ADBA responds to the GGSS Annual Tariff Review

The GGSS Annual Tariff Review consultation was launched on 2nd May, seeking views from stakeholders on the outlook for the biomethane industry and on whether specific costs and revenues for biomethane plants have changed over the past year. The consultation was initially supposed to end on 31st May, however, upon request of the ADBA policy team, DESNZ extended the deadline to 5th June.

ADBA reached out to the members within the past few weeks, to allow an opportunity to feed into the consultation response with industry insight and cost data. We thank the members who provided valuable feedback to strengthen our response and to add your thoughts on current concerns the industry is facing.

The GGSS regulations allow tariffs to be increased or decreased on 1 October each year from 2022 to 2025. Tariffs can then reduce every quarter in between if a degression is triggered. The Annual Tariff Review informs the decision to change or maintain tariffs, acting to ensure that payments continue to incentivise the deployment of biomethane production plants effectively, whilst ensuring value for money for billpayers.

Consultation Response in Summary

The attractiveness of developing anaerobic digestion capacity; increased or decreased?

We have received mixed responses from the members regarding the attractiveness of developing AD capacity over the past year.

Factors increasing attractiveness:

The energy crisis and high gas prices have increased the attractiveness of developing AD capacity in the UK, reducing dependence on gas imports. The implementation of the GGSS and closure of other support schemes signal government intent and provide reassurance for investment in new AD plants. The finance industry has shown interest in the UK AD market, with significant growth potential in the local market, driven by farming waste and food waste availability. The rising costs of artificial fertilizers have also made land-ready digestate more favourable for farmers as an alternative.

Factors decreasing attractiveness:

Delays in feedstock availability, lack of coordination with other government departments, and uncertainty about the long-term vision for anaerobic digestion have decreased the attractiveness of AD development in the UK. Without stronger support and strategic alignment, it is unlikely that the industry will reach its full potential or attract significant investment, while other jurisdictions may be perceived as more enthusiastic about the technology.

Challenges for AD plant development

Supply chain issues:

• Supply chain delays in the AD sector, influenced by factors like energy price increases, inflation, and Brexit, have extended construction times and pose a risk to commissioning deadlines. Transport issues, including driver shortages, increased wages, higher fuel costs, and the loss of the red diesel rebate, have also impacted the entire supply chain over the past year.

Feedstock availability and/or price:

• Delays in the announcement of Defra’s recycling consultation have caused issues for the industry, particularly in relation to registering for the GGSS. The delayed rollout of separate food waste collections, now postponed until 2025, and the negative gate fees for food waste have impacted the availability and security of feedstock, making it challenging to secure investment and meet commissioning deadlines.
• In addition, rising electricity and gas prices, coupled with increased transportation distances for feedstock, have further complicated the feedstock market, adding to the risks associated with investing in new plants.

GGSS tariff tiers; are they appropriately compensating the plant development?

AD plants’ attractiveness as an investment depends on rising discount rates and revenue stream volatility. At the recent Finance Forum, participants reported a required return on investment from 9% to 16%. ADBA suggested in the consultation that the 16% figure is more realistic.

There is also additional uncertainty about the gas price: some investors require long-run off-take contracts but these are limited to companies that require sustainable biogas as part of their offer. Given that offtake contracts typically last for 7 years, ADBA further emphasised the importance of a system of administered contracts for difference, providing a 12-year strike price to substantially incentivise plants that can rely on local sources of feedstock.

Excerpt from the consultation:

The potential profitability of new plants crucially depends on the UK natural gas price, as biomethane is a perfect substitute for fossil gas. The natural gas price in the UK in turn reflects the European price due to the substantial interconnections between the two markets. Both the UK and the European prices have been falling steadily since the panic peak in the summer of 2022 (at more than 600 p/therm).

In what follows, we report modelling at both the price of 299 p/therm (as it was in the early winter) and then at 61 p/therm (the price at the time of writing). The dominance of the gas price in AD plant revenues is shown by the internal rate of return (IRR) that results from the different assumptions: at the higher price assumption, the IRR ranges from 21% for the smallest plants to 42% for the medium-sized plants, whereas at the current lower price the IRR falls to minus 6% for the smallest plants up to 9-10% for the medium and larger plants, levels of return that are inadequate at all plant scales given the previously reported target rates to sustain investment.

The sensitivity of rates of return to the gas price underlines the difficulty of reaching the firm conclusions requested by the consultation in an environment of such continuing volatility. It also reveals the shortcomings of the GGSS as an incentive mechanism in current circumstances.

In addition, the ADBA policy team offered to undertake modelling work for DESNZ including for example runs based on the gas price projected by the Office of Budget Responsibility – the agency that forecasts for HM Treasury.

RTFCs as a revenue stream for AD plants

According to our members’ feedback, RTFCs remain an attractive revenue stream when a plant has reached the tier 2 threshold. Even though RTFC prices have fallen to 30p, the certificates still provide a viable source of revenue, especially for plants that are using waste as feedstock.

Members have expressed concerns about the volatility of RTFCs as a revenue source, posing challenges for investor support in biogas plant investments. Long-term price certainty from off-takers comes with penalties for producers, and fixed pricing in such arrangements poses challenges in achieving investment returns when costs increase without revenue uplifts.

Members further suggested that the tiering system is unsuitable for those wanting to build and inject beyond the tier 1 threshold in GGSS, as RTFC offers more favourable rates for any biomethane produced above the first tier.

Impact of Green Gas Certificates on developing AD plants

The revenue generated from Green Gas Certificates (GGCs) will depend on how the UK Emissions Trading Scheme (ETS) is extended to include the biogas and biomethane sectors. If only certain plants are included in the ETS, it could increase the revenue from GGCs and potentially raise the price of unsubsidized biomethane GGCs. However, if the ETS extension covers the entire sector, it may substitute GGCs but provide a more reliable revenue stream for producers.

Market developments and revenue from digestate

The recent energy crisis led to the closure and suspension of fertiliser facilities in the UK, causing an increase in the cost of manufactured fertilisers. As a result, there was higher demand and value for both solid and liquid fractions of digestate. While some have continued to use digestates instead of artificial fertilisers, the market is still developing. Digestate value is influenced by whether individual companies seek organic certification, as it affects the perception and usage of digestate. Organic standards and Countryside stewardship programmes have provided a government opportunity for selling digestate.

Market developments and revenue from Bio-CO₂

The increased demand for bio-CO2 from biomethane plants due to higher CO2 prices faces several barriers. Cost barriers include the need for dedicated trucks to transport lower-grade bio-CO2, while capital investment and operational costs for carbon capture systems pose challenges for installation. Perception barriers exist within end markets, but efforts from authorities and integration with quality protocols aim to provide clarity and certainty for the use of bio-CO2 in the food and drink industry.