The Iberian green industrial opportunity: Biomethane

The European Union (EU) has set ambitious decarbonization goals for all member states: at least a 55 percent greenhouse gas (GHG) emissions reduction target by 2030 compared to 1990 levels, and at least a 42.5 percent—although aiming for 45 percent—share of renewable energy consumption based on the Renewable Energy Directive III (RED III).¹“Delivering the European Green Deal: On the path to a climate neutral Europe by 2050,” European Commission, 2021; “Renewable energy directive,” European Commission, December 2018.

To achieve these targets, major changes are required in Spain’s energy consumption. Alongside other levers such as renewable energy and electrification, a crucial step would be shifting from fossil fuels by embracing renewable molecules across different sectors (see sidebar “What are renewable molecules?”). Industry and transport and other hard-to-abate sectors are the most critical as we estimate that in 2022 they contributed approximately 50 percent of GHG emissions and 20 percent of Spain’s gross value added.²“Emissions of greenhouse gases,” Spain’s Ministry of the Ecological Transition and Demographic Challenge (MITECO), March 2023; “Gross value added,” National Institute of Statistics database, April 2024.

Several regulations have already been implemented to expedite decarbonization efforts within these hard-to-abate sectors.³“Sectors are unevenly exposed in net-zero transition,” McKinsey, January 25, 2022. The EU’s Emissions Trading System (ETS) applies to industrial installations and the maritime sector from 2024. And, from 2027, the EU’s ETS2 will address emissions from fuel combustion in buildings and road transport.⁴“ETS2: Building, road and transport and additional sectors,” EU Commission, 2023.

RED III also introduces specific objectives for the industry, transport, and building sectors. Industry is required to increase its renewable energy consumption by 1.6 percent annually, while the transport sector must attain either a 29 percent share of renewables in final energy consumption or a 14.5 percent GHG emissions reduction by 2030.

Biomethane is a key low-carbon, gaseous alternative that can be used to achieve these targets, thanks to its ability to act as a direct replacement for natural gas (see sidebar “What is biomethane?”). To accelerate the production of biomethane, the European Commission has set the ambitious goal of replacing 35 billion cubic meters—about 342 terawatt hours (TWh)—of natural gas with biomethane across Europe by 2030.⁵“REPowerEU Plan,” European Commission, May 18, 2022.

In this article—the third in our series looking at the Iberian green industrial opportunity—we explore how Spain could emerge as a European leader in biomethane production (see sidebar “The Iberian Industry and Energy Transition Initiative). We first identify the three key challenges that need to be addressed for Spain to reach a goal of 20 terawatt hours per year (TWh/y) in biomethane production by 2030. These challenges include streamlining the permitting process, facilitating access to feedstock, and improving grid connection accessibility. Additionally, we explore further initiatives aimed at surpassing the 20 TWh/y milestone, thereby unlocking biomethane’s full socioeconomic and environmental potential.

The role of biomethane in Spain’s energy transition

Biomethane could be key to expediting Spain’s energy transition and driving local economic growth for a number of reasons.

Accelerating the decarbonization of Spanish industry: Spain has a ten-year decarbonization road map, laid out in the National Integrated Energy and Climate Plan (PNIEC).⁶National integrated energy and climate plan (PNIEC) 2021–2030, MITECO, January 20, 2020. This plan aims to achieve a 32 percent GHG reduction by 2030 compared to 1990 levels. Further, it sets a 20 TWh annual production target for biogases, including biomethane. We believe this objective could be met entirely through biomethane production, alongside the existing biogas output. Biomethane demand in Spain by 2030 could reach around 15 TWh annually. According to our analysis, roughly 80 percent of this is expected to be concentrated in industrial sectors, especially those reliant on high-temperature processes (such as ceramics, glass, and pulp and paper), where biomethane emerges as the most cost-effective sustainable alternative.

Given its inherent properties, biomethane’s role in the industry sector could see it replace natural gas primarily as an energy source (particularly for heating) and, to a lesser extent, to be used as feedstock (for instance, for steam methane reforming [SMR] hydrogen production for complementing the intermittency of other renewable energy sources). Further demand could result from an uptake in liquified natural gas (LNG)-powered vessels, from the existing gas-powered road fleet, and ultimately from heating in buildings and electricity generation in combined heat and power (CHP) plants.

These applications show that biomethane stands out as a pivotal decarbonization solution, notably in high-temperature industrial processes, thanks to its mature technology and economic viability. Further, its “drop-in” nature facilitates seamless integration into the gas grid, requiring no infrastructure modifications.

Increasing Spain’s energy self-sufficiency: Spain consumed around 320 TWh of natural gas in 2022, mostly for power generation and industrial applications, at around 160 TWh and 100 TWh respectively.⁷“Energy balance of Spain,” MITECO, December 18, 2023. The country relies on imports—mainly from Algeria, Russia, and the United States—to fulfill this demand.⁸“Statistics,” Cores. Biomethane offers Spain an opportunity to diminish the country’s reliance on natural gas imports and enhance its supply security.

Supporting the principles of a circular economy: A circular economy refers to a production and consumption model that involves reusing and recycling materials for as long as possible, aiming to reduce waste to a minimum. Fostering a circular economy helps to avoid the depletion of natural resources while sustaining economic growth. Biomethane production is an example of circularity as it converts waste (for example, manure or agricultural residues) into green energy and by-products (biofertilizers).

