Legal Briefing

Greening 
your gas

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Projects, energy and natural resources | 01 September 2013

A combination of government policy and consumer and shareholder pressure over recent years has led to many UK companies developing and implementing corporate social responsibility (CSR) programmes, which for some are becoming an integral part of their brand. A common aspect of many CSR programmes is a commitment to reduce energy usage, increase energy efficiency and procure at least some energy from renewable sources. Many of these commitments focus on 
the procurement of ‘green’ electricity or explore the use of on-site combined heat and power (CHP) plants.

GREEN NATURAL GAS SUBSTITUTE

As a result of recent developments in the renewable energy sector, a small but growing number of corporates are now starting to look at whether there are opportunities to further reduce the carbon impact of their activities by encouraging their gas suppliers to purchase renewable gas, known as ‘biogas’ and becoming involved in the UK’s two nascent renewable gas certification schemes.

Biogas can be produced principally by the anaerobic digestion, gasification or pyrolysis of biomass or organic wastes. In order that the biogas meets the regulatory requirements for injection into the national gas network it is first processed into ‘biomethane’. This involves the removal of water vapour, addition of a safety odourant and the addition of propane to boost calorific value. This renewable source of gas can then be injected into the national gas network and used by consumers as if it were natural gas. Alternatively it can be supplied outside of the gas network as a natural gas substitute or biogas can be compressed for use as a vehicle fuel in suitable vehicles.

GOVERNMENT POLICY AND INCENTIVES

According to government figures published in 20121:

  • almost 80% of heat used in industry comes from fossil fuel combustion with natural gas, electricity and oil being the main energy sources;
  • 79% of the energy we use in our homes is for space and hot water heating of which over 80% is produced using 
gas-fired boilers.

As a result, heat is responsible for around a third of the UK’s greenhouse gas emissions.

However, government policy over the last decade has been largely to focus on increasing the amount of electrical energy the UK generates from low-carbon technologies. It is only more recently that the issue of renewable heat has started to play a more significant role in government energy policy. In the biogas sector, there has been a large growth in the number of anaerobic digestion (AD) renewable energy schemes over recent years – as AD is a more established technology – but there has also been considerable investment, particularly in the waste management sector, in developing commercial scale gasification and pyrolysis plants in the UK.

The Department for Environment, Farming & Rural Affairs’ Anaerobic Digestion Strategy and Action Plan Annual Report 2012-13, published in July 2013, cites 112 operational anaerobic digestion plants in the UK with a total generating capacity of 95 MW. In addition the report references over 100 further AD projects with 
planning permission which are currently 
in development.

The investment in these technologies has been largely in response to the financial incentives available through the government’s environmental policies. These incentives encourage the development of renewable energy projects in order that the UK can meet its ambitious carbon emission reduction targets and source 15% of UK energy consumption from renewable resources by 2020.

In the vast majority of operational UK biogas production plants, the biogas is combusted in a gas engine or steam boiler to generate renewable electricity. As a renewable energy technology choice, anaerobic digestion, gasification and pyrolysis are attractive because as a ‘fuelled’ technology the plants can operate constantly and generate baseload energy.

The introduction of the government’s Renewable Heat Incentive (RHI) scheme on 28 November 2011 represented a step change in government policy on renewable heat and presented new opportunities for the generation of renewable gas. As a result of the powers contained in s100 of the Energy Act 2008 and The Renewable Heat Incentive Scheme Regulations 2011, incentives are now available for the generation and injection into the gas grid of biomethane (known as ‘gas to grid’ projects). Prior to the RHI, only renewable energy generation from the combustion of biogas had been incentivised.

As a result of these incentives there is 
now a growing number of biogas production plants (particularly those using AD technology) pioneering the use of gas 
to grid technology in Great Britain and taking advantage of the RHI’s biomethane injection tariff which is currently set at 
7.3 pence per kWh (and is index linked for 20 years).

Estimates vary as to what the potential size of the UK biogas market could be but based on the amount of feedstock available in the UK, the Anaerobic Digestion and Biogas Association (ADBA) has predicted that AD could provide enough clean energy to deliver more than 10% of the UK’s domestic gas requirements2.

