Jonathan Wright, energy research director from financial advisory firm finnCap Group, on the increasing importance of bioenergy at a time when the world is struggling to reduce CO2 emissions as a result of stratospheric energy prices and global inflation - and how the market is already on track for exponential growth.
The world is struggling to reduce CO2 emissions at the pace required to limit global temperature increases. Stratospheric gas prices driven by the Ukraine war, searing summer heat and widespread drought has resulted in more coal being burnt in the US, Europe and China whilst also hiking up European carbon prices to record levels. In a time of global inflation and a cost-of living-crisis, meeting ambitious climate targets is becoming less of a priority for many governments.
It’s not all doom and gloom though. We are seeing a big increase in investment into new renewable energy resources, particularly into the fast-expanding bioenergy market as well as into the more nascent carbon removal market. Both of these industries are set for strong and urgently needed growth and will play a vital role in reducing emissions in key sectors globally by 2050.
Focusing in on the bioenergy market, it is useful to provide some background on biomass and its role in energy transition. Biomass is absorbed from the atmosphere as plants grow, then released as biological matter decays or burns. Bioenergy from biomass accounts for around 10% of the world’s primary energy demand. It can play a key role in reducing CO2 emissions by storing CO2 for long periods of time in soil, trees and other plants and by displacing oil, coal and natural gas use when sustainably harvested. Energy stored in biomass can be released to produce biopower through either combustion or anaerobic digestion and conversion.
The volatility of the natural gas market as a result of the Ukraine war has pushed biogas up the political agenda and biogas and biomethane production are fast gaining traction for providing the same benefits as natural gas – storage, flexibility and high temperature heat - without the net carbon emissions. The IEA estimate that the use of biomethane production alone can avoid 1,000 million tonnes of GHG emissions in 2040.
Biogas and biomethane also deliver the further benefit of not needing to be transported and imported over long distances and, with natural gas prices sky rocketing, both represent an attractive alternative from a cost perspective.
The global biomethane market is rapidly expanding, doubling in nearly five years and now produced in 20 European countries. It is set for strong growth with estimates that it will reach 100bcm by 2030, representing close to 3% of global gas demand. Biomethane has taken on a higher profile in Europe following Russia’s invasion of Ukraine and is seen as playing a vital role in supporting the EU in achieving its net zero target by 2050. Its penetration of the European gas market is expected to reach 8% by 2030.
Germany is by far the largest market, home to around two-thirds of Europe’s biogas capacity. Notable areas for growth include the UK, France, Denmark, the Netherlands and Italy.
Biomethane enjoys strong policy support in the UK where around 85% of homes rely upon the gas network for heating and cooking. The UK Government’s Biomass Strategy is expected to be published this year but it is already clear that biomethane will play a significant role in the UK’s clean energy future.
Elsewhere, US production has been growing rapidly, supported by the US Inflation Reduction Act which will expand a renewable energy investment tax credit to include certain biogas operations. China is also looking to encourage a large-scale industrialisation of the sector, while India is pursuing ambitious build-out targets and Brazil has strong growth opportunities due to its large biomass and organic waste availability.
As broader ESG ambitions and GHG emission reductions goals expand, there has been an increasing amount of M&A activity in this sector, which will enable the market to scale up dramatically. We are seeing investment from many European oil majors which have set ambitious growth targets for increasing their biomethane production. Notable transactions include the acquisition of Fonroche Biogaz by TotalEnergies in 2021 and BP’s acquisition of a 30% stake in Green Biofuels.
Infrastructure funds are also becoming highly active in this space. Many funds view the anaerobic digestion plants as a particularly attractive market. Macquarie Capital acquired a greenfield AD in Somerset in May 2021 and in October Energy Acquisitions Group completed the acquisition of an AD plant in Ireland. Green infrastructure investments hit record levels in the first nine months of 2021, as UK investment trusts investing in renewable energy raised more than £1.7bn, according to the Association of Investment Companies.
It is clear that the growing international urgency to tackle climate change, coupled with the major challenges in the natural gas market, has propelled the expansion of the bioenergy market on a global scale. With many countries expanding their biogas operations to meet net zero targets, and increased demand for investment from Europe’s big energy companies and green infrastructure funds, the sector is on course for exponential growth.