Enabling further economic development of rural areas: Approximately 80 percent of Spain’s biomethane potential is in rural areas.⁹ACRE by McKinsey, April 2024. Boosting biomethane production could help promote these areas by attracting investments, creating new job opportunities, and providing a sustainable waste-management solution for farmers.

Growing the biomethane market: Spain’s untapped potential

The biomethane market in Spain is still in its infancy. National production stands at 0.5 TWh/y, with an additional 1.2 TWh/y under construction—far from the levels of biomethane production achieved in more mature European markets (13 TWh/y in Germany and 6 to 7 TWh/y in Denmark, France, and the United Kingdom in 2022).¹⁰The 0.5 TWh/y production was generated by ten biomethane plants that were already operational in Spain as of April 2024; “Map of biomethane production plants,” Gasnam, April 2024; EBA statistical report, European Biogas Association, December 2023.

According to our analysis, reaching the 20 TWh/y ambition with biomethane alone by 2030 would require Spain to increase production 11-fold, adding approximately 3 TWh of capacity annually. Spain’s substantial feedstock potential and interest shown by the private sector provide reasons for optimism.

Large, untapped feedstock potential

Spain has the fourth largest feedstock availability in Europe, estimated to be a potential 55 TWh/y of biomethane, with about 80 percent derived from manure and agricultural residues.¹¹Includes manure, agricultural residues, organic fraction of municipal solid waste (OFMSW), industrial waste, and sludge, and excludes forestry residues and intermediate crops; total theoretical potential of about 85 TWh, of which 77 TWh come from manure, agricultural residues, and OFMSW. This potential is reduced to 55 TWh due to other competitive uses (for example, the portion of crops used for animal feed or municipal solid waste used for composting); technical collection limitations (excluding residues not economically feasible to collect and assuming not all straw is collected); and assuming a maximum sourcing radius of 22.5 kilometers from the plant. Manure potential estimated based on livestock heads (INE), their dejection (kilogram dry matter/year/head), and the methane potential per ton of dejection as reported by ENGIE. Agricultural residue potential is estimated based on dry agricultural production (FAO) and residue-to-product ratios. Organic waste potential is estimated based on waste produced per capita and organic fraction statistics, considering waste collection rates and the fraction that has already been disposed (for example, for composting). It is concentrated in key regions, with the two largest clusters (Northeast Spain and Castilla y León) having the highest concentration of biomethane potential per square kilometer—around 170 megawatts hour per square kilometer (MWh/km ²) annually in Northeast Spain and around 140 MWh/km² annually in Castilla y León. Together, they could hold approximately 50 percent of the addressable potential. Other hot-spot locations for biomethane production include Castilla La Mancha and the Southwest region of Spain (Andalucía–Extremadura), with about an additional 30 percent of the total potential (Exhibit 1).

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Further, 70 to 80 percent of the addressable feedstock potential (around 40 to 45 TWh/y) is located within 20 km of the nearest grid point, facilitating a cost-effective biomethane injection to the existing gas grid, despite the country having lower grid density than other European countries, as assessed by our analysis.¹²Thresholds considered in our analysis: 20 km for livestock manure, 15 km for agriculture residues, and 5 km for OFMSW. Beyond those distances, certain feedstock types may see a decline in their energy capacity as the distance to the biomethane plant grows.

Biomethane’s cost advantage over alternative technologies

As it requires no infrastructure alterations, biomethane is expected to maintain a significant cost advantage over alternative green technologies for high-temperature applications by 2030, our analysis shows. For example, we estimate that the total cost of ownership (TCO) of biomethane for industrial heating technologies is estimated at around €70/MWh, which is half the TCO for a hydrogen boiler at approximately €150/MWh.¹³Includes levelized capital expenditure and operating expenditure.

An attractive business case for investors

Depending on project characteristics, biomethane production could reach double-digit returns, based on an annualized production cost of around €60/MWh to €75/MWh a year and an offtake price that varies based on the end user¹⁴In our analysis, we considered a plant of 5 to 10 MW (equivalent to 42 to 85 GWh/y of production capacity) that leverages mostly manure as feedstock, located at an average distance of 15 km from feedstock, and that injects biomethane to the grid at a cost of around €250,000 per km of connecting pipeline and around €250,000 for the injection station. and that could range from €80/MWh to €110/MWh a year,¹⁵We estimated 2030 price range in line with European markets’ prices; currently, prices for industrial sectors are around €60/MWh. potentially increasing even further in sectors with a greater willingness to pay, such as maritime. Several elements can impact the business case, including:

• Feedstock can have a significant effect on plant economics, depending on the producer’s ability to secure a constant and streamlined flow and on the type of feedstock used. Potential upside can be observed in plants that leverage organic fraction of municipal solid waste (OFMSW) or manure due to negative emissions (emissions prevented from being released to the atmosphere). Our analysis shows that the distance to feedstock can also impact logistics costs—for example, annualized costs can increase up to around €10 to €15/MWh per year when the distance to feedstock is increased by 15 km.
• Plant size can also have an impact, as unitary capital expenditure (capex) cost savings from scale are compensated with higher logistics costs to source the required feedstock. Plant size could ultimately be determined by access to nearby feedstock.
• The by-products market could further enhance the business case. This includes production of biofertilizers from digestate as well as biogenic CO₂ capture and storage or its commercialization for development of synthetic fuels.
• Willingness to pay by offtakers can substantially impact the business case. The price of biomethane varies significantly by sector and is driven by the price of the fossil alternative (such as natural gas for industry), sector-specific EU ETS allowances or blending quotas (for example, for road transport or maritime), and a potential green premium if the industry can pass the additional cost on to the end consumer.¹⁶For the industrial sector, this is driven by natural gas (fossil alternative) price, EU ETS allowance price and, in some sectors, an additional green premium. For the transport sector, willingness to pay is determined by the corresponding fossil alternative (that is, diesel value) and can also be subject to blending mandates and potential tax savings. In this sector, the regulatory drivers are RED III and EU ETS2 (operational by 2027).
• Other potential factors could impact the biomethane business case, including the distance from the plant to the distribution or transport grid and injection point, and the efficiency of feedstock treatment.