CREATING A MARKET FOR TRACEABLE GREEN GAS

‘Traceability’ is the ability for consumers to clearly identify and audit the origin of renewable energy generation and its subsequent use. Improvements in traceability have been a key feature of the development of the renewable electricity market for those tasked with delivering the energy related aspects of CSR programmes. Technology codes form part of the unique reference numbers contained on Renewable Energy Guarantees of Origin (REGOs) and Renewables Obligation Certificates issued in respect of renewable electricity generation. These unique identifiers have enabled licensed suppliers to develop sophisticated products for some corporate customers which can offer high levels of traceability of generation and in some circumstances even allow customers to influence the profile of the renewable generation technology types which feed in to their energy supply.

Although biogas producers are now incentivised by the RHI to develop gas to grid projects and non-domestic electricity consumers are incentivised by the Climate Change Levy to purchase electricity generated from renewable sources, there is no similar statutory incentive for consumers of biogas. The biogas industry in the UK has for some time recognised that in order to create new revenue streams for its participants (in the form of tradable certificates and/or guarantees of origin) and encourage demand for biogas, it would be desirable to have a scheme in place to incentivise and record the generation, supply and use of biogas. In the context of CSR schemes this would also allow a corporate to audit compliance with CSR renewable energy commitments which they are seeking to fulfil through the purchase of biogas or biomethane.

A recent report by the European Biogas Association3 recorded that in only some of the ten European countries currently injecting biomethane into the natural gas grid is there a national certification scheme providing an independent system for registering the biomethane volumes injected. The report acknowledges the important function played by such schemes in creating market confidence, particularly where independent auditing is integrated into the system.

UK BIOGAS CERTIFICATION

In the UK there is no public body tasked with developing or operating a system for certificating the production of green gas but two separate systems have been developed by or with the support of two 
UK-based trade associations, namely:

  • the Biomethane Certification Scheme (BMCS)4, run by Green Gas Trading Ltd (GGT) and supported by the Anaerobic Digestion & Biogas Association; and
  • the Green Gas Certification Scheme (GGCS)5, run by Renewable Energy Assurance Ltd, a subsidiary of the Renewable Energy Association.

The BMCS will issue unique, electronic Biomethane Certificates (known as BMCs) to biomethane producers to certify each MWh of biomethane injected into the grid (or liquefied/compressed for transport fuel). BMCs issued will be based upon gas volumes, net of any calorific value upgrade. Consistent with the RHI incentive regime, BMCs will be allocated into the biogas producer’s registry account from where they can be traded separately from the physical gas. The BMCS also intends to establish a separate trading platform for the primary and secondary trading of BMCs.

The GGCS is a slightly different system that tracks the contractual flows of biomethane. On injection into the grid by a GGCS-participating biogas producer, a unique identifier known as a Renewable Gas Guarantee of Origin (RGGO) is created for each kWh of biomethane injected. A reporting system allows participants to track contractual (rather than physical) flows of gas between market participants (and the corresponding RGGOs are transferred between participants’ accounts) until its sale to the end consumer. Once a licensed gas supplier registers a sale of biomethane to an end-use consumer, an electronic Green Gas Certificate will be issued in the consumer’s name, setting out the RGGOs associated with the amount of gas (in kWh) supplied. The GGCS will then retire those RGGOs from the system and record them as having been issued to the customer.

INTEGRATION WITH THE CARBON MARKET?

The UK’s two renewable gas certification schemes are currently voluntary and both function in a similar way to the voluntary carbon market: they have a registry for green gas producers, a protocol for defining and measuring the green gas production that creates a credit or certificate, vintages of green gas (periods over which credits are generated), and certificates that are issued with a unique identifier to aid security and prevent double counting.

The main difference between the UK’s renewable gas certification schemes and other carbon allowance schemes (both mandatory, such as the UK’s Carbon Reduction Commitment, and voluntary 
such as the World Wildlife Fund’s ‘gold standard’) is that most carbon market schemes measure a credit of emission reduction. The UK’s renewable gas certification schemes are by comparison ‘replacement’ schemes, in that they can 
be used to demonstrate a commitment 
to reducing carbon emissions by purchasing 
a renewable form of gas, rather than 
natural gas.

Market-based schemes serve two different purposes:

  • to create a mechanism to measure and count credits for the purpose of compliance with government regulations – a compliance scheme typically focuses on energy-intensive emitters such as energy producers, as well as sectors that have intense impacts on the environment, like transportation;
  • to provide a platform for scheme participants acting on a voluntary basis to measure and reduce their environmental impact.

