Powering Change: Scaling biogas for net zero

Cameron Smith:

Hello everyone, and welcome to the Ashurst Business Agenda podcast. Today you'll be tuning in for a special episode that is part of our Powering Change 2025 miniseries, which delves into the findings of our recently released report, Powering Change: A New Era for the Energy Transition.

My name is Cameron Smith and I'm a partner within the Projects & Energy Transition team here at Ashurst. I'll be your host for today's session where we'll be exploring the topic of biomethane. I've worked on projects across a number of jurisdictions in the UK, Europe, Africa, Australia and Asia, with a primary focus on projects in the waste, waste to energy, biomass, and biogas sectors.

Recently, Ashurst has been involved in several landmark biomethane projects, which illustrate the ways in which biomethane can be used by companies to decarbonise their operations and provide longer term cost certainty regarding their energy requirements.

Joining me as our special guest today is Philipp Lukas, CEO of Future Biogas, a UK-based developer and operator of anaerobic digestion plants, which focuses on producing biomethane from sustainably grown crops and other organic materials.

Philipp started life as a lawyer in London before moving into the biomethane business and growing Future Biogas into one of the leading developers and operators of anaerobic digestion facilities in the UK. Future Biogas produces over 500 gigawatt hours of biogas per year, enough energy for over 40,000 homes.

Hi, Philipp. It's great to have you on our podcast.

Philipp Lukas:

Hi, Cameron. Great to be talking to you. Looking forward to our chat.

Cameron Smith:

Over the past five years, Ashurst's Powering Change reports have surveyed senior lenders involved in energy decision-making for their views on the energy transition. These reports have given us a comprehensive data set, offering unique insights into the way the market is evolving, the barriers businesses face and the steps they can take to stay ahead of the competition. In what's a rapidly evolving global energy market, understanding the way that these trends are impacting technology, investment and policymaking is more critical than ever. These insights raise an important question for organisations across the globe. Are you prepared for the opportunities the new era of the energy transition presents?

A good example of this trend is the latest project on which Ashurst advised which Future Biogas has commenced with AstraZeneca. Having now commenced operation, this project will enable AstraZeneca to take significant steps to decarbonise their UK operations. Now Philipp, could you summarise this project and describe how this came about?

Philipp Lukas:

So as you know, Cameron, we've been operating anaerobic digesters now for 15 years and we've built a business off the back of very useful and quite all-encompassing subsidy regime created by the British government. But about four or five years ago, we started thinking about what the future holds for anaerobic digestion. We see wind and solar going towards unsubsidised and we think that's the way it needs to go in AD as well. And so, we came up with a project that effectively allows us to sell gas unsubsidised to corporate users who are looking for, in the what's in the jargon, known as full additionality. And that's how the project with AstraZeneca came about. It's all about allowing them to decarbonise and genuinely prove that they're buying green gas that hasn't been subsidised, pushed by a government obligation or similar, and that's how we came to develop the plant that we're now running.

Cameron Smith:

Okay, and did you approach them or was it their initiative at the time?

Philipp Lukas:

No, they came out with expression of interest back in 2020 because their Chief Executive, Pascal Soriot, had effectively issued a mandate in early 20 saying, "We want to be net-zero by the end of 2025," which was and still is hugely ambitious by comparison to the rest of industry. And they came out in the summer and said, "Look, we have X gas demand in the UK, how can we decarbonise this?". And they really got a whole raft of different offers from different companies, and ultimately ended up deciding to go down the route of unsubsidised green gas from us.

Cameron Smith:

Fantastic. Sounds like a play to your strengths.

So why don't we kick off the discussion with a bit about Future Biogas and the way which you've repositioned the company over the last 10 years, from what I recall as a company developing AD projects backed by UK government subsidies to a company developing power and heat solutions for large industrials.

Philipp Lukas:

Well, as you well know, because you were involved in a lot of the transactions Cameron, the business developed a lot of the original plants, as you say, under subsidy, but also with tax efficient funds from a variety of investors in London. Then we transitioned through to, and kept on operating the plants, but transitioned through to new owners institutional capital, the sort of money that comes from pension funds, from life companies, etc. And that meant that we had become largely an operator and we were looking to get back into development because we see huge potential in this market. We were looking to get back into building new plants.

But the world is not awash with subsidy anymore, less so now than ever. We just can't afford to do the energy transition off the back of subsidy. And so that's why we came to developing what's known internally as Project Carbon Harvest, the idea of grasping all the strengths of anaerobic digestion, taking the opportunity to decarbonise farming, taking the opportunity to capture the carbon dioxide at the back end and plugging that together with what we think is a nascent demand. And certainly it's been proven by AstraZeneca, a nascent demand for unsubsidised green gas.

Cameron Smith:

Your website states that Future Biogas partners with businesses looking to decarbonise their electricity and heat demand, this effectively categorises the business as a logistics business in the decarbonisation space rather than pure AD developer. How important is that distinction for your customers and businesses?