The expected returns from biomethane production have already attracted private-sector investment—a trend underscored by the growing number of public announcements in Spain, totaling around 90 projects (equivalent to more than 4.5 TWh/y), the majority of which are currently in the feasibility stage.¹⁷Only including projects announced that report a specific production capacity; “Map of biomethane production plants,” Gasnam, April 2024.

Alignment with EU and local regulation

Achieving the 35 billion cubic meters (bcm)—about 342 TWh/y—European target for biomethane at an EU level by 2030 would require a 30 percent CAGR growth in production capacity, doubling the past five-year average growth rate in Europe.¹⁸“REPowerEU Plan,” May 18, 2022; EBA statistical report 2023, December 2023. In Spain, a significant production ramp-up would be needed to reach the 20 TWh/y of biomethane ambition by 2030.¹⁹“National integrated energy and climate plan (PNIEC) 2021–2030,” January 20, 2020.

Further, Europe is advancing toward an integrated European market, as RED III considers EU countries’ gas grids as a single interconnected grid. As a result, Spanish agents could export to Europe and access offtakers with higher willingness to pay, beyond national demand.

Key challenges and unlocks for Spain’s 2030 aspirations

Despite Spain’s strong starting position, with large untapped feedstock potential and high private-sector interest to develop the market and align with EU targets, several challenges currently could prevent the industry from achieving the biomethane production ambition of 20 TWh/y by 2030.

Permitting and regulatory framework: Developing a biomethane plant in Spain can be a drawn-out process that can take up to four years, largely due to lengthy permitting timelines.²⁰Industry expert interviews. Developers need to comply with several directives at EU level, while nationally, each level of local administration applies its own criteria and timelines for permit evaluation. Moreover, the surge in plant announcements has strained the system, potentially resulting in lengthier processes. Achieving the biomethane ambition of 20 TWh/y on time requires substantially accelerating permitting times.²¹EBA statistical report 2023, December 2023—see section 1, “Permitting and regulatory framework.”

Access to feedstock: Despite its numerous benefits, such as attracting investment opportunities and fostering local job creation, the limited awareness of biomethane often leads to low rural engagement. And, given the nascent nature of the biomethane market in Spain, there is a lack of the standardized, off-the-shelf, producer-supplier partnership models that are needed in a context of decentralized feedstock (when several farmers are required to supply a given plant).

Access to the grid: As mentioned, our analysis shows that in Spain most addressable feedstock potential is located less than 20 km from the gas grid. It therefore is vital to define a process that addresses grid connection requests to transmission system operators (TSOs) and distribution system operators (DSOs)—including, for example, regulated timings for answering requests and a regulated process for selecting providers to build pipelines. In line with this, the Comisión Nacional de los Mercados y la Competencia (CNMC) has recently approved a resolution establishing procedures for managing the connections of biomethane plants with the transport or distribution network.²²“The CNMC expedites the connection of biomethane plants to natural gas networks and promotes decarbonization,” Spanish National Markets and Competition Commission, April 30, 2024.

To enable further market development beyond the 2030 target, additional challenges would need to be addressed, such as: i) devising solutions for feedstock located too far from the grid network; ii) ensuring a market for biomethane by-products to improve the business case and unlock biomethane potential in currently unprofitable locations; and iii) developing national and European offtake agreements, reaching offtakers with higher willingness to pay and covering different degrees of risk exposure according to the offtaker.

The remainder of this article examines each of these broad challenges in turn, outlining potential unlocks to drive Spain’s biomethane opportunity.

Enabling Spain’s 2030 ambitions

Several factors could play key roles in Spain reaching 20 TWh/y of biomethane production by 2030: permits and regulations, access to feedstock, and access to the grid. For each factor, there are potential unlocks that could facilitate action.

1. Permitting and regulatory framework

The development of biomethane projects is slowed by various factors, including the lengthiness of the permitting process, which is due to a combination of the complexities of the European regulatory framework and the time-consuming nature of local administrative procedures.

Complex European directives: The biomethane sector operates within a highly regulated environment, with developers having to comply with several norms at an EU level (mostly environmental impact assessments).²³A study of the capacity for biomethane production in Spain, 2023, Sedigas, 2023. Biomethane projects combine the complexity and requirements of both energy and environmental sectors, requiring compliance with several directives—such as those dealing with waste, agriculture, livestock, animal and vegetable hygiene, urban, industrial, emissions, reject water and digestates, noise, odor, transportation, SANDACH, gas, and electricity.²⁴SANDACH (Subproductos de origan animal no destinados al consumo humano) is the Spanish acronym for animal by-products not intended for human consumption.

Heterogeneous administrative procedures in Spain: Producers in Spain face an additional layer of complexity: each level of public administration (national, autonomous regions, and municipalities) establishes its own criteria for aspects such as land approval and approval timelines for new plants, requiring producers to adjust to each of these particularities. Producers report difficulties in navigating local administrative processes.

