded because GGSS is not available for existing AD plants.
GGSS is itself effectively a stopgap which uses the same mechanism as the renewable heat incentive (RHI), which closed to new applications in 2021. Industry figures are lobbying for more long-term commitments with many hopeful for a resolution which can give security and encourage investors.
One further piece of legislation that may come into play due to the potential for biomethane in the transport sector is the Renewable Transport Fuel Obligation (RTFO). This mandates any suppliers of at least 45,000 litres of transport fuel in the UK to show evidence that a percentage of the fuel they supply comes from sustainable sources.
The funding and legal landscape for AD, as far as government strategy is concerned, is a patchwork of short and medium-term solutions. Some reassurance is offered in the form of long-term Net Zero goals, which seem to guarantee a future for biomethane, but exactly what shape that will take remains to be seen.
In an uncertain funding environment, the natural way forward for AD is to pursue innovative business models and financial solutions.
For larger plants, connecting to the gas grid to provide biomethane for households and industry is their best option for turning a profit, but getting a connection if plants are remote can prove difficult, not least given the speed at which infrastructure adjustments in the UK occur.
A secondary choice is, therefore, integration into a third-party provider’s vertical supply chain or a bespoke deal with an industrial partner in sectors which are difficult or exorbitantly expensive to electrify. One biomethane producer currently has a number of bio-compressed natural gas (bio-CNG) stations which offer fuel for freight and haulage fleets in the UK. This sector is difficult to decarbonise through electrification, and bio-CNG offers an attractive, sustainable alternative. High-profile retailers are moving to use bio-CNG as a way of meeting climate goals, and becoming part of an upstream – downstream supply chain in this way could be hugely beneficial for AD plants.
In a similar vein, the UK’s first subsidy-free AD plant, owned by Future Biogas, struck a deal with Biopharmaceutical company AstraZeneca, the company that developed one of the COVID-19 vaccines purchasing all biomethane from a site for use in their operations. This kind of long-term deal offers a low carbon, sustainable green gas supply and price security for the buyer and long-term financial security for the seller. Insulating everyone from both the volatile fossil fuel market and changes to the funding environment.
A second part of Future Biogas’s business model speaks to a further potential income stream for the industry and that is the CO2 market. To generate profits the AD company plans to capture its CO2 emissions (generated in the AD process) and sell it commercially, eventually storing via CO2 storage company Northern Lights. The growth of the CO2 market could see huge profit-making opportunities for AD and hold the key to subsidy-free financial viability whilst further contributing to Net Zero goals. The food and drinks market is one example of a destination for saleable CO2, but CO2 capture and storage will have increasing value as carbon pricing regulatory frameworks such as the UK and EU ETS begin to affect industry bottom lines.
Feedstock is an ongoing expense for AD plants, but a future boon could come in the shape of circular economy initiatives. Future Biogas are a feedstock-based operation, working with hundreds of farms in Lincolnshire, Yorkshire, Norfolk and East Anglia that utilise locally and purposely-grown energy crops exclusively for certain plants, with waste feedstocks also used in others.
The future changes to food waste collection policy could see increasing levels of domestic food waste supply and uplift gate fees seen by AD plants, which would ultimately partly offset subsidy loss. This, in combination with working with the animal farming industry, as seen in cooperative AD models in Europe, could lead to mitigating feedstock risk, but the workability of this in the UK is yet to be proven.
Amberside Advisors is no stranger to navigating new and exciting energy markets as well as revitalising existing ones. What sets us apart is our passion for sustainability and a deep care for the projects we work on. We understand big infrastructure and energy assets and look beyond the numbers to find the best solutions for our clients.
We understand the subsidies and funding on offer for AD assets and can help owners make the most of their existing AD plants and work out short and medium-term pathways in a difficult financial climate for the industry. Ultimately, the long-term future for AD and biomethane is bright, but the journey to get there will require patience and fortitude. I myself have worked in AD for almost a decade and know the ins and outs of managing these assets.
Innovative solutions in the green energy space are our speciality. We have both insider knowledge of the tech and financial acumen, and we are poised to understand and negotiate bespoke arrangements.
Please reach out to learn about Amberside Advisors’ work in the AD space and find out how we can support your next project or help refinance your existing assets.
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