28 July 2022

The EU 2030 Climate and Energy Framework identifies Renewable Gases and the Circular Economy as two fundamental axes of economic growth, sustainability and reduction of energy dependence. Thus, renewable gases - biogas, biomethane, synthetic gas and green hydrogen - play a key role in the decarbonization process as they contribute to the reduction of methane and CO2 emissions and constitutes the energy vector that contributes most to the circular economy. This is because they are generated from waste - biomass wastes/residues, animal, human or industrial organic wastes - (or s renewable electricity surpluses) and are intended for all types of uses - self-consumption, direct production of heat and electricity (cogeneration), injection into the existing gas network, storage, ... - and in all types of sectors - transport, industry, building, generation, storage, ... -.

This is all more relevant given the current context of high raising energy costs and international tensions, where the European Commission set out in the REPowerEU its plan to make Europe independent from Russian fossil fuels well before 2030.

More specifically, in the generation of Biomethane - a gas with a composition similar to that of natural gas, obtained by purifying biogas or the synthetization of syngas-, the European Union recognizes Spain as the third country with the greatest potential, after France and Germany, considering it a mature and competitive technology.

Although the Spanish Government has established in the Biogas roadmap published last March, a minimum biogas production target of 10.41 TWh per year in 2030, the Spanish Gas Association (Sedigas) considers that it is possible to reach a more ambitious target, close to 10% of natural gas demand (38Twh of biomethane), on par with other countries such as France.

Spain currently has a gas infrastructure of more than 100,000 kilometers of distribution network already prepared for the circulation of biomethane, and although only 5 facilities currently produce  biomethane and inject it into the network, there are many biogas generating facilities - urban waste treatment plants, wastewater treatment plants, landfills, livestock, agricultural and industrial waste, ... - that will require investment and upgrading for large scale biomethane production.


If the figures for Spain are compared with other countries such as France and Germany, there is still a long way to go. Europe has 1,023 Biomethane plants according to the Biomethane Map (2022 Edition) published by The European Biogas Association (EBA) and Gas Infrastructure Europe (GIE), of which 337 belong to France and 242 to Germany (the average size of German plants are considerably larger than that of French plants).

Thus, an increasing number of projects is foreseen for the coming years. According to GASNAM, 64 biomethane plants are expected to be in operation by 2024, generating 2,077 GWh/year.

Without being overly complex technology projects, they require investments with returns at reasonable levels for investors, as well as the participation of waste and/or biogas generators. Therefore, the aforementioned investment and growth needs make it necessary to propose efficient financing alternatives to boost the increase of biomethane production targets in Spain.

Investment in such projects is not always affordable for everyone (e.g., those in the agricultural sector, whose margins have been affected in recent times), and also its relatively new in the Spanish market together with the differences in size of the investments required, may represent a barrier when investing in this type of project, which is why it is necessary to consider successful international formulas such as Structured Financing or Project Finance either non-recourse or with limited recourse.

These financing formulas make it possible to isolate these investments, the risks and returns, from the core business in a Special Purpose Vehicle (SPV or NEWco), as well as to facilitate high leverage, and therefore, minimize the equity required, together with the participation of various investors - technological, financial and/or industrial -. Also permits long amortization periods in line with the useful life of the facilities, involve a very tight financial cost and are non-recourse financing to the shareholders (or with very limited recourse), due to the exhaustive analysis – technical, environmental, legal, financial, tax, insurance and risk Due Diligence - of the project, carried out by the lender - only collateral ultimately available to the lender for the repayment of the borrowed funds -.

Notwithstanding the above, a possible problem for the application of these Structured or Project Finance type financing formulas to these projects, could arise from their size in terms of CAPEX, being in many cases, individually, below the minimum volumes required by traditional banking (for the structuring of this type of financing formulas). The above, for example, insofar as it has traditionally been considered that the application of these structured or Project Finance type financing formulas require a minimum size to dilute the costs of Due Diligence and the time and resources of the financial institutions, more usually used to the structured financing of large power plants and/or infrastructure projects.

However, in recent years, there has been a greater diversification in the providers of this type of financing, with the emergence of debt funds specialized in energy transition, which seek precisely to mitigate this type of financing gaps. These debt funds, which are very active internationally, have already proven to be successful in Spain, for example, for the aggregate financing of self-consumption projects, and may also play a relevant role in the financing of this new wave of biomethane projects of different sizes. Likewise, they are characterized by their higher flexibility and risk appetite when compared to traditional banks, and may act as locomotives for the financing of this type of projects, which are relatively new in Spain.

In any case, for an optimal structuring of the financing:

  • It will be necessary to analyze the source of supply of waste and/or biogas, and its participation in the project, the formulas for selling the biomethane produced by each plant - merchant, self-consumption, cogeneration, physical PPA, financial PPA, ... -, as well as the participants and stakeholders, both in terms of technical and financial solvency, as well as their contribution to the project.
  • Identify, evaluate and mitigate the risks associated with the construction and operation period, and therefore, determine how the risks affect the different stakeholders, including lenders, as well as a detailed analysis of the capacity to generate cash flows throughout its useful life, both in the base case and under certain sensitivity assumptions.
  • Identify and evaluate the optimal financing formula for the project (or portfolio of projects) from among those available in the financial markets, through a broad comparison with financial institutions, debt funds and/or investors.  
  • At the legal level, define the structure of guarantees, being usual in this type of nonrecourse financing, both the pledge of the shares of the Special Purpose Vehicle (SPV), and the chattel mortgage and/or pledge without transfer of possession of the current and future assets of the SPV, and the pledge of the credit rights derived from the project contracts (supply contract, PPA, EPC, O&M, insurance policies, etc.)

Access to this type of efficient structured financing formulas, which have proven to be successful in financing projects in other energy transition investment sectors, both nationally and internationally, together with the partial investment grants being implemented through the Next Generation EU Funds and other European programs (ERDF), as well as any aid that may be granted by local authorities for their installation, and the recent approval by the Spanish Government (2022) of the system of guarantees of origin for renewable gases , are all measures that will undoubtedly allow progress towards the achievement of the objectives set in Renewable Gases, and specifically in the field of Biomethane, in accordance with the potential of the Spanish economy.