Recently, the influx of announced projects in Spain has occasionally posed a challenge for the relevant authorities. Some projects have faced significant delays before the start of the permitting process, leading to bottlenecks that hinder the rapid development of the national biomethane industry.

Potential unlocks

If Spain’s 20 TWh/y ambition is to be fully fulfilled by biomethane, a substantial ramp-up in biomethane production capacity of approximately 70 percent per annum would be needed until 2030. This would necessitate materializing capacity under construction (1.2 TWh/y); initiating approximately 3 TWh/y (adding up to 12 TWh/y by 2030 on current development timelines); and reducing development times by half from 2024 or 2025 for new projects—which would require permitting times to be accelerated significantly and could add approximately 6 TWh/y in production capacity (Exhibit 2).²⁵“Map of biomethane production plants,” April 2024. Estimation is based on the average yearly deployment rates in France (numerous small plants at about 94 plants per year, 2017 to 2022) and Denmark (few large plants at around seven plants a year, 2017 to 2022), assuming permitting for small and medium-size plants is similar; 80 percent of new plants reach construction phase; construction duration of one year; and permitting optimization starts from 2025.

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In other countries such as Denmark, France, and Italy, biomethane production has grown by 60 to 80 percent annually, showing that it is possible for Spain to reach the necessary cruising speed to meet the target.²⁶EBA statistical report 2023, December 2023.

The following unlocks could be explored to accelerate permitting processes²⁷These unlocks could be applicable not only to biomethane projects but also to other renewable technologies more broadly.:

• Fast-tracking the development of strategic projects by central and regional governments: A key lever is to prioritize the permitting of projects deemed “strategic” and reduce their time to approval. For instance, Denmark and France have created a “zoning approach” where permitting is simplified for key areas based on the availability of sustainable feedstock and gas grid infrastructure.²⁸“Accelerating biomethane permitting,” Biomethane Industrial Partnership, October 10, 2023.

  In Spain, some autonomous regions such as Galicia and Castilla La Mancha are already facilitating the expedited development of some key projects. For instance, the Castilla La Mancha government approved a law in 2020 aimed at establishing a framework for preferential processing and streamlining administrative permitting.²⁹“Law 5/2020, of July 24, on urgent measures for the declaration of priority projects in Castilla-La Mancha,” MITECO, October 23, 2020. This has facilitated the development of initiatives that could attract investments in strategically important sectors for the region. As an example, one of the projects considered a priority under this law was the development of a biomethane plant in the Noez municipality.³⁰“The regional government approves a new priority project for the installation of a biogas plant in Noez,” Department of Development Castilla-La Mancha, August 22, 2022.

• Allocating dedicated resources for the approval of biomethane projects: Beyond fast-tracking strategic projects, an increase in dedicated administrative resources could be key to coping with the rising number of projects announced by the private sector and to alleviating current permitting bottlenecks. Castilla y León, one of the regions with the greatest feedstock potential, is already dedicating specific efforts to approving biomethane projects.³¹“Castilla y León prepares a biogas plan for 2024 that will improve the management of agriculture and livestock waste,” Leonoticias, July 7, 2023; industry expert interviews.
• Standardizing permitting criteria by corresponding public authorities: Another possible initiative to streamline the permitting process and reduce the number of stakeholders involved could be the creation of specific guidelines by the central government to promote consistent criteria, documentation, and timelines across regions. This could be complemented by a centralized office (at a central or regional level) to oversee the entire permitting process. For example, Sedigas has already announced its willingness to develop a permitting procedure guide for Spain.³²A study of the capacity for biomethane production in Spain, 2023, Sedigas, 2023. And in Denmark, developers can apply for local zoning plans and environmental approvals at the conceptual-design stage, enabling the design process to run in parallel with regulatory authorizations.³³“Accelerating biomethane permitting,” October 2023.
• Assisting process filing for permitting: An effective and easy-to-implement measure to improve permitting processes is providing public-private helplines to support developers in checklist requirements and permit filing. Austria and Italy have deployed dedicated help desks, established by industry associations, to assist developers in understanding documentation and preparing permit submissions.³⁴“Accelerating biomethane permitting,” October 2023.

2. Access to feedstock

Biomethane has yet to gain significant public attention or recognition in Spain, particularly among farmers and rural communities. Frequently, these stakeholders are hesitant about the development of industrial complexes near their rural environments and, in the case of biomethane, they often remain unaware of the considerable positive impact associated with the development of biomethane plants. This limited awareness could delay the progress of certain projects.

The development of biomethane plants offers numerous benefits alongside energy production, including the revitalization of rural areas through the creation of high-skilled jobs and attracting investments. Additionally, it helps reduce farms’ environmental footprints by mitigating emissions from waste and promotes soil health by encouraging sustainable agricultural practices.

Potential unlocks

There are various potential unlocks that could facilitate access to feedstock.

Promoting educational campaigns and engaging with local communities before project development: Both the public and private sectors can actively engage with local communities, showcasing the benefits of biomethane plants by using successful examples from other European countries. Municipalities can promote educational campaigns to highlight the socioeconomic benefits arising from the development of biomethane plants. For example, the ALFA project, funded by the EU, aims to promote biogas systems in the farming sector in six EU countries, including Spain. This will be done by improving social acceptance through awareness campaigns and by engaging local stakeholders in codesigning the approach through an engagement platform that facilitates collaboration and knowledge exchange.³⁵“Mission and goals,” ALFA, accessed April 2024. Producers can also proactively foster discussions with farmers and agricultural players, making the case for biomethane production as a solution for sustainable waste management.