Philipp Lukas:

Well, the partnership element is really important because a lot of the people that we are talking to about selling green gas have a complicated decarbonisation journey, but are most crucially interested in getting to a point where they have a solution that is future-proof. They don't want to be found out for greenwashing in three years, five years, 10 years, and so they need something where they have end-to-end comfort that it's a substantive solution that stands up to scrutiny. Yeah, I mean ultimately we are still a utility, if you like, providing gas into the network like lots of other people put gas into the UK gas network. But it is a wider role than that because from our point of view, it's very important that our partners, our buyers are involved in all elements and of course we are talking to a lot of people who have connections to the agricultural space, particularly in the food industry.

Cameron Smith:

We've sort of touched upon this, but we've been involved in one project utilising the very valuable green gas support schemes of subsidies, but you've mentioned that it's very important for Future Biogas and companies like you, to be able to operate on an unsubsidised basis going forward rather than being reliant upon green subsidies. How important is that for the business and the industry more broadly?

Philipp Lukas:

I think that's absolutely crucial. I think in the future we need to get to a point where we can do this without subsidy. The issue we have is that we are not going to see the same development in pricing as we've seen in solar where the cost of panels has fallen a thousand fold in the last 20 years or in wind where the size of turbines has increased a hundred fold since the first ones went up when you and I are a boy. That's not the way anaerobic digestion is going to go. However, what we see with all of the corporate demand we're talking to is that they're well aware of that fact now. The solutions for their high heat applications are going to be more expensive. So it's very much the mantra of use less and pay more, the cheapest kilowatt being the one you don't use, and they have the all now started a journey of reduction and insulation and electrification, and that puts a lot of them into a position where unsubsidised isn't that expensive anymore.

And with the unsubsidized come all of the peripheral benefits that are so crucial to a premium corporate looking to come up with a watertight solution. The whole idea of additionality in the jargon, which is to say you've paid the full price for it and also the full transparency of the supply chain. We can take every one of our gas buyers back to the farm where the crop was grown and demonstrate that it was done so in a regenerative or a sustainable manner, in the same way that we account for every kilowatt of gas that we make through the grid all the way to them.

Cameron Smith:

Given that not every off-taker is able to pay a premium or pay for completely unsubsidised gas, do you think there's still a role for subsidies in the AD space?

Philipp Lukas:

I think there's still a role for subsidies in the AD space, particularly for trickier feedstocks. Ones where perhaps the economics are a bit challenging, and then that does include decarbonising livestock agriculture to some extent. It does include food waste, possibly sewage sludge. There's still a large amount of that that's undigested as we know and it all ends up in the wrong place. But ultimately, I think we will move to a world where the bulk of it's going to have to be unsubsidised, particularly if we want to make the sorts of quantities of gas to make a meaningful impact on the gas network.

Cameron Smith:

Yeah, that's fair enough. And that's actually, that's a really neat segue into my next question. I know you've always used energy crops such as maize, wheat, grass, etc, or one or two cases, agricultural waste as a feedstock, whereas many of your competitors have opted to go down the route of using food waste as a feedstock and as you said, more challenging feedstocks and not necessarily always successfully. How much of a differentiator is the choice of feedstock and what's behind this choice for your own business?

Philipp Lukas:

It's a crucial differentiator and it's one that's been controversial in the past.  Let me pick you up on something, we certainly don't use wheat. What we're trying to do is get every UK farmer back to a tidy crop of wheat because that's the biggest income generator on the farm, and there are a whole lot of agronomic issues that make growing wheat in the UK harder and harder: Lack of chemistry, herbicide-resistant weeds, all sorts of other issues that we've been having over the last decades that have meant that our fields of food crops have effectively plateaued. And what farmers really need, and you may have heard in the press that farmers are having a bit of a hard time of it, but what farmers really need is profitable stable crops that fit into their rotation that help them decarbonise. That is to say, reduce diesel use, reduce fertilizer use, reduce the inputs in terms of sprays and so forth, at the same time as offering them a profitable break crop to the standard food crops, they really, and we really, want them to get back to and want them to deliver, and that's where the opportunity is enormous.

Food waste, brilliant, should all go to digestion, needs collecting, needs pulling out of the system, which in England we don't do yet. In Zero Waste, Scotland and Wales, we do. Sewage sludges, I've already said, absolutely should. Animal manures where we can collect them, where the cows aren't standing out in the field clearly, absolutely should go through digestors. But the biggest opportunity by a factor of 10 almost, in terms of producing green gas is integrating it into more sustainable agriculture where you utilise the opportunities of growing crops for anaerobic digestion once in every five years, twice in every seven years, whatever the rotation happens to be, to boost the soil health on farm, to boost organic matter in the soil and to reduce your inputs in terms of all those fossil fuels that farms are struggling to get shot of.

