Building CBG market in India through certificates mechanism

Introduction

India imports more than 50% of its natural gas requirements and 85% of its crude oil demand. CBG, being an indigenous source of energy, can replace imports and hence has huge potential for saving foreign exchange. To capitalise on the benefits of this indigenous source, GoI in 2018 launched the Sustainable Alternative towards Affordable Transportation (SATAT) scheme, which aimed at setting up 5,000 CBG plants by 2023-24. However, the progress has been relatively slow, and as of March 2023, only 58 CBG plants have been operationalized, though LoI has been issued to 3,694 projects. The creation of transparent markets can fasten the development of CBG ecosystem and production.

According to India's Nationally Determined Contribution (NDC) submitted to the United Nations Framework Convention on Climate Change (UNFCCC), India has commit- ted to achieving net-zero GHG emissions by the year 2070 and plans to achieve energy independence by 2047. CBG, being a clean and indigenously available source of energy, that can also be integrated into the existing gas infrastructure, provides the easiest route to achieve these goals. Another advantage of biogas systems is that they can be set up and operated locally, thereby enhancing local ecosystem.

To provide fresh impetus to CBG, GoI on February 1 2023 announced its plans to introduce a mandate for all organizations marketing natural gas to use at least 5 per cent CBG in the future. Assuming the GoI mandates a progressive mandate of 1% (starting FY24) to 5% by FY27 on CBG obligation, the country would require CBG starting from 0.40 MMSCMD in FY24 to 5 MMSCMD in FY30 against current production of mere 0.002 MMSCMD.

(refer Table 1 Below)

Also, it is pertinent to mention here is the final report of the “Energy Transition Advisory Committee” constituted by MoPNG has identified certain enablers for CBG Market Development. One of these enablers include providing CBG blending mandates to all CGD entities marketing CNG and PNG, and another important enabler includes trading the green attribute of CBG. An additional source of revenue can be created for biogas producers by monetizing the green attributes of CBG. We can create a certificate from the green attributes that will capture a premium over normal natural gas. This certificate is expected to solve many issues simultaneously.

One, it can overcome barriers of location, technology, and infrastructure. India has ample availability of feedstocks to meet the requirements of CBG; however, the challenge is that each feedstock has its own availability, supply chain, and processing technology. It is this variability in terms of feedstock availability, technology, grid infrastructure, and the varied and distributed presence of CBG procurers that creates the diversity in supply and demand in terms of geographical spread, temporal and seasonal spread. Two, CBG certificates can also address the mismatch between the availability of CBG and the requirement of mandated entities to meet their obligations in a costeffective manner and over a longer timescale, say one year, as compared to CBG procurement, which has to be simultaneous and over a comparatively shorter time period. Three, certificate trading also widens the base of buyers and sellers of CBG, obviates inter-state transportation needs, and makes procurement of green energy/ attributes simple and competitive.

Concept of CBG certificates

CBG certificates’ are digital certificates issued against the green attributes of CBG produced/injected in the grid, which represent the “green” value of biogas. The certificate or green value of the CBG may be traded commercially. One of the most important principles of a CBG certificate is that it can be traded independently from the physical molecules of biogas it represents. Also, while CBG certificates can be traded independently from the physical commodity they rep- resent, CBG certificates can also be bought and sold with the physical commodity it represents. There is currently no mechanism to enable the selling, purchasing, and tracking of CBG and/or green attributes in India. A scheme can be developed to facilitate the same. Also, it may be noted that the ‘Carbon Credits Trading Scheme’ and ‘CBG Certificates Scheme’ shall run independently of each other for the obligated and eligible entities. Further, they can be made fungible over time.

Transaction lifecycle

A CBG producer can sell the gas produced as green gas accompanied by the CBG certificate. Or you can decouple them and sell CBG as normal brown gas in the gas mar- ket and sell the certificate in the certificate market. There are therefore two markets: a physical gas market for trade in gas and a virtual market for trade in certificates. At the time of CBG production, a certificate would be issued, after which the gas would be traded and transported to users just like normal gas. At that time, CBG would no longer be recognised as CBG because it would mix with natural gas in the pipeline. The "green" attribute would be transformed into a CBG Certificate, which can then be traded separately from the physical gas flow and linked back to the physical gas flow if an end user consumes CBG.

Transaction lifecycle diagram

Scheme design elements

Element

Registry functionality

Certificate attributes

Producer eligibility

Description

Creation, trading, surrender, or cancellation of CCs

Producer, technology, location, feedstocks, time period etc.

Both grid-connected and off-grid plants

Obligated entities As mandated by GoI say CGD licensees or all natural gas consumers etc.

Voluntary entities

Environment conscious corporates/individuals

Certificate denomination 1 certificate = Green attribute relating to 1 MMBTU or equivalent of CBG produced

Certificate validity

Auditing

Certificate price

Initial validity period of 12 months, extendable based on requirement

Regular auditing based on defined reporting period

Benchmark price linked to carbon markets in an advanced economies let’s say EU after adjustments like purchase parity etc.

Formula thus determined can then be used with a discount (let’s say 25%) to start with and gradually tapering it down in 5 years

Benefits to the ecosystem

Benefits to CBG producers: CBG certificates would provide an additional revenue stream to CBG producers as certificates could be sold as a tradeable instrument independent from the physical CBG commodity. Certificates could also enable CBG producers to gain information on consumer appetite for their product, which could provide market signals for expanding CBG production facilities. Benefits to consumers: Beneficial to consumers as certificates would enable virtual trade instead of physical trade, hence overcoming barriers of location, feedstock availability, technology, infrastructure, and time. Also, certificates would be an attractive proposition for certain industries to meet their green norms.

Benefits to the overall industry: A CBG certificate mechanism shall be able to differentiate CBG from NG in the grid, thus also enabling the trading of green gas through the grid.

Way forward

Developing a CBG certificate scheme can be an important step towards promoting the production and consumption of CBG and supporting the transition to a low-carbon economy. Developing a successful scheme would require a certification mechanism, effective mandates, and compliance, a trading platform, and effective promotion and communication.

The Ministry of Petroleum and Natural Gas (MoPNG) can serve as the Nodal Ministry for administering such a scheme and providing various policy level directions for promoting CBG and its grid integration. Next the Natural gas retailing entities, specifically CGD entities, would need to be mandated a CBG procurement trajectory yearon-year through the Ministry. The mandate shall also be allowed to be met through CBG certificates. Compliance and monitoring of the scheme can be ensured by enabling regulations. The Petroleum and Natural Gas Regulatory Board (PNGRB) can provide the Regulatory Framework through CBG purchase obligations, CBG trading, and CBG certificate trading regulations.

Also, to ensure proper development of the sector, regulations / modalities need to be modified immediately with respect to CBG. Producers of CBG, if they so desire, should be allowed to unlock higher values for their investment since the sale of CBG is currently limited to only CGD networks as it is considered equivalent to CNG. With marginal investment, CBG can be further processed to match properties essential for various applications of Natural Gas and then be injected into the National Gas Grid. This is in line with international practice.

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