Biomethane PPAs and other business models: how to sell green gas
A biomethane plant can sell gas into the grid, to an end customer under a PPA, as a transport fuel, or with guarantees of origin separated out. We compare the models and their risks.
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A biomethane plant can sell its product in several ways: as gas into the grid on the wholesale market, as gas under a long-term PPA with an end customer, as a transport fuel (bioCNG/bioLNG), or in a split variant in which gas energy and the "green" attribute in the form of guarantees of origin are sold separately. A PPA (Power Purchase Agreement, in gas often a GPA or "biomethane offtake agreement") is an agreement that stabilises revenue and eases financing, but requires careful regulation of volume, price, quality and environmental attributes.
Sales models
| Model | Who pays | Risk on the producer's side |
|---|---|---|
| Wholesale sale into the grid | a gas supplier or an exchange | gas price volatility |
| PPA with an industrial customer | the plant consuming the gas | counterparty risk, availability |
| Sale as a transport fuel | a fleet or station operator | regulations, demand |
| Sale of the attribute (GO) separately | an entity buying the green certificate | volatility of the GO price, register rules |
| Integrated model (producer + supplier) | the end customer | operational complexity |
What a PPA contains
- Parties and delivery point: a grid entry point or a virtual trading point; the method of balancing.
- Volume: fixed, with a tolerance (e.g. ± a few per cent), or "the whole production".
- Price: fixed, indexed (e.g. to TTF with a premium), rising with inflation or mixed. For biomethane a "gas + premium for the green attribute" price is often used.
- Environmental attributes: transfer of guarantees of origin or other evidence, no double sale.
- Quality: compliance with the operator's requirements and the standard.
- Interruptions and force majeure: rules in case of failures, overhauls, grid restrictions.
- Term: several to a dozen or so years; important for financing.
- Termination and security: guarantees, penalties, rules of assignment.
- Changes in law: adjustment mechanisms when the support or certification regime changes.
Price: indexation and premium
The price of green gas is easiest to express as a reference gas price plus a premium. An illustrative example, purely computational: reference gas 40 EUR/MWh (an assumption), premium for the attribute 30 EUR/MWh, in total 70 EUR/MWh. For a production of 30 GWh a year the revenue is 2.1 million EUR, of which the premium accounts for 0.9 million EUR. When the reference price falls to 25 EUR/MWh, revenue falls by 0.45 million EUR, and with a fixed price (e.g. 70 EUR/MWh for 10 years) the risk falls, but the producer loses potential profit if the market rises. This is the classic compromise between stability and flexibility.
Separating the gas and the attribute
Guarantees of origin can be sold independently of the physical gas. The advantage is flexibility: the gas is sold on the wholesale market, and the GO to an entity that wants to declare the consumption of green gas. This requires a system of registers and rules preventing double counting (e.g. under the European ERGaR register and national systems). The end customer must be sure that the attribute has not been sold a second time, and the regulator – that the gas is not simultaneously counted towards targets in transport.
The role of the customer
The buyers of green gas are mainly: industry wanting to reduce scope 1 emissions (e.g. the food, chemical and glass sectors), gas suppliers offering "green" products, fleets of gas vehicles and entities obliged to meet targets in transport. Each group has different requirements for proof of origin and emissions reporting.
Producer's risks
- failure to deliver the agreed volume (penalties, loss of the contract),
- a change in the regulations on certification or support,
- counterparty risk (insolvency of the customer),
- volatility of gas prices, substrate costs and energy,
- grid restrictions (cut-off of injection).
How to prepare for negotiations
Before talks with the customer, prepare a production forecast that takes overhauls into account (P50 and P90), certification documents and a cost analysis. Define the minimum price below which the project does not meet the financing conditions, and alternative sales scenarios. It is also worth considering diversification: part of the volume on a long-term agreement, part on the wholesale market, which gives stability and takes advantage of possible price rises.
The role of the bank and the investor
Banks financing biomethane plants expect a significant part of revenue to be secured by agreements with reliable customers, and technical risks by contractors' guarantees and insurance. For this reason a PPA is sometimes a condition for releasing the loan. The investor should check whether the covenants of the loan agreement (e.g. a minimum level of availability) are consistent with the obligations towards the customer, to avoid a situation in which breach of one agreement triggers sanctions in the other.
Summary
A well-constructed PPA makes it possible to finance a biomethane plant, because it gives the bank a predictable stream of revenue. The key, however, is to balance interests: provisions on volume, price and attributes should take into account the real availability of the installation and the volatility of the gas market.
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