Biomethane in the electricity market

The most important instrument for promoting renewable energies in Germany is the Renewable Energy Sources Act (EEG). The EEG first came into force in 2000 and has since been amended several times. The last major amendment (EEG 2023) came into force on January 1, 2023. The purpose of the EEG is climate and environmental protection, a sustainable energy supply, the reduction of the economic costs of energy supply, the replacement of fossil resources and the further development of technologies for the generation of electricity from renewable energies. In order to achieve these goals, the EEG provides for the priority connection of systems for the generation of electricity from renewable energies to the general supply grids as well as the priority purchase, transmission and distribution of the electricity generated. In addition to these grid-related entitlements, operators of renewable energy installations are also entitled to financial support, the amount of which has been determined primarily through tenders since the EEG 2017 came into force.

The EEG 2023 aims to establish a renewable energy share of 80 % in the electricity mix by 2030 and 100 % by 2035.

The EEG grants operators of combined heat and power (CHP) plants that draw gas from the natural gas grid a subsidy for every kWh of electricity generated if the operator can prove that at least as much biomethane was fed into the German natural gas grid in the respective calendar year as was fed out to generate electricity in the CHP plant. Since EEG 2017, the subsidized quantities have been auctioned. In the case of electricity generation in CHPs already operated with renewable energies before 2017, however, the amount of the remuneration entitlement is based on the feed-in tariffs under the relevant law. The amount of the subsidy is determined, among other things, by the substances used for biogas production. It is also possible to split the biomethane used into different feedstocks.

In order to receive financial support, the operator must prove that it generates the electricity using combined heat and power (CHP) (heat utilization obligation) and has fulfilled various technical requirements and documentation obligations (feedstock diary).

The subsidy is paid for the year in which the CHP plant is commissioned and for a further 20 years at a constant level. This allows the biomethane to be used efficiently in CHP plants that are operated at locations with a corresponding demand for heat.

Operators of all biomethane CHP plants commissioned since 2012 must market the electricity from their plants directly, whereby they can receive support in the form of the sliding market premium. The direct marketing obligation applies to all new plants commissioned since January 1, 2012 with an installed capacity of more than 750 kW. On August 1, 2014, the threshold was then lowered to a maximum installed capacity of 500 kW. On January 1, 2016, the threshold was lowered to 100 kW.

The further expansion of biomass and biogas plants has already been slowed down considerably by the 2014 Renewable Energy Sources Act: since 2016, the legislator has provided for an annual increase in degression from 0.5% to 1.27%, depending on the amount of additional capacity added, if the amount of additional capacity exceeds 100 MW (gross). The 2014 EEG also significantly reduced the level of funding. In particular, the increased payments previously provided for the use of certain input materials and the gas processing bonus were abolished without replacement. Under the EEG 2023, the total tendered capacity is 8.4 GWel, as in the EEG 2021.

Since the EEG 2017 came into force, all newly commissioned biomass plants must participate in an annual tender in which they must “bid” for their individual subsidy rate in the form of the value to be applied to calculate the market premium. There is no differentiation by feedstock, nor is there any differentiation by plant size or technology. This means that in future, all technologies for generating electricity from biomass will be in competition with each other.

The EEG 2023 will see a shift in funding from biomass to biomethane. The biomass volumes put out to tender will be reduced by 100 MW per year from 600 MW in 2023 until they finally reach 300 MW in 2026. In contrast, the volumes of biomethane put out to tender will be increased so that they reach 600 MW in 2026.

Until the end of 2025, there will be two biomass tenders per year: on April 1 and October 1. From 2026, tenders will only take place once a year, on June 1. Biomethane tenders, on the other hand, will take place twice a year from 2023, on April 1 and October 1. Biomethane will then only be eligible for funding as part of the biomethane tenders.

Bidders can then indicate the value they require for the economic operation of their plant over a 20-year funding period per kilowatt hour of installed capacity. The most favorable bids are awarded the contract until the tender volume is exhausted. The winning new plants then receive the market premium at the value they themselves have bid (so-called bid price or “pay-as-bid” procedure). No bids may be considered for new plants that exceed the statutory maximum value of 19.31 ct/kWh. Only biomethane CHP plants built in the southern region of Germany may participate in the tender. A higher subsidy than this - degressively decreasing - amount can no longer be achieved in future. When participating in the tender, a security of 60 euros per kWh of installed capacity bid must be deposited with the Federal Network Agency. If the plant is not installed within a specified period of time after being awarded the contract, penalty payments will be due.

In future, various restrictions will apply to biomethane CHP units awarded a subsidy in the tender: For example, biomethane CHP plants that have been awarded a subsidy are only entitled to funding for an annual average output that corresponds to 10 percent of the value of the installed output. They must therefore significantly increase the output of their plant and offer the correspondingly increased installed output in the tender. The market premium does not apply to electricity volumes in excess of this in direct marketing; the plant operator only receives the market revenue. However, system operators can claim a so-called flexibility surcharge of EUR 65 per kW and year for the entire installed capacity (EEG §50a).

In addition, only such biomethane or biomass may be used in subsidized plants in whose production the proportion of maize and cereal grain is a maximum of 40%. This so-called maize cap is to be lowered further. Until 2024, it is to be a maximum of 35% and from 2026 a maximum of 30%. For biomethane, the upper limit of 20 MW will no longer apply. In addition, biomethane plants with an installed capacity of 10 MW or more must be “H2-ready” in order to be operated on the basis of hydrogen from 2028.