Biomethane Ladder: Building Sector Demand Could Exceed Supply

The current draft of the Building Modernization Act (GModG) permits gas heating systems as a heating technology in the long term, provided compliance with the so-called “biomethane ladder,” with an increasing biogenic content in newly installed gas heating systems. If the European supply potential for biomethane remains constant, demand could exceed supply. In that case, scarcity prices could emerge starting in 2040, especially if many new gas boilers continue to be installed instead of heat pumps.

It is insufficient to investigate supply and demand in Germany in isolation. Since biomethane is physically fed into the Europe-wide natural gas grid and traded on a book-and-claim basis via certificates, the market is primarily European. Against this background, researchers of the Institute of Energy Economics at the University of Cologne (EWI) investigate potential gas price developments in the publication “Biomethane in the German Building Sector”, based on scenarios for the growth of biomethane demand in Germany’s residential building sector, as well as the European supply potential for biomethane. The publication was funded by the “Wärmewende” initiative of the Gesellschaft zur Förderung des Energiewirtschaftlichen Instituts an der Universität zu Köln e.V..

Biomethane demand in the building sector could rise to almost 200 TWh

Currently, biomethane is used only in a small scale in the building sector. Future use depends largely on the installation rates of new gas heating systems as well as bio-quotas – the so-called bio-ladder for newly installed gas boilers and the blending ratio for existing boilers. The EWI examines four demand scenarios for the German building sector. If current installation rates for gas heating systems continue and bio-quotas rise to 100 percent by 2045, biomethane demand would increase to almost 200 TWh in Germany. With increased heat pump installations and the continuation of currently discussed bio-quotas, demand could rise to just almost 40 TWh. In 2023, the total biogas and biomethane consumption in Europe was approximately 215 TWh.

On the supply side, this dynamic is counteracted by limited European potential, as depicted in the EWI analysis through two scenarios. The “Constant Scenario” assumes that the sustainable biomethane production potential remains at the current level of 510 TWh (according to data from the International Energy Agency, IEA). The “Growing Scenario” corresponds to the IEA scenario from the “Outlook for Biogas and Biomethane”, and assumes a 40 percent increase to around 714 TWh by 2050.

In situations of scarcity, end-user prices could multiply manyfold

“If European biomethane potential stagnates at current levels, price pressure would increase significantly starting in 2040,” says Dr. Philipp Theile, who conducted the analysis together with Tobias Leibfritz and Michael Moritz. Starting in 2040, this would lead to scarcity prices in all demand scenarios considered, meaning supply could fall short of demand. As a result, end-user prices for gas could multiply by 2040, depending on the elasticity of demand. This could make replacing heating systems economically attractive even before the end of their service life and force existing systems out of the market. If supply were to grow, demand pressure would ease, and scarcity prices could be avoided.