ETS2 and the gas market: how much it adds to the price and what it means for biomethane

ETS2 is a new EU emissions trading system, introduced by Directive (EU) 2023/959, which will cover CO₂ emissions from fuels used in buildings, road transport and part of small industry. Unlike the existing ETS for power generation and industry, the obligation to surrender allowances rests on entities supplying fuels (e.g. distributors of gas and liquid fuels), and the cost will be passed on to customers' prices. Burning 1 MWh of natural gas causes emissions of about 0.2 t CO₂, so every 10 EUR/t CO₂ adds about 2 EUR/MWh to the cost of gas.

Basics

ETS2 complements the existing ETS and forms part of the "Fit for 55" package. The original assumptions provided for emissions monitoring from 2025 and the start of the system in 2027. The regulated entities are fuel suppliers placing fuels on the internal market. Revenue from the auctioning of allowances is to feed the Social Climate Fund (Regulation (EU) 2023/955), which supports households vulnerable to energy and transport poverty. The directive also provides for mechanisms limiting too rapid a rise in allowance prices, including a reference to a level of 45 EUR (in 2020 prices).

Converting the allowance price into the cost of gas

The emission factor of natural gas is about 56.1 kgCO₂/GJ (the IPCC default value for the net calorific value), or about 0.202 tCO₂/MWh. The additional cost of gas is the product of the allowance price and the emission factor:

The prices in the table are an illustrative scenario, not a forecast. At an exchange rate of PLN 4.30/EUR, 9 EUR/MWh is about PLN 39/MWh, which for a household consuming 15 MWh of gas per year gives about PLN 580 of additional costs per year. The scale of the increase depends on the allowance price and on whether mitigating measures are introduced.

What about biomethane

Under ETS2, biomass fuels meeting the sustainability and emission reduction criteria of the RED directive have a zero emission factor, so the biomethane supplier does not have to surrender allowances for its combustion. This means that biomethane becomes relatively cheaper compared with fossil gas by the cost of allowances. For a household customer or a heating plant, biomethane sold as "green" can therefore gain in competitiveness, provided it meets the certification requirements and is available. The "zero emission" rule requires sustainability to be documented; without a certificate, biomethane is treated as fossil gas.

Example: biomethane premium

Let us assume (for illustration) that fossil gas costs 40 EUR/MWh and the ETS2 allowance is 45 EUR/t, so fossil gas after ETS2 is 49 EUR/MWh. Biomethane with a production cost of 90 EUR/MWh is still more expensive, but the difference falls from 50 to 41 EUR/MWh. The premium for biomethane needed to cover costs falls by 9 EUR/MWh if demand comes from customers subject to ETS2 and willing to pay for the absence of the charge. The actual price of biomethane depends on the market and competition.

Effects on the gas market

• higher gas costs for households and small businesses;
• incentives for thermal retrofitting, heat pumps and other sources;
• lower demand for gas in buildings in the long term, which affects grid absorption capacity in summer and winter;
• greater interest in biomethane where replacing the heat source is difficult;
• social and political risk, hence the mitigating mechanisms and the possibility of delays in introduction.

Uncertainties

ETS2 is the subject of political debate: questions of price affordability, the scope of compensation and possible postponements may change the timetable. For investors this means the need to carry out scenario analyses. A single allowance price path should not be assumed.

How to prepare for ETS2

A biomethane producer should make sure it holds a valid sustainability certificate and that the mass balance documentation makes it possible to show customers that the gas sold is biomass meeting the criteria. It is also worth following national solutions on compensation and possible adjustments, and in long-term contracts to include a mechanism for changing the price in the event of regulatory changes. Customers planning to buy biomethane should take into account the cost of allowances they will avoid by choosing certified gas.

Summary

ETS2 will raise the cost of fossil gas in the buildings and transport sector, and biomethane meeting the sustainability criteria will be exempt from it. This alone will not solve the problem of biomethane costs, but it improves its competitive position.