Whichever route is chosen, the main stakeholders impacted by the development of plants should be engaged right from the outset. Conducting pre-permitting information sessions with the local community can significantly enhance public acceptance. For example, through our research, we have learned that Credit Agricole in France shares information about the biomethane opportunity with farmers through their branches in rural areas. And Nature Energy in Denmark—a developer of biogas and biomethane plants—involves local leaders early in the project, organizing site visits and holding local sessions to emphasize the limited impact of externalities.³⁶“Neighbour of a biogas plant,” Nature Energy, December 2023.

Engaging farmers through “skin in the game” joint ventures: Promoting robust strategic partnerships between biomethane producers and feedstock providers presents a win-win opportunity, key for streamlining the value chain of plants while guaranteeing consistent feedstock flows. This is particularly relevant given that manure and agriculture residues—accounting for approximately 80 percent of Spain’s biomethane potential—require producers to engage with multiple suppliers for a single plant. The nature of these agreements could vary based on the characteristics of each supplier and the type of feedstock they provide:

• Joint ventures between producers and small farmers (via farm cooperatives) can align the interests of all involved parties. This collaborative framework can help farmers in the sustainable and efficient management of their agricultural and livestock waste, while streamlining plant operations through centralized feedstock storage and collection centers. For instance, E.ON operates one of Denmark’s largest biomethane plants through a 50/50 joint venture with Sønderjysk Biogas, a cooperative comprising over 70 farm owners.³⁷“E.ON and SBI open Denmark’s largest biogas plant,” E.ON, September 26, 2016.
• Long-term agreements could be established with large industrial waste producers such as breweries, dairies, and other industries. For example, in Denmark, Bigadan—a leading biogas operator—has established a partnership with Danish Crown, Europe’s largest meat processor, granting Bigadan exclusive rights to purchase its feedstock.³⁸“New agreement on biogas to accelerate green transition,” Danish Crown, May 25, 2023.

Producers could enlist the support of industry associations or local bank branches to facilitate dialogue with farmers. In Spain, agriculture associations such as Coordinadora de Organizaciones de Agricultores y Ganaderos (COAG), which has 220 offices and connects over 150,000 farmers, could play a relevant role in disseminating information about projects.³⁹“Our history,” COAG, 2022. Another potential enabler could be the use of digital solutions such as marketplaces to connect small farmers with producers and facilitate feedstock collection and deal-making processes.

3. Access to the grid

Spain’s biomethane potential at a feasible distance from the grid amounts to around 40 to 45 TWh.⁴⁰In our analysis, we considered: geospatial mapping of distribution network is not publicly available; ranges correspond to a distribution grid radius from the transmission grid of zero to ten kilometers; the feasibility of injection considers a standard plant of 5 to 10 MW that leverages mostly manure as feedstock, located at an average distance of 15 km from feedstock, that does not leverage by-products, and that injects biomethane to the grid at a cost of about €250,000 per kilometer of connecting pipeline and about €250,000 for the injection station. Spain would need to continue to address certain challenges to fully realize this potential.

Connection support from grid operators: The biomethane industry could benefit from a regulatory framework that defines grid connection support from TSOs and DSOs.⁴¹In Spain, this has been addressed by the CNMC, with a proposal sent in January 2024 to the Consejo Consultivo de Hidrocarburos and a final resolution published in April 2024. The following areas are particularly relevant for producers:

• a regulated process for submitting and processing connection requests
• regulated timings to fulfill these requests
• a standardized selection process for engineering, procurement, and construction (EPC) providers to build the connections

In line with this, the CNMC has recently approved a resolution that establishes the procedure and timelines for managing requests by biomethane producers to connect their plants with the transport or distribution network.⁴²“The CNMC expedites the connection of biomethane plants,” April 30, 2024. Going forward, and as the biomethane market develops in Spain, the approval of this regulation could help guarantee a level playing field for all involved players.

Visibility over distribution networks and injection points: Currently, producers have a limited view of the distribution network and injection points, which complicates the identification of areas with the most potential for cost-effective biomethane production (areas with both high feedstock potential and low distance from the gas grid). This challenge has also been addressed by the aforementioned CNMC resolution.

Potential unlocks

There are a number of ways better access to the grid and injection points could be achieved.

The enforcement of an EU regulatory framework to support grid connections: In December 2023, EU member states reached an agreement within the revised Gas Package to endorse a series of initiatives aimed at incentivizing access to the grid.⁴³“Interinstitutional file 2021/0424 (COD),” Council of the European Union, December 16, 2023. It includes the obligation for network operators to address connection requests (including conducting feasibility studies) and ensure grid capacity for biomethane producers. Further, it mandates transparency on territorial zonings for grid reinforcement or new connections by TSOs and DSOs, based on technical and economic criteria. These measures will pass into law in 2024, although no deadline for implementation at a national level has been set.

Some EU countries, including Denmark, France, and Italy, have already incorporated the “right to inject” policy into their national law.⁴⁴Bridging energy and climate change mitigation: A workable EU framework to scale up biomethane integration into gas networks, European Biogas Association, 2022; Variation of national regulation with respect to biomethane grid connection, Green Me Up, 2023. French regulation mandates that grid operators make the required infrastructure adaptations to the existing grid, including reverse flows to facilitate biomethane injection.⁴⁵“From plant to grid: Navigating biomethane injection,” European Biogas Association, February 23, 2024; Variations in national regulations with respect to biomethane grid connections, February 2024. In exchange, operators receive economic compensation from the government.

