Italian Biomethane - Navigating a Producer-Driven Market

In this blog post, we are pleased to share the English version of the article originally published by Staffetta Quotidiana (Biometano, orientarsi in un mercato del produttore | Staffetta Quotidiana), based on an interview with our colleague Sofia Ubaldini,  who offered insights into the evolving biomethane market and the dynamics of Biomethane Purchase Agreements (BPAs) in Italy.

Sofia Ubaldini from Our New Energy explains the key points of a BPA contract

Biomethane is currently virtually the only viable tool for decarbonizing sectors that are not easily electrifiable, such as heavy transport or industry. However, supply remains limited and is expected to stay that way in the foreseeable future, shifting the balance of power in favor of producers—as is evident in the emerging market of Biomethane Purchase Agreements (BPAs) for molecule trading.

Staffetta spoke with Sofia Ubaldini of ONE – Our New Energy, a consulting firm that has specialized in designing Power Purchase Agreements (PPAs) for renewables and is now also active in the BPA space, particularly in the application of Article 5-bis of the Agriculture Decree, which has expanded access opportunities to biomethane for hard-to-abate sectors.

The scheme primarily involves two main players: the biomethane producer—usually using agricultural waste—and the industrial consumer, with the addition of a third party: the shipper. The shipper is responsible for transporting the molecule through the gas infrastructure, and sometimes also acts as a commercial counterparty.

The Agriculture Decree stipulates that the buyer acquires the green gas along with its Guarantee of Origin (GO) at no additional cost, effectively paying for biomethane at the price of fossil gas.

For the producer, nothing changes compared to the standard framework laid out in the 2022 incentive decree: they receive the commodity price from the buyer and the difference between that price and the incentivized tariff from the GSE, without having to deduct the value of the GO, which is transferred for free.

In this context, the BPA becomes an additional revenue stream for the producer—on top of the primary income from incentives—through a premium that the consumer agrees to pay in order to secure the supply.

The negotiation of this premium, Ubaldini explains, is understandably the core of any BPA deal. However, it’s not the only issue on the table: other topics include tax treatment, the shipper’s role, potential valorization of by-products (e.g., compost, CO₂), minimum quantity commitments, and operational management.

“It’s a market that’s heavily tilted in favor of producers,” she notes. “There are few producers and many potential hard-to-abate clients, which is why the market favors the former.”

Potential buyers fall into several categories: companies subject to the EU Emissions Trading System (ETS), for whom buying biomethane means eliminating associated costs, and non-ETS industries that are still hard-to-abate and thus interested in green gas for sustainability reporting purposes.

The price of an emission allowance (EUA), currently around €15/MWh as per the 9-year EEX average, is the key benchmark in premium negotiations. This premium can be fixed or variable—indexed to market trends—but in both cases, it’s linked to EUA values, following a logic in which the consumer shares part of the avoided EUA cost benefit with the producer.

For companies not subject to ETS, the sustainability level of the biomethane is also significant. This depends on how it’s produced, Ubaldini explains.

For sustainability reporting, it matters whether the molecule guarantees an 80% reduction in emissions compared to reference fuel—the minimum level required to nullify ETS obligations—or whether it achieves 100% or even 120% reductions, as in the case of carbon-negative biomethane produced with CO₂ capture.

Another key aspect is the role of the shipper, who can act as a mere “courier,” delivering the molecule from production to consumption site, or as a full-fledged buyer-reseller.

This leads to differences in taxation and risk allocation, and consequently affects the level of the fee involved—typically borne by the consumer in either case.

Among many other issues to address in a BPA, Ubaldini adds, are how to ensure supply starts on schedule even if the plant launch is delayed, how to guarantee minimum volumes, how to define the consumer’s role—who, according to the ministerial decree, has a say in operational management—and how to market by-products like compost or, in the future, captured CO₂.

Going forward, the balance of power is still expected to favor producers.

“Biomethane availability is extremely variable,” Ubaldini concludes, pointing upstream to the issue of feedstock availability. “This is a concern especially in more advanced Northern European markets, where producers, aware of the risk, are negotiating long-term feedstock agreements.” In the coming years, demand for green gas will further increase with the implementation of ETS2.

One limitation in the Italian context, she notes, is the heavy reliance on incentives. This in turn hinders the development of a Guarantees of Origin and sustainability certificate market, and slows integration with the European market, as incentivized plants are not allowed to export GOs abroad, while merchant-based plants are not currently economically viable.

This is not the case everywhere, Ubaldini explains. “In Spain, for instance, plants are being developed without significant incentives, thanks to cross-border certificate trading in Central Europe (e.g., Germany) and the UK,” driven by strong demand from sectors with decarbonization obligations set by EU regulations like RED II.