Both reduction and replacement mechanisms have the same intended 
result – limiting environmental degradation. As a result, in theory, it should be possible 
to link a renewable gas certification 
scheme so that certificates could be used on a voluntary market scheme for retirement (as an offset of carbon) or a compliance scheme (to comply with emission reduction rules). However, a translation would need to be developed in the form of a protocol to measure how many units of carbon are reduced (or offset) against one renewable gas certificate. One of the stated aims of the BMCS is to allow certificates it issues to be used to offset against mandatory carbon reduction schemes. Linking schemes is often supported by industry because it 
creates a larger market and more liquidity, which helps to allow for hedging of price risks and diversification of portfolios. However, complications with implementation and pricing of credits/certificates can arise.

It is still early days for renewable gas certification schemes in the UK. Given that the schemes are currently voluntary (rather than providing a means for participants to fulfil any statutory requirement), a liquid market in certificates needs to be created. This will require:

  • biogas generators to opt to directly inject gas rather than generating electricity, to create the necessary supply; and
  • gas consumers large and small 
to embrace the concept of biogas 
and its environmental benefits 
and to be prepared to pay a 
premium for the certificates 
in the absence of any statutory compulsion.

Initial signs are positive and it will be very encouraging if biogas producers are able to score some early wins with large corporate gas users. The growing importance of environmental CSR schemes is likely to be good news for the renewable gas certification schemes. For now it is a case of wait and see how the renewable gas certification schemes develop and crucially whether, in time, any statutory regime (such as a climate change levy exemption) is put in place to support the consumption of biomethane as a heating fuel.

By Nick Churchward, partner, 
Burges Salmon LLP.

E-mail: nick.churchward@burges-salmon.com.

 

UK GAS MARKET AT A GLANCE

Key players

 

  • gas producer: either extracts gas from natural resources or in the case of biogas, generates the biogas;
  • gas transporter: transports the gas through the gas pipeline network;
  • gas shipper: buys gas from the producer and contracts with the transporter to convey gas through the gas pipeline network;
  • gas supplier: purchases gas from the shipper and in turn supplies and invoices end customers

.

 

Other than gas producer, each of these roles requires the participant to hold a licence pursuant to the Gas Act 1986 (as amended). Licenses are regulated by Ofgem.

Gas transmission/transportation

Similar to the electricity network, the UK gas network is split into two main systems as follows:

 

  • high pressure transmission system: referred to as the National Transmission System (NTS), which is operated by National Grid Gas (NGG); and
  • medium pressure distribution system: there are eight regional gas distribution networks.

 

Gas shippers enter into contracts with gas transporters for the transportation of gas to a defined end point. Shippers:

 

  • buy capacity from a gas transporter to use the transporter’s pipeline or storage;
  • purchase gas from producers, traders or other shippers;
  • sell gas to gas suppliers for onward supply to end customers.

 

Gas suppliers buy gas from gas shippers and then on-sell the gas to end users (being domestic and non-domestic consumers) who are free to choose their individual gas supplier.

THE SCIENCE BIT

Section 100(3) of the Energy Act 2008 defines:

 

  • biogas as gas produced by anaerobic or thermal conversion of biomass;
  • biomass as any material, other than fossil fuel or peat, which is, or is derived directly or indirectly from, plant matter, animal matter, fungi or algae;
  • biomethane as biogas which is suitable for conveyance through pipes to premises in accordance with a license under s7 of the Gas Act 1986.

 

Regulation 2 of The Renewable Heat Incentive Scheme Regulations 2011 defines:

 

  • anaerobic digestion as the bacterial fermentation of biomass in the absence of oxygen;
  • gasification as the substoichiometric oxidation or steam reformation of a substance to produce a gaseous mixture containing two or all of the following: oxides of carbon methane and hydrogen;
  • pyrolysis as the thermal degradation of a substance in the absence of an oxidising agent (other than that which forms part of the substance itself) to produce char and one or both of gas and liquid.

NOTES

  1. The Department of Energy and Climate Change, March 2012, The Future of Heating: A strategic framework for low carbon heat in the UK. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48574/4805-future-heating-strategic-framework.pdf.
  2. Anaerobic Digestion and Biogas Association, The practical guide to AD (first edition). Available at http://www.adbiogas.co.uk/resources/the-practical-guide-to-ad/.
  3. European Biogas Association, 28 March 2013, Green Gas Grids Project Working Group on Biomethane Trade Discussion Paper #2.
  4. http://greengastrading.co.uk/.
  5. http://www.greengas.org.uk/.