Europe's biomethane market is set for substantial growth in the coming years on the back of the continent's drive for energy independence. Some utilities are deepening their footprint in the niche technology, but while money is available, the business case is not always there.

REPowerEU, the European Union's plan to wean itself off Russian gas, includes a target to ramp up production of biomethane — sourced from agricultural waste and residues — to 35 billion cubic meters by 2030, up from 3 Bcm today.

"Europe has great potential for producing biomethane, a green alternative for natural gas. In the current energy supply crisis, we cannot allow this potential to go to waste," EU Energy Commissioner Kadri Simson said in September 2022 as the European Commission, together with biogas industry players, launched a Biomethane Industrial Partnership to deliver on the target.

The 2030 target could make biomethane an increasingly appealing asset class. In a recent milestone for the sector, oil major Shell PLC acquired Danish biogas and biomethane producer Nature Energy Biogas A/S for $2 billion.

However, the 35 Bcm target is steep, requiring roughly elevenfold growth from today's level, and Europe is not on track to get there, according to an analysis by S&P Global Commodity Insights.

Some of that growth could be met by upgrading biogas used in power and heat generation to biomethane, Deborah Mann, senior director of gas, power and climate solutions at Commodity Insights, said in the report. But this would only account for half of the target at best, Mann noted.

Biogas is a composition of several gases including methane and carbon dioxide, whereas biomethane is purified in a process that removes any CO₂, the toxic gas hydrogen sulfide and water from the original biogas composition.

In the US, gas utilities are already scrambling to demonstrate they can keep a foothold in an increasingly crowded market for renewable natural gas projects.

In Europe, biogas and biomethane are typically a small part of utilities' strategies compared to classic renewables development.

France's Engie SA is targeting 10 TWh of biomethane production per year by 2030, for instance. Italy's Snam SpA is planning to spend €500 million on its Bioenerys business, which is tasked with growing the utility's footprint in the market by 2026, chiefly through conversion of biogas to biomethane.

"Biogas is the province of farmers or sewage treatment companies generally. Managing manure is going to be right out of the comfort zone of utilities and energy majors," Mann said separately via email. "Those that have got involved, [such as] TotalEnergies SE or Shell, are partnering with, or buying up, existing specialist companies."

Biomethane drive as part of security of supply effort

Support for renewable natural gas from European governments was, until recently, mostly targeted at power generation. This led to the direct use of biogas, without upgrading it into biomethane, Mann said in the report. Now, the aim is for biomethane to replace natural gas in sectors that are hard to electrify, such as transport, the analyst said.

"In the case of power and heat, the replacement will probably need to be dispatchable and storable, and could be solid biomass; but if not managed carefully, this could also lead to more gas demand from elsewhere," Mann noted.

Biomethane business cases vary across the EU, also because of a patchwork of regulatory approaches. Some countries such as Germany, France, Denmark and the Netherlands offer feed-in tariffs or feed-in premiums, while Finland offers investment support.

Italy has one of the most generous subsidy programs, with a September 2022 governmental decree introducing a 40% capital contribution for investments and an incentive tariff for biomethane produced, according to a briefing from the law firm Bird & Bird.

Snam wants to ride this wave of support, according to Marco Ortu, CEO of the company's Bioenerys unit. The new law will facilitate the conversion of biogas plants to biomethane, as well as support the construction of new sites, Ortu said in an interview.

The focus on homegrown energy sources at the EU and national level has also lifted biomethane, which "is a niche but it's an existing niche ready for production," Ortu said. "We cannot solve the security of supply but we can definitely and immediately contribute to it."

Biomethane is "not a technology that can jump on command," said Zoltan Elek, CEO of Germany's Landwärme GmbH, one of Europe's largest traders in the market. "This is a technology that just needs time. It is a medium-term solution."

Elek argued that the European Commission's target is achievable but that the 35-Bcm goal is not enough to spur the necessary investments. "It is not rocket science. I consider it technically possible, though the time is increasingly tight because the regulatory frameworks are not yet brought underway," Elek said.

In most markets except Denmark, biomethane production is scattered across agricultural sites, local sewage treatment sites or biorefineries. Plans for larger greenfield projects often face local opposition, Elek said, limiting the scope for investors with big ambitions.

"Even if I have the money, I won't find the sites," the executive said.

Feedstocks: volume, price, location

One challenge for ramping up biomethane production is that increasing the supply of new biogas is difficult, according to Mann, requiring market players to be deeply involved and individual farmers and producers to change their working procedures.

"This contrasts with, for example, wind turbines or solar panels, which do not require much ongoing effort once installed," Mann said in the report.

The potential of biogas and biomethane is chiefly driven by the availability of feedstocks, such as animal slurry, biological waste and plant waste. For a business case to stack up, it needs feedstocks in "correct volumes, correct prices, correct locations," Ari Suomilammi, head of production at Finnish gas producer and trader Gasum Oy, said in an interview.

Gasum runs 17 biogas plants in Finland and Sweden and also has an import arm. In 2022, it produced and imported 1.7 TWh of renewable gas, which it plans to ramp up to 7 TWh by 2027.

Feedstock such as grease is also in high demand because it is also used in biodiesel, Suomilammi noted.

In Finland, biogas producers receive investment subsidies but the business case is driven by the gas price. Biomethane also goes into the transport sector as fuel.

The executive also pointed to a dynamic regulatory picture that goes far beyond energy policy, for instance because byproduct digestate is covered by EU fertilizer regulations. "Agricultural, energy, environmental regulations — they are overlapping ... and all of these things have to function at the same time," Suomilammi said.

While the 2030 target will be challenging to reach, Ortu does not see problems with financing.

"The willingness of investors, funds, key operators is there. It is something we are all interested in," Ortu said. Constraints come chiefly from permitting and bureaucracy and the complexity of the Italian subsidy framework, which can be very challenging for small operators to navigate, the executive added.

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