Is There a Fit between Bio-methane Projects and Natural Gas Supply?

September 2012

• Recently, biogas projects have emerged that revolve around injecting bio-methane into the natural gas system, where it becomes part of a utility’s common natural gas supply.
• Currently low natural gas prices make it difficult for bio-methane to compete head to head with natural gas in the gas supply system purely on economics. Existing FIT rates for electricity produced from biogas may offer greater value for the gas in that application.

Methane is the principal component of natural gas. The methane in the gas stream, like other "fossil fuels", was produced from the decomposition under heat and pressure of ancient organic material, trapped under layers of rock.

But methane is also produced from the decomposition of organic materials in landfill sites and anaerobic digestion at waste water treatment facilities. Methane is known to be a "greenhouse gas", with an effect on the atmosphere more than 20 times greater than carbon dioxide. For this reason, methane produced at landfill and waste water treatment facilities is routinely captured and sent to a flare stack, where it is burned. In larger facilities, the volume of gas produced may justify the added expense of using the gas for practical purposes, such as boiler fuel for industrial, or for power generation, using the gas to fuel an engine that runs a generator. Sometimes, this threshold is met by using the bio-methane to supplement a purchased natural gas supply. In any event, this requires conditioning the gas to remove contaminants (for example, sulphur) and water.

The Ontario Power Authority offers a Feed-in-Tariff (FIT) rate for qualifying small, medium, and larger scale power from biogas projects. Rates range from 16 cents per kWh for projects under 500 kW, to 10.4 cents per kWh for projects greater than 10 MW.

Recently, biogas projects have emerged that revolve around injecting the bio-methane into the natural gas system, where it becomes part of the common natural gas supply. Gaz Metro, the principal gas distributor in Quebec, has entered into an agreement to buy biogas produced at the municipal landfill in Saint-Hyacinthe, Quebec.

One large Ontario municipality has recently implemented a novel project to capture bio-methane and inject it into the Union Gas system. The biogas displaces some of the city's gas purchase requirements, adding an extra green dimension to the city's energy management program.

Last September, Enbridge Gas Distribution and Union Gas filed applications with the Ontario Energy Board requesting approval of the cost consequences of purchasing bio-methane, which they referred to as "renewable natural gas", as part of their respective supply portfolios for customers purchasing their gas from the utilities.

The utilities acknowledged that the introduction of bio-methane into their portfolios would not be a significant element of their supply planning. They cited the benefits of a bio-methane program as enabling the bio-methane market, local production and economic benefits, waste reduction, efficiency benefits compared to electricity generation, and greenhouse gas emissions reductions in keeping with government policy.

Enbridge and Union proposed to limit the volume of bio-methane purchased to about 2% of their total system supply. The utilities were also seeking approval of a pricing framework that included the purchase of bio-methane from Ontario producers at specified prices for a 20-year period. The framework included differing prices for bio-methane produced through landfill and anaerobic digester sources; namely, landfill - $13/GJ below a specified threshold and $6/GJ above and anaerobic digester - $17/GJ below a specific threshold and $11/GJ above. The utilities estimated the total bill impact of these prices on a typical residential system supply consumer to be about $18 per year, which they maintained would be acceptable based on the results of a customer survey they had undertaken.

The utilities were in effect proposing their own "feed-in-tariff" program for bio-methane.

In its July 2012 interim decision on the utilities' applications, the Ontario Energy Board found it could not approve the proposals for bio-methane on the basis of the evidence presented during the proceeding. The OEB expressed concern with the lack of evidence in certain areas: a rigorous cost-benefit analysis, technical and operational considerations of potential Ontario developers, like programs in other jurisdictions, the potential involvement of gas marketers, the appropriate size for the program and customer acceptance of the bill impacts. In light of what the OEB saw as the novel nature of the applications, it provided Enbridge and Union with the opportunity to file supplemental evidence to address the issues and concerns raised by the OEB.

In its decision, the OEB provided its views on the program benefits identified by the utilities. The utilities had identified the main objective and benefit of their programs as enabling the development of a bio-methane market in Ontario. In the OEB's view, this was the wrong goal for the programs and an objective that is beyond the scope of the gas distributor's role. The OEB said it would not be inappropriate for the utilities to purchase bio-methane, but it would be entirely inappropriate for the distributors to have system supply customers subsidize bio-methane producers in the hope of developing a viable bio-methane supply market.

If the utilities decide to file additional evidence to respond to the OEB’s concerns, then the deadline for doing so is October 31, 2012. The OEB clarified that in taking this approach it is not suggesting that it is making any finding that the proposed bio-methane programs are appropriate. Rather, it is saying that at this point it does not have key information upon which to base a finding. The OEB also noted that it is open to the utilities to withdraw the applications if they so choose.

Currently low natural gas prices make it difficult for bio-methane or "renewable natural gas" to compete head to head with natural gas in the gas supply system purely on economics. Existing FIT rates for electricity produced from biogas may offer greater value for the gas in that application. Green energy retailers are often willing to pay premium prices to buy gas from renewable sources, since they have customers who are willing to pay premiums for the green attributes of the supply.

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