Grid connection support framework from local authorities: The CNMC resolution includes, among other items, a standard process for all parties involved to address connection requests. It sets time limits for network operators to fulfill these requests and requires them to disclose the potential injection points for a given plant. And, if the request is approved, the resolution demands that the operator provide an estimated budget for executing the connection.

Further measures could be explored, such as ensuring producers’ flexibility in selecting providers for grid connection construction (especially if producers bear the injection costs). Lastly, initiatives could be considered to facilitate agreements with landowners along the pipeline route to accelerate time to market.

Improved visibility over the distribution network: An additional measure could be to enhance accessibility to information regarding the distribution grid and injection points that offer the greatest cost advantages for the plant. For instance, network operators in France provide a mapping system that ranks regions based on the feasibility of establishing new connections, considering factors such as cost per kilometer and potential feedstock availability.⁴⁶“Manual for national biomethane strategies,” a joint report by Gas for Climate and Guidehouse, September 2022.

Beyond Spain’s 2030 aspirations

Spain has the potential to go beyond the 20 TWh/y biomethane ambition and maximize the wider socioeconomic and environmental impact of the biomethane market. However, there would be additional challenges for the country to address, including enabling biomethane transport from plants located “off the grid”; monetizing by-products such as digestate and biogenic CO₂; and fostering optimal offtake agreements with national and international gas traders or end users.

The following section explores these “beyond 2030” challenges and potential unlocks.

1. Off-the-grid biomethane potential

In Spain, 20 to 30 percent of feedstock potential is in remote areas without access to the grid (Exhibit 3).⁴⁷Thresholds considered: 20 km for livestock manure, 15 km for agriculture residues, and 5 km for OFMSW. Some types of feedstock, such as manure, may experience a decrease in their energy capacity when transported over long distances. Further, some plants that are less than 20 km from the grid may have unattractive economics for grid connection, needing additional cost savings to offset higher connection costs.

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Costs associated with grid connection are fully borne by producers, from pipeline construction to the injection station setup (including reverse-flow facilities when required). In addition, producers may have to pay injection fees, which include charges relating to gas quality assurance and the installation and maintenance of metering and measurement systems. As optimal locations become saturated, grid connection costs might render biomethane plants unviable.

Potential unlocks

Various measures could be taken to unlock Spain’s off-the-grid potential.⁴⁸In our analysis, these measures do not take into consideration the possibility of expanding the distribution network, which would be significantly costly. The development of approximately 100 km of new grid infrastructure in these clusters could result in an additional 1 TWh/y of biomethane. These include:

• Biomethane liquefaction: Biomethane can be liquified on site and delivered to end users by truck. This may only be viable in certain cases and for large plants, as it entails additional investment and operating expenses that could add up to €10 to €15/MWh. Consequently, securing offtakers with higher willingness to pay (such as maritime players) could become essential to cover the incremental costs.
• Biomethane compression: Biomethane can also be compressed on site and transported by truck to end users, or regasified and injected into the grid. Compression also requires additional capex and opex, albeit less than liquefaction. Beside grid injection, the primary end use for biocompressed natural gas (bio-CNG) could be as an alternative fuel for the legacy compressed natural gas (CNG) vehicle fleet.
• Small-scale biomethane plant clusters to improve economics: Neighboring small-scale plants could share infrastructure to achieve economies of scale, for instance, by sharing centralized upgrading units, injection points to the grid, or compression infrastructure. This clustering approach has already proven effective in other regions—for example, in the Netherlands, Cogas (DSO) and Gasunie (TSO) have established a network for transporting raw biogas from a pig farm to a centralized biomethane upgrading facility in the Twente region.⁴⁹Manual for national biomethane strategies, September 2022.
• Cost-sharing schemes between network operators and producers: The implementation of cost-sharing schemes between grid operators and biomethane producers—already in place in several European countries—could relieve producers from bearing full grid connection costs.⁵⁰“Gas package: Council and Parliament reach deal on future hydrogen and gas markets,” Council of the European Union, December 21, 2023; “Variation of national regulation with respect to biomethane grid connection,” GreenMeUp, 2023. For instance, in France, the grid operator covers up to 60 percent of the connection investment (capped at a maximum of €600,000), with the producer responsible for the remainder. In Germany, the grid operator contributes up to 75 percent of the capex required, though this is capped for pipelines longer than 10 km.⁵¹Our analysis considered that if the length of connection is shorter than 1 km, then producers cannot pay more than €250,000; if the length is longer than 10 km, producers must bear all additional costs. In both countries, the grid operator bears 100 percent of the opex costs.⁵²In our analysis for both cases, we considered that operating expenses are covered 100 percent by TSO or DSO and costs are socialized: all gas customers pay a “biogas charge.” In certain countries, biomethane producers benefit from reductions in injection fees, a measure already considered under the reviewed Gas Package. For example, in Germany and Italy, producers are fully exempt from paying these fees.

2. By-product monetization

Biomethane production generates a range of valuable by-products, including biogenic CO₂ and digestate, with diverse commercial applications. Biogenic CO₂ can be reused as feedstock for multiple industrial processes. Digestate, which is particularly important in the case of manure, given its lower methane yield, presents a sustainable biofertilizer alternative to synthetic fertilizers in the agricultural sector.⁵³Lower methane yield of manure (17 normal meter cube per hour (Nm³/t) versus 175 Nm³/t of agricultural residues) means more feedstock is needed to produce the same amount of biomethane, hence more digestate is produced.

