DECC consults on reviewing the tariff for biomethane injection to grid under the RHI

5th June 2014

What is biomethane to grid?

The technology involves producing biogas through anaerobic digestion (AD) of crops, waste, slurries or sewage feedstock. The biogas is then ‘upgraded’ to remove the carbon dioxide and other impurities (known as ‘scrubbing’) and propane is added to ensure the calorific value closely matches that of natural gas. The resulting gas is then odorised and compressed and injected into the gas grid – a way of partly decarbonising the gas grid with the advantage of using existing gas infrastructure.

Why does the tariff need reviewing?

When DECC first introduced the ‘one size fits all’ biomethane to grid tariff under the Renewable Heat Incentive (RHI) in November 2011, there were no full-scale biomethane to grid plants in commercial operation. The RHI kick-started the market for biomethane to grid and there are now three plants registered to the RHI and many more, of much higher capacities than the 1MW on which the original tariff was based, planned or in the pipeline. The RHI tariffs were calculated on a 12 per cent rate of return but it was recognised that they might need to be changed over time. DECC are now reviewing the tariff because there is a risk that the measure is excessive, providing significant upside for large plants and/or plants with existing assets that are converting to biomethane injection.

The proposals

At present, the tariff is set at 7.5 pence per kWh.  Rather than introducing degression, which DECC think would destabilise the market and investor confidence, DECC propose two new tariff options:

• Tiering – a higher tariff for the first designated amount of kilowatt hours of biomethane injected into the grid (the ‘tier 1’ tariff) and a lower tariff for any subsequent biomethane injected (‘tier 2’) over a period of 12 months
• Banding – defining capacity bands for the technology and paying an appropriate tariff for an agreed level of plant capacity – higher tariffs for lower capacity bands and lower tariffs for higher capacity bands.

The tiering option has two scenarios depending on different gate fees:

*15,000 MWh per year is the approximate output of a 2MW biogas capacity plant

Tiering seems in theory the better option (and is the one preferred by ADBA, the Anaerobic Digestion and Biogas Association) as it provides for a gradual reduction in the average tariff earned as capacity increases, unlike banding where the average tariff falls in large steps. It is straightforward to understand and mirrors the approach taken elsewhere in the RHI scheme. There is no need to determine system capacity or how additional capacity should be treated. However, DECC is concerned that its underlying assumptions may not be correct and seeks views on them (see the Technical Annex). An unintended consequence might be that installers limit the production of their biomethane installations to 15,000 MWh.

The consultation proposes two approaches to banding. Option 1 is a tariff curve, where plants up to 2 MW capacity receive a fixed tariff of between 7.1 and 9.9 pence per kWh and plants between 2 and 15 MW receive a bespoke tariff specific to their capacity, along a curve between 0.5 and 9.9 pence per kWh.

Option 2 is to divide the capacity range into 4 bands and set the tariff so that the mid-point capacity in each band will generate a 12 per cent. internal rate of return. This however runs a greater risk of operators deliberately sizing their installation around band thresholds to maximise returns.

DECC recognises that in order to implement either of the banding options, the plant’s capacity needs to be accurately measured. Plants that increase their capacity after they have registered for RHI will also cause an issue and DECC is suggesting that if it introduced banding, it would not permit additional capacity and plants would only be able to receive an RHI tariff for injected biomethane which did not exceed the capacity of the plant registered.

DECC also seeks views on how to ensure that existing AD plants that install biomethane clean-up kit do not receive a double subsidy (i.e. they might have already received Renewables Obligation or Feed-in Tariff which would have compensated for some of the start-up costs).

The consultation seeks general views on the relative merits of banding and tiering and whether there are any other unintended consequences that DECC has not considered.

Comment

Whilst not unexpected (DECC announced an early review of the biomethane tariff on 28 February 2014), this tariff review raises many questions. It is clear that DECC needs a strong evidence base on which to base the revised tariffs and is looking to industry for that evidence. In particular, the level of gate fee will determine the level of final tariff, so industry needs to be prepared to share with DECC what may well be sensitive commercial information. DECC are holding a number of surgery days in June which industry is encourage to attend. The final tariffs could well differ from those consulted on, but it is up to industry to respond. The consultation is only open for 4 weeks and the aim is to lay the amended Regulations in the Autumn.

The Renewable Energy Association welcomes the intent of this review but expresses concerns about the detail of the proposals, which it thinks in the worst case scenario could halt all but the smallest (under 2 MW) biomethane developments.

Whatever method is chosen, there is a likelihood that it will influence the size of future plants and possibly restrict the ability to expand existing ones. Whether it is “a well-managed adjustment to the biomethane to grid tariff, which will enable the market to continue to grow sustainably” remains to be seen.