Biomethane price puzzle: why demand-side policy is the missing piece

The European biomethane sector stands at a crossroads. European production capacity has surged, increasing by 14% in 2023 and 25% in 2024, but sustainable growth will require more than supply expansion alone. The real challenge lies in developing demand-side policies that justify biomethane’s premium over conventional natural gas.

Our enhanced Biomethane/RNG service now includes sector-specific demand forecasts for selected countries and a price outlook for certificates based on Germany’s greenhouse gas (GHG) quota system. These insights show how policy frameworks are shaping the industry’s trajectory.

Explore the latest findings from the Biomethane/RNG service below, and complete the form to access selected charts from a recent Wood Mackenzie .

Supply potential exists, but demand drives growth

Europe's biomethane supply potential is substantial. Sustainable feedstock estimates indicate that capacity could reach 90 bcm by 2050. Our more conservative forecast projects growth from today's 7.5 bcm to just over 15 bcm by 2030 and ~30 bcm by 2050. This represents a doubling of capacity within five years – significant progress towards the original RePowerEU target of meeting ~10% of European gas demand, but still far from reaching it.

Yet supply potential alone won't drive market development. The critical challenge lies in transitioning from production-focused subsidies to demand-side mechanisms that create genuine market pull.

Transport demand: a useful start, but limited ceiling

Current biomethane consumption is heavily skewed towards transport compliance markets, driven by the transposition of RED II and III across member states. This has created valuable early demand, but transport represents just a tiny fraction of total European gas consumption. For biomethane to realise its full potential, the industry must look beyond transport's natural ceiling.

The broader gas demand picture tells the story: residential, commercial, industrial and power sectors offer the scale needed for meaningful biomethane deployment, but they require different policy approaches to drive adoption.

Marine fuel: a game-changing demand driver

FuelEU Maritime legislation represents a turning point. This comprehensive EU-wide mandate could absorb more than half of our 2030 supply forecast, creating a demand centre where biomethane pricing isn't constrained by production costs or natural gas comparisons. Instead, prices will reflect biomethane's value in helping shippers avoid significant penalties.

This policy-backed demand demonstrates how effective regulation can create premium markets for biomethane. The key here: compliance obligations must have meaningful financial consequences.

The Netherlands: building blending obligations that work

Europe's policy landscape remains frustratingly fragmented, with different mandates and inconsistent enforcement across countries. Some policies impose real penalties; others set voluntary targets with weak enforcement. Enforcement is crucial: without it, biomethane will chase higher-return markets, threatening national decarbonisation goals. And without export access, local industry growth will stay limited.

The Netherlands provides a compelling example of effective demand-side policy. Their proposed blending obligation requires unsubsidised biomethane to be blended into the gas grid, backed by a buyout price mechanism that increases over time, creating genuine domestic demand and market certainty – and potentially presenting a viable alternative to production support.

Price dynamics: beyond production costs

Biomethane will remain more expensive to produce than natural gas for the foreseeable future. To achieve a premium for its green credentials producers must be able to link biomethane’s value directly to its ability to decarbonise and provide additional environmental benefits. Either through mandated obligations, carbon pricing or its ability to support sustainable farming and waste management practices.

The German transport quota market illustrates both the potential and pitfalls of ticket-based systems. After significant price increases in 2022, credits crashed and remain depressed due to surplus conditions. The outlook on price hinges on policy development to tighten credit supply-demand dynamics – without it, prices will struggle to recover.

The path forward: demand-side focus

Several policy developments could unlock biomethane's potential:

• Expanding EU ETS coverage to buildings and transport will create carbon pricing incentives across major gas-consuming sectors
• National blending obligations could drive domestic demand while supporting price discovery
• Cross-border trade facilitation through mass balancing and reduced regulatory barriers could improve market efficiency
• Coordinated mandate design across sectors could prevent destructive competition between end-use markets

The biomethane industry has demonstrated impressive supply-side momentum. Now it needs demand-side policies that match this ambition. The feedstock potential exists, production capacity is growing – the missing piece is policy frameworks that create sustainable, premium demand across Europe's major gas-consuming sectors. Getting this right will determine whether biomethane becomes a cornerstone of European energy security or remains an expensive footnote in the continent's decarbonisation story.

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