The monetization of these by-products could provide an additional revenue stream for producers, thereby improving their overall business case and unlocking value in currently unprofitable areas (such as those located far from the grid). Here, a number of considerations are important, such as:

• Digestate disposal requirements: The EU Nitrates Directive calls on member states to designate nitrate vulnerable zones (NVZs)—areas of land either draining into polluted waters or facing pollution risks—where limits on fertilizer disposal are imposed.⁵⁴“Nitrates,” European Commission, January 2024. In Spain, an estimated 25 to 35 percent of the territory is expected to fall within this classification. This could lead to increased operational costs for producers, depending on plant location, as they would need to transport digestate further away from the production site.
• Potential for growth in the EU organic fertilizer market: The EU Nitrates Directive does not yet differentiate between synthetic fertilizers and biofertilizers derived from digestate. Consequently, the strict limits on manure application in NVZs also applies to digestate use.
• Underdeveloped local market for biogenic CO₂: Despite the multiple end uses of biogenic CO₂, regulatory frameworks do not yet recognize the environmental benefits associated with its use.⁵⁵Biogenic CO₂ from biogas industry, European Biogas Association, 2023. Additionally, the infrastructure requirements, such as facilities for CO₂ capture and storage, that are necessary to support its specific end uses are not met.

Potential unlocks

Both producers and public authorities could explore a range of initiatives to unleash the full potential of the biomethane business case and maximize its positive environmental footprint.

Agreements with farmers: Producers could sell back digestate as part of their feedstock supply agreements. Farmers could use the digestate as fertilizer, thereby incentivizing the complete circularity of the feedstock.⁵⁶Not all digestate can be considered fertilizer; it depends on the feedstock used. In some cases, digestate may be considered stabilized waste, subject to different applications and restrictions. For instance, Apsley Farm, which is located in an area in the United Kingdom without livestock and with poor soil, uses digestate to enrich its cultivated fields. The digestate is produced from its biogas plant fed by its agricultural residues.⁵⁷“Organic digestate,” Apsley Farms, 2024.

Partnerships with industrial players: Producers could sell biogenic CO₂ to several industries for multiple purposes, such as e-fuels production, healthcare imaging, agricultural applications (such as enriching air in greenhouses), or carbon capture (to reduce carbon intensity [CI] scores). For example, in Italy, Biogas Wipptal captures biogenic CO₂ in its biomethane plant and uses it in dry ice production.⁵⁸Beyond energy—monetizing biomethane’s whole-system benefits, Guidehouse, February 2023. The greatest commercialization potential could eventually come from the e-fuels sector, where biogenic CO₂ could be used alongside hydrogen and transformed into synfuels (subject to sufficient CO₂ volume).

Centralizing digestate treatment facilities: The centralization of digestate treatment facilities among neighboring biomethane plants could help amortize the investment and reduce the effort for any single plant.

Incentivizing regulatory frameworks for digestate treatment: Internal market barriers would need to be eliminated so that digestate is recognized as a product (organic fertilizer) rather than waste. The EU is already taking the first steps to ease restrictions on organic fertilizers—for example, with the introduction of the Fertilizing Products Regulation in 2022, which prepares the ground for an EU biofertilizer market.⁵⁹“Safe and effective fertilizer products on the EU market,” EUR-Lex, April 2024.

Creating incentives for biogenic CO₂ capture: The public sector could consider establishing a national subsidy scheme to support companies investing in capturing, purifying, and selling biogenic CO₂. Denmark, for example, provides up to €350 million in subsidies through the Negative Emissions Carbon Capture and Storage (NECCS) fund to support negative emissions from CO₂ capture of biogenic sources.⁶⁰“Denmark’s pioneering support for CCUS—a gateway for foreign companies,” Ministry of Foreign Affairs of Denmark, February 28, 2024.

3. Offtake agreements and willingness to pay

Potential biomethane demand in Spain may reach 12 to 15 TWh/y by 2030. However, reaching offtakers with sufficient willingness to pay remains key for an attractive business case. A number of considerations are important here, too.

The largest demand is expected from industrial sectors, with lower willingness to pay. As the European market for biomethane develops, we expect that prices could converge at the European level, which is higher than prices currently observed in the Spanish market. National demand will therefore likely materialize from those end users with sufficient willingness to pay.

The industrial sector, one of the largest natural gas consumers in Spain, is expected to drive more than 75 percent of biomethane national demand (Exhibit 4). Sectors with the highest potential include non-metallic industries such as ceramics and glass, as well as the pulp and paper industry.⁶¹We estimate that ceramics and glass could cover around 50 percent of the industrial demand by 2030. The pulp and paper industry will likely account for more than 10 percent of the demand.

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Other end users with greater willingness to pay include road transport and maritime. Although the gas-powered road fleet is expected to stagnate, biomethane could replace around 30 percent of the current natural gas consumption in road transport by 2030.⁶²Biomethane accounted for 20 percent of gas consumption in the natural gas-fueled transport sector on average in Europe in 2022. However, we have observed that there is further upside potential, as in more mature EU markets such as Germany, biomethane represents nearly 100 percent of total gas consumption; EBA statistical report, European Biogas Association, December 2023. According to our analysis, LNG demand in maritime is expected to increase four to sevenfold by 2030, based on orders of LNG-powered vessels, which makes biomethane a key alternative to meet the 6 percent GHG emissions reduction target set by FuelEU Maritime.⁶³“FuelEU maritime initiative: Council adopts new law to decarbonize the maritime sector,” Council of the European Union, July 25, 2023.

