Finland: target price premium of €83.50/MWh for biogas and its closure in 2019

Since Act 1396/2010 came into force, Finland has supported electricity from biogas through a target price premium mechanism: the generator received from the budget the difference between €83.50/MWh and the average market price of energy. The scheme was shaped by Act 1396/2010, and it was closed to new biogas plants at the start of 2019.

How the premium was calculated

The Act on support for electricity production from renewable sources (1396/2010) provided for a target price for each technology. For biogas it was €83.50/MWh; for wind power plants a higher value of €105.30/MWh was set, applicable until the end of 2015.

The premium is calculated quarterly according to a simple rule:

1. Take the average market price of energy over the previous three months.
2. Subtract this average from the target price.
3. If the average price fell below €30/MWh, €30/MWh is used for the subtraction, so the premium does not rise above €53.50/MWh.
4. If the market price exceeds the target price, the premium is zero.

The difference from Polish auctions (a fixed reference price) is clear: the generator in Finland has no guarantee of fixed revenue at very low market prices, because the lower safeguard ends at €30/MWh. At very high prices, it also receives nothing above the market price.

Heat premium

Cogeneration biogas plants could receive an additional €50/MWh (Article 26 of the Act), and wood-fuel power plants €20/MWh. The heat premium is paid alongside the target price premium, also for a maximum of 12 years. It encouraged the use of heat, because without a heat customer a biogas plant loses a significant part of its potential revenue.

Duration and closure of the scheme

Support is available for up to 12 years from the award. According to the description of the scheme in the European Commission's database, the tariff system together with the heat premium was closed to biogas and wood-fuel power plants on 1 January 2019, while separate rules for wood-chip power plants expired later. For biogas, the only route for new installations since then has been the tender mode under the same Act. Its only round so far, in autumn 2018, ended with the victory of onshore wind (discussion of the auction).

What this means for an investor

• Revenue from biogas energy in the Finnish model is "capped" at the top and the bottom: at prices of €30–83.50/MWh the generator received a total of €83.50/MWh, and below €30/MWh it loses part of the guarantee.
• Heat from cogeneration was the second leg of financing; electricity support alone did not replace a market for heat.
• Installations that received a decision before the scheme closed end their support period after a maximum of 12 years.

Calculation example

Suppose the average three-month energy price is €45/MWh. The premium to the target price is 83.50 − 45 = €38.50/MWh, so the generator receives a total of €83.50/MWh. If the same biogas plant also sells heat to the network and meets the conditions for the heat premium, the €50/MWh heat premium is added (the source gives it as an amount "per MWh produced", without specifying whether this refers to electricity or heat, so we do not add it here to the revenue for energy). When the market price falls to €20/MWh, €30/MWh is used to calculate the premium, so the premium is €53.50/MWh, and the generator receives €73.50/MWh in total (20 from the market plus 53.50 of premium).

Premium versus fixed tariff

In a classic fixed tariff (feed-in tariff) the generator has a price known in advance for every megawatt-hour, regardless of the market. The Finnish model is a sliding premium: the state tops up market revenue to the target level, but the generator still sells energy on the market and bears the risk of access to it. From the budget's point of view this solution is cheaper in years of high prices, because support decreases automatically. From the investor's point of view it requires taking into account a scenario of prices below €30/MWh, in which the guarantee stops increasing.

Such a design also favours control of production: a biogas plant whose generator set can operate flexibly has an interest in generating energy when the market pays more, because the premium is calculated from the quarterly average, not from the price in the hour in which the energy was sold.

Closure of the scheme in practice

The closure of the scheme on 1 January 2019 does not affect installations already participating in it: they receive the premium until the maximum 12-year period expires. A new investor, however, must plan a project without a guaranteed target price. In practice this means basing the economic calculation on selling energy at market prices, using heat on site and other channels, such as selling biogas after upgrading. It is therefore worth reading the Finnish experience as an example of the transition from an administratively set target price to a competitive tender mode, in which biogas must measure up to cheaper sources.