In November, Gravis, investment adviser to GCP Infrastructure Investments Limited, hosted an investor visit to the Inchdairnie Renewable Energy anaerobic digestion (AD) plant at Glenrothes, in Scotland.

Here, Michael Horton, portfolio manager of the asset, gives an overview of the plant and the investment case:

GCP Infrastructure Investments Limited (the Company) has 19 anaerobic digestion plants in its portfolio today. Inchdairnie was the second investment into this asset class, the first being in Northern Ireland in 2013, which is still held in the portfolio.

The Company first invested in this project and its two sister plants in 2017, providing senior funding, before exercising its security under the loan facility after the construction contractor entered administration, taking ownership in February 2020.

The project is accredited to two government subsidy schemes: the Renewable Heat Incentive (RHI) and the Renewables Obligation (RO). These schemes encourage the use of renewable gas (RHI) and renewable electricity (RO) with tariffs paid over 20 years through to 2036.

The biomethane that is injected into the national gas grid is sold to energy suppliers via a Gas Purchase Agreement (GPA) and the renewable electricity the plant generates is sold via a Power Purchase Agreement (PPA). Energy suppliers will also purchase certificates known as RGGOs (Renewable Gas Guarantee of Origin) and ROCs (Renewable Obligation Certificates) which prove the renewable energy they are purchasing, and selling to the end user, is from a renewable source.

Inchdairnie Renewable Energy AD plant plant is located on farmland, with the farmer landlord supplying the feedstock (Grass and Rye) via a long-term Feedstock Supply agreement. The plant is also supplied with Pot Ale and Draff (by-products of the distilling process) from the nearby InchDairnie Distillery.

The AD plant produces enough biomethane to heat approximately 2,700 homes each year.

The process is, in simple terms, the decomposition of organic matter (the feedstock) in the absence of oxygen, which produces a biogas. Some of the biogas is used to fuel two combined heat and power engines (CHP), which produce the heat and power the AD plant requires to operate. The remaining biogas is diverted to a Biogas Upgrader (BUP) where the biogas is filtered and cleaned, effectively upgrading the biogas to biomethane before being exported to the gas grid as a substitute for natural gas.

Once the feedstock has fully decomposed and all biogas has been upgraded, there remains material both in solid and liquid form, known as digestate. The farmer extracts the digestate from the AD plant before spreading it to land as a nutrient rich bio-fertiliser for the next crop of feedstock, thereby eliminating the use of synthetic fertilisers and completing the cyclical AD process.

As with many renewable projects, the Inchdairnie Renewable Energy AD plant has a limited lifespan tied to its subsidies, so as an investment adviser, we at Gravis need to be thinking about what happens beyond 2036.

The potential for our biomethane AD plants moving forward is, however, quite exciting, especially when you consider the UK government’s 2030 gas grid decarbonisation objectives, the ongoing need to reduce carbon emissions and the longer term 2050 net zero targets.

Today, around 6.4 of terawatt hours (TWH) of biogas are produced in the UK versus the 2050 target of 30-40 TWH as defined in the government’s Biomass Strategy1. So, life extension of the Inchdairnie Renewable Energy AD plant and its two sister plants also located in Scotland is vital, and there are several opportunities available.

Beyond biomethane’s ability to heat and power our homes and contribute to decarbonising the gas grid, biomethane is being used as a renewable transport fuel. This extends to road and farm use thereby replacing compressed natural gas, diesel, and liquid natural gas. Biomethane can also be used as a feedstock to produce green hydrogen.

Perhaps the most exciting opportunity, however, is carbon capture, utilisation and storage (CCUS). We are planning to install CO2 upgrading equipment that will allow us to capture the CO2 that is extracted during the biogas upgrading process. The CO2 will then be liquefied for use in the food and beverage industry, healthcare, sustainable aviation fuels. Most importantly from a sustainability perspective, the CO2 can also be permanently sequestered in geological stores.

Our three biomethane AD plants are ideally located close to the Acorn Project2 and the wider Scottish Cluster of offshore geological storage sites. The North Sea is home to aquifers and depleted oil and gas fields suitable for use as major underground CO₂ storage sites, with the potential to abate up to 10 million tonnes of CO₂, per year, by 2030.

We have planning approval for CO2 upgrading at two plants, with the third application nearing submission. We believe this is where the future lies for these plants, long after the existing subsidies cease.