In other sectors, consumption will be significantly constrained due to low willingness to pay. Residual consumption is expected from buildings’ heating (estimated at around 1 TWh/year, solely coming from the commercial sector) and from CHP plants.⁶⁴No demand is expected for residential buildings due to nonexistent carbon taxes on individual consumers; biomethane consumption in the commercial sector could be suitable for decarbonizing buildings when other sustainable alternatives face technical, regulatory, or financial constraints; for CHP plants, based on the expected installed capacity in 2030 (PNIEC expects a 40 percent decrease), only 3 percent of natural gas consumption is expected to be replaced by biomethane; “National integrated energy and climate plan (PNIEC) 2021–2030,” January 20, 2020.

Limited cross-border trading. Cross-border trade of biomethane within Europe is currently limited. A few countries are trading via the European Renewable Gas Registry (ERGaR), the existing scheme that enables the exchange of certificates of origin among participating national biomethane registries. This platform has already enabled the trading of more than 3 TWh within Europe. However, ERGaR’s reach is restricted, with only six biomethane registries in Europe currently participating in the scheme. An additional barrier to cross-border trade is the potential for import restrictions on subsidized biomethane.⁶⁵Enagás, the responsible entity to issue guarantees of origin within Spain, is already a member of ERGaR but is yet to become an active participant in trading under the scheme; “European renewable gas registry,” ERGaR, accessed June 2024.

Offtake agreements are complex. Offtake agreements are sector specific and require individual negotiations with end users, each exhibiting different risk appetites. Key factors for offtakers include volume and delivery commitments, carbon intensity score, risk exposure (for example, natural gas price volatility), and pricing. For instance, regarding pricing, maritime and industrial consumers typically prefer high flexibility compared to building and transport consumers. The range of options creates complexity for producers, who need to find the right balance for the long-term profitability of their biomethane portfolio. Securing these long-term offtake agreements is crucial for producers to ensure financing for the development of biomethane plants.

Potential unlocks

Three potential unlocks could address these challenges:

1. Connecting to the Union Database for biogases: Taking a step beyond the ERGaR scheme, the EU is in the process of launching the Union Database for biogases, a new register platform to ensure traceability of renewable gases within Europe.⁶⁶“The European renewable gas registry,” accessed June 2024; “Union database for biofuels,” European Commission, accessed April 2024. This database will interconnect member states’ oversight databases, enabling the full traceability of renewable gases from their source to consumption while also allowing for guarantees of origin and sustainability certificates. The Union Database for biogases will officially launch in November 2024 and is expected to be fully operational by 2025.⁶⁷The EU has already launched a version of this Union Database for Biofuels (UDB), which has been available since January 15, 2024 for the registration of transactions in the liquid fuels supply chain. According to McKinsey estimates, the Union Database will be fully operational by 2025. Spain could ensure a smooth connection to the Union Database to enable the commercialization of Spanish biomethane and improve access to European offtakers with higher willingness to pay.
2. Exploring hybrid offtake solutions: Hybrid offtake agreements, involving various pricing mechanisms to a share of the agreed-upon volumes, could offer an attractive solution for biomethane producers and offtakers. For example, Arkema, a French specialty materials company, and ENGIE recently signed a ten-year biomethane purchase agreement.⁶⁸“Major biomethane supply agreement signed with ENGIE to reduce Arkema’s carbon footprint,” Arkema, January 19, 2023. The deal offers a fixed price over an extended term, plus flexible options to address forthcoming regulatory uncertainty and opportunities.
3. Stimulating national demand through temporary public incentives: Biomethane demand in Spain will primarily come from the industrial sector, which has a lower willingness to pay. As a result, producers may find more attractive offtakers in Europe who are willing to pay a higher price. To stimulate domestic demand once more production capacity has materialized, a range of public incentives could be considered to compensate for this price difference. Some of these incentives have already proven effective in other European markets. For example, Denmark exempts low-emission cars, including ones fueled by biomethane, from motorway toll and parking fees. And in 2022, Italy established specific quotas: a 10 percent integration rate of biofuels for fuel suppliers, with 2 percent dedicated specifically to biomethane. Other countries such as Austria and the Netherlands are contemplating mandating the injection of a minimum quantity of renewable gases into the grid.⁶⁹Manual for national biomethane strategies, September 2022.

Biomethane could support Spain’s decarbonization ambitions by replacing natural gas without the need for major infrastructure changes. It could accelerate the decarbonization of hard-to-abate sectors such as industry while reducing the country’s dependency on natural gas imports, fostering circularity, and contributing to the economic development of rural areas.

With production presently standing at only 0.5 TWh/y, biomethane production in Spain is in its infancy. However, the country is poised to emerge as a leading biomethane producer in Europe, fueled by a range of favorable conditions. These include a large yet untapped feedstock potential; a competitive cost advantage against other technologies; attractive returns without reliance on subsidies; and the backing of supportive European and national regulations. In this context and based on similar measures adopted by other European markets such as Denmark and France, Spain could reach the highly ambitious target of 20 TWh/y for biomethane production by 2030.

To achieve this, however, three key challenges must be addressed in the short term: accelerating permitting of greenfield projects; improving access to feedstock by communicating the benefits of biomethane and engaging with farmers; and formalizing support for grid connections. Overcoming these will only be possible if all stakeholders involved, from both the private and public sectors, collaborate closely.