Up and away: introduction of the Green Gas Support Scheme and Levy 

United Kingdom

Introduction

On 30 November 2021, Ofgem launched the Green Gas Support Scheme (“Scheme”) and the Green Gas Levy (“Levy”). The Scheme will be governed by the Green Gas Support Scheme Regulations 2021, which are expected to come in to force this autumn.

The Scheme is designed to provide financial incentives for new anaerobic digestion biomethane plants to increase the proportion of green gas in the gas grid by way of tariff payments for 15 years. The Scheme is funded by the new Levy on licensed gas suppliers which supply gas from fossil fuel sources.

Its launch follows the UK government’s Heat and Buildings strategy published in October 2021 which sets out ambitions to decarbonise heat in buildings using a number of approaches including increasing the proportion of green gas on the grid.

Ofgem is in the process of publishing final detailed guidance on the Scheme (which as it is in draft is not covered in this Law-Now) but Ofgem has now published its guidance on the Levy which we cover in more detail below.

What are the aims of the Scheme?

With the heating of industry, businesses and homes being responsible for a third of the UK’s greenhouse gas emissions, the Scheme aims to reduce these emissions by replacing natural gas on the grid with green gas through supporting biomethane production and injection. While green gas still emits CO2 into the atmosphere when burned, it is considered to be carbon neutral as the carbon released is equal to the carbon absorbed by its organic material source. Further, as the organic source is from waste products or fast growing crops, it is considered renewable (IEA (2020), Outlook for biogas and biomethane: Prospects for organic growth).

During peak years of production, it is hoped that biomethane plants incentivised by the Scheme will produce enough green gas to heat approximately 200,000 homes. It is also expected that the Scheme will contribute 3.7 million tons of CO2 equivalent of carbon savings over the Carbon Budgets 4 (2023 – 2027) and 5 (2028-2032).

How does the Scheme operate?

The scheme will only support biomethane produced from new anaerobic digestion plants. The scheme will not support the following:

  • Process heating

  • Biogas combustion

  • Solar thermal

  • Hybrid heat pump systems

  • Heat networks

  • Plants already receiving the Non-Domestic Renewable Heat Incentive

There will be three-tiers of tariffs to mirror the price of producing biomethane at different scales. The current initial tariffs are as follows:

Tariff

Threshold

Support Payment (pence / kWh)

Tier 1

The first 60,000 MWh of eligible biomethane

5.51

Tier 2

The next 40,000 MWh of eligible biomethane

3.53

Tier 3

The remaining eligible biomethane

1.56

Tariffs are guaranteed for a 15-year period upon the commissioning of an anaerobic digestion plant. There will be an annual tariff review mechanism to ensure that the Scheme delivers value for money. It is possible for tariffs to be lowered, raised, or maintained as a result of the review. The outcome of the annual tariff review will be announced annually in the autumn of 2022, 2023 and 2024.

How does the Levy operate?

The funding for the Scheme will be provided by the Levy - a new flat levy on Fossil Fuel Gas Suppliers.

The Levy scheme year will run from 1 April to 31 March, with the first levy payments being collected in April 2022.

At the start of each quarter, Fossil Fuel Gas Suppliers will be required to submit to Ofgem the cumulative total of domestic and non-domestic meter points they serviced for each day in the preceding quarter.

Ofgem shall use this data to issue a quarterly invoice to each Fossil Fuel Gas Suppliers for its Levy payment. The amount will be calculated by multiplying the published levy rate:

  • for the first scheme year (30 November 2021 to 31 March 2022) - 0.484p per meter per day, equivalent to 59p per meter over the period; and

  • for the second scheme year (1 April 2022 to 31 March 2023) - 0.576p per meter per day, equivalent to £2.10 per meter over the period); by

the sum of meter points the Fossil Fuel Gas Supplier has supplied. The per meter levy rather than a volumetric levy is unusual and will see Levy costs distributed amongst gas suppliers according to the number of gas meters that they supply. The government has indicated that this approach was taken to enable the Levy to be introduced alongside the Scheme as it grapples with feasibility issues of a volumetric levy design.

Each Fossil Fuel Gas Supplier must have credit cover in place with Ofgem in respect of its Levy obligations. This can be provided by either a cash payment made to Ofgem or a letter of credit from a financial institution (as approved by Ofgem). The level of credit cover required will be calculated by multiplying:

  • the levy rate (as covered above); by

  • the total number of the Fossil Fuel Gas Suppliers’ meter points (that it supplied during the quarter beginning six months prior to the credit cover period) multiplied by 1.15.

Should a Fossil Fuel Gas Supplier default on a levy payment and have insufficient credit cover in place to cover the full payment obligation, Ofgem will carry out a mutualisation process to make up the short fall in levy payments.  Ofgem will apportion the total amount to be mutualised by all of the non-defaulting suppliers by reference to the total number of meters it supplies.

Those gas suppliers that supply 95% or more green gas are exempt from the Levy obligation. Green gas is gas produced by anaerobic digestion. To be exempt, a supplier will have to make a declaration to Ofgem and provide evidence, by way of certification of an approved certification scheme that 95% of the gas it supplied was green.

Comments and Next Steps

It is important to note that the Levy applies to the total number of meters (including domestic) rather than attributing to gas suppliers by the actual volume of gas supplied. This means it is likely to hit suppliers of smaller customers in a disproportionate manner. The government has stated that it intends to transition the Levy from its current meter point design to a volumetric levy as soon as possible, subject to overcoming feasibility issues. Therefore, the meter point design of the Levy appears like a stopgap measure. This change will likely be consulted on in the future.

For Fossil Fuel Gas Suppliers, the introduction of the Levy at a time when gas prices have been at an all-time high will add strain to already stretched finances. They will wish to ensure that this new regulatory cost is included as a ‘Policy Cost Allowance’ in any future price cap set by Ofgem. However, the aims of the Scheme follow the stated policy objectives for the UK to reach net zero by 2050. According to the Green Gas Certification Scheme 2020 Annual Report, the UK now has approximately 80 operating biomethane to grid plants, with RGGOs issued in respect of 2,550GWh of green gas injected during 2020.

Lastly, the Scheme will replace the Non-domestic Renewable Heat Incentive which closed to new applicants on 31 March 2021. In being open to new anaerobic digestion facilities only the Scheme is focused on incentivising the development of new anaerobic digestion facilities in the U.K.