The coming four years will see Goldman Sachs Asset Management invest more than €1 billion in European biomethane through a newly established business, Verdalia Bioenergy.
Verdalia Bioenergy will invest both in greenfield and brownfield biomethane plants. The platform has already acquired – subject to regulatory approval – a Spanish portfolio of plants with a capacity of up to 150 GWh/year.
“We think there is a secular backdrop which should support very significant growth in the biomethane market in Europe over the next five years. First, the focus on energy independence and energy security in Europe has changed. Second, both governments and corporates are very focused on emissions at net zero and are willing to attribute economics to that end goal. Thirdly, biomethane is a great circular economy story,” says Tavis Cannell, global co-head of infrastructure at Goldman Sachs Asset Management.
“Biomethane is still in its infancy in many European markets. That makes the development and management of assets very granular and operationally intensive. As a GP with a lot of resources and experience with platforms, we think we can create a leading platform,” says Cannell.
The funding will be deployed over the coming four years through Goldman’s West Street Infrastructure Partners IV fund, which closed in October 2022 on $3.09 billion. WSIP IV is targeting returns in the mid-teens through a value-add strategy.
Cannell thinks it likely that the fund will hold the biomethane assets for the long end of the usual average of five to six years.
Spanish biomethane potential
Goldman’s push into this particular flavour of green molecules will begin in Spain, where there is 163 TWh/year of potential as natural gas is phased out, according to the Spanish Gas Association, Sedigas. Less than 3 TWh of biomethane was produced in Spain in 2021 while the demand for methane of any kind was 364 TWh in 2022.
The total of €1 billion should be enough for a sizeable portfolio, as the plants are often small to account for the local nature of the feedstock. “The average capex for Spain’s existing biomethane plants is €10 million to €30 million, depending on the volume of feedstock that can be processed,” says Matteo Botto-Poala, managing director at Goldman Sachs.
In the future, Spain may host as many as 2,000 biomethane plants. This is compared to just five established plants at the end of 2022.
Spain was chosen as the starting point for this enterprise not only because the country is a biomethane laggard but also because this is where Goldman Sachs found a suitable management team to partner with. Botto-Poala sees Spain’s neighbouring countries as places for likely expansion but emphasises that the ambition is pan-European, including the UK.
Biomethane differs from green fuels such as hydrogen in the dependence on feedstock in the form of some kind of biomass. In theory, the emergence of biomethane production facilities could introduce competition for the available biomass, but this does not worry Botto-Poala.
“There is plenty of feedstock available. Only five percent of the potential feedstock is currently used to produce biomethane, and if you were to use all available feedstock in Europe, you could cover 50-100 percent of the European gas demand in 2050,” says Botto-Poala.
“It does not make sense to transport organic waste more than 50km, so I don’t see a European market for feedstock,” he adds.
There will, however, be a clearly defined market for the offtake. If the resulting biomethane is sufficiently pure then it can be injected directly into the existing natural gas grid. This would be the easiest option, according to Botto-Poala, but not the only one.
“We would consider offtake agreements with corporate counterparties. Also, some countries support biomethane with national frameworks and regulations, so the offtakers will differ from one country to the next.”
Goldman Sachs is not the first and likely not the last GP to join the ranks of biomethane investors. The utilisation of biomethane is set to increase dramatically worldwide in the coming decades and current investors include IFM Investors, which announced the acquisition of Green Gas USA last week, and Arjun Infrastructure Partners, which is heavily invested in Danish biogas.
Early investors in the sector, such as Pioneer Point Partners, have already been in and out.
Just as the world is unlikely to run out of sun or wind any time soon, there will probably be plenty of organic waste around in the coming years. And forecasts for the future energy mix are counting on this: worldwide, the International Energy Agency estimates that the use of biomethane will quadruple between 2025 and 2040.
In the EU, the target for biomethane production is 35 billion cubic metres per year by 2030, according to the EU’s REPowerEU plan’s objectives. This is no small feat given that it was estimated a year ago that only three bcm of biomethane was produced yearly in the EU.