Cameron Smith:

I think that's interesting because I think that there is a perception that sometimes AD developers and operators simply treat feedstock suppliers as a contractual counterparty, but I've always been surprised at how closely you work with the farming community and you've got agricultural experts within the business and you work very closely with your suppliers.

Philipp Lukas:

Oh, totally. Yeah, Cameron, absolutely right. We have a farming team of 14 who spend their lives out on farm having cups of tea, leaning over gates, looking out on fields and thinking with the farmers together about the rotation for the next five years or 10 years, or in some cases even longer, and where we are going to slot in and how they're going to make best use of the digestate fertiliser that comes out as a byproduct of our process, how we could slot in more cover crops or how we can change the way that they drill their crops. We can move to minimum tillage, all these sorts of things. So we have a huge training exercise for all of our team, but also we do seminars for growers. We go out to trade shows. We try and do lots of things to try and bring on that new paradigm in terms of farming.

Cameron Smith:

Okay. Moving on to a slightly more negative take, what do you see as the biggest challenges at present the biomethane industry? What keeps you awake when you're wondering about where you're going to be in five years time?

Philipp Lukas:

Well, scaling is the biggest challenge that is affected by a number of things. We struggle, as I'm sure lots of your clients do, with the planning system in this country, won't come as a huge surprise. Similarly, we have difficulties with the grid. A) Getting electricity on to site to run a plant, it can be expensive and time-consuming. We can wait around for many years and then be presented with an enormous bill for a little bit of electricity. And then actually the gas network itself was never designed to have gas injected at various parts of it, and so it needs adaptation.

Now all of those things are being addressed. The current administration are definitely wanting to do something about planning. We know that NESO (National Energy System Operator) and the grid operators are looking at the electricity network and trying to streamline that, and there will be lots of investment. But most positively, I think the gas networks are all on board now with biomethane as a big part of their future plans.

I was at a conference in London yesterday hosted by SGN, the gas network that runs Scotland and a fair bit of the south coast in England. And they were hosting an event with all the gas networks, all the regulators, a bunch of us AD operators, who are of course still the pipsqueaks in the room, but it was all about how do we drive this ambition forward so that by 2050 we could represent something like 50 plus percent of the residual gas in the UK network. That's a big challenge. I mean, you've got 25 years to get on with it, right?

Cameron Smith:

Yeah, absolutely. But it is good that those long-term decisions are being considered and dealt with.

Philipp Lukas:

Very much.

Cameron Smith:

Because often people complain about the short-term horizon of the public sector from time to time.

Philipp Lukas:

Well, totally. And we have a totally new strategic view on energy networks being advanced at the moment. You're quite right. We see an amount of strategic thinking on the network that's unparalleled in my experience over the last 15 years.

Cameron Smith:

Finally, let's end on a positive note. Where do you see the biggest opportunities for the biomethane industry? And in particular, do you see sufficient opportunities in the UK or would you consider expansion into Europe or elsewhere?

Philipp Lukas:

Well, we've certainly considered expansion, mainly I have to say into Ireland because it's close by and they speak English, but we have been looking elsewhere. But fundamentally, I think the opportunity in the UK is so large when you consider, we have a gas network that transports and uses about 700 plus terawatt hours of gas every year in the UK, and the industry makes 1% of that, the biogas industry, at the moment. But the ambition or the likely outcome for the gas network is that by 2050, that will be maybe 150-200 terawatt hours, much, much less. Obviously, it's going to reduce because we won't be heating homes with gas so much. We won't be making quite so much electric all the time, et cetera, et cetera. But that residual gas demand, we think half of that could easily be met by anaerobic digestion that gives you a delta from seven terawatt hours today to a hundred by 2050. That's an awful lot of capacity to be getting on and building and operating, and that's quite a big sandpit to be playing in before we need to step out and look for other stuff.

Cameron Smith:

Yeah, plenty of food for thought. Thanks for sharing those valuable insights with us, Philipp, it's been a great pleasure having you join us today. Before we wrap things up, what would you consider to be the key insight you'd like to share with your audience?

Philipp Lukas:

Oh, look, I mean, I'd come back to the point I made earlier. The cheapest kilowatt-hour is the one you don't use, which always seems a bit odd for an energy supplier to be talking about, but it is the cardinal lesson I've taken away from all of the conversations we've had, particularly with the most advanced corporates who are furthest on their journey. If you don't have to use it, don't, please. Make the capital investment and look to see what the lowest cost is, and then plump for a sensible solution that uses less energy because it'll pay dividends in the future.

Cameron Smith:

Okay. Brilliant. Well, thank you again and look forward to speaking with you soon.

Philipp Lukas:

Yeah, absolutely, Cameron, and thanks for taking the time.

Cameron Smith:

Thank you to everyone for listening. That brings us to the end of this special Powering Change miniseries episode. To find out more about the insights discussed during this episode, download our Powering Change report from Ashurst.com. You can find the link to the report in the show notes for this episode.

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