Biomethane production cost (LCOE): a calculation example and sensitivity analysis

The LCOE (Levelized Cost of Energy) of biomethane is the average cost of producing a unit of energy over the whole life of the installation, i.e. the annual cost of capital and operation divided by annual energy production. In the example, based on explicit, hypothetical assumptions, the cost of biomethane comes out at a level of the order of PLN 400–570/MWh (depending on the cost of substrates), but the real result depends on scale, substrates, the electricity price and financing. Below we show the formula, an example and a sensitivity analysis that can be applied to your own data.

The formula

LCOE = (CAPEX × CRF + OPEX_annual) / E_annual

where CRF (capital recovery factor) = r(1 + r)ⁿ / ((1 + r)ⁿ − 1), r is the discount rate, n is the period in years, and E_annual is the biomethane energy sold in the year (MWh). The full version takes into account degradation, taxes, inflation and price volatility, but the basic formula is enough for preliminary comparisons.

Example assumptions (hypothetical)

The calculation

CRF(8%, 15) ≈ 0.1168. Annual cost of capital: PLN 55 million × 0.1168 ≈ PLN 6.42 million. Total OPEX: 7.0 + 1.5 + 1.3 + 2.0 = PLN 11.8 million. Sum: PLN 18.22 million. LCOE = PLN 18.22 million / 32,000 MWh ≈ PLN 569/MWh. Converted to m³ (1 m³ = 0.01 MWh): about PLN 5.69/m³. The result is merely an illustration of the assumptions adopted.

Variant with waste substrates

If substrates are accepted for a fee or their cost is low (e.g. PLN 2.0 million instead of PLN 7.0 million), total OPEX is PLN 6.8 million, and the sum is PLN 13.22 million. LCOE ≈ PLN 13.22 million / 32,000 ≈ PLN 413/MWh. On the other hand, in a variant with silage bought at a high price LCOE rises above PLN 570/MWh. The spread shows how large a role the substrate structure plays.

Sensitivity analysis (change of one parameter from the base example of PLN 569/MWh)

The figures result from a simple conversion and are illustrative.

What needs to be added

• Methane losses – they reduce E_annual; 1% slip is −1% of energy.
• The cost of digestate management, which can be revenue or a cost.
• Taxes, financing, reserves.
• The value of CO₂ sold as a product, which lowers the net cost.
• Additional revenues: guarantees of origin, premiums in transport, fees for accepting waste.

How to read the result

LCOE is not a selling price; it shows the minimum level of unit revenue at which the investor will recover costs and the expected rate of return. Comparing with gas prices (e.g. TTF) and additional instruments, one can assess whether the project requires support or long-term sales agreements. In years when gas costs little, the LCOE of biomethane will be clearly higher than the gas price; at high prices the difference narrows, but it is never obvious without taking into account the premium for green energy.

Good modelling practices

The financial model is worth building in three scenarios (pessimistic, base and optimistic), with separately described assumptions about the prices of substrates, electricity and gas and the exchange rate. Costs should be expressed in the same unit of time (constant or current prices), and the analysis period should match the period of the sales agreements and the life of the equipment; membranes or sorbents must be included as cyclical replacements. It is also worth calculating the break-even point: the minimum selling price at which the DSCR (debt service coverage ratio) meets the bank's requirements.

Summary

A simple LCOE model makes it possible to assess a project quickly and see what has the greatest effect on the result. Put your own offers and prices into it, not averages from reports, and always check sensitivity to substrates, CAPEX and availability.