Biogas value chain – Microeconomic incentives and policy regulation

Abstract

Recently, climate change issues have gained more importance on the international agenda, increasing the willingness to decrease GreenHouse Gas (GHG)-emissions. The European Union (EU) targets GHG-emissions with country goals for CO2-emissions, Renewable Energy production, and Energy savings. Denmark is far ahead with development of renewable energy production primarily through wind power, which is an inflexible type of power production. Biogas is a renewable fuel that could function as regulating power, and when based on manure, it potentially has a reducing effect on GHGemissions. Biogas has been produced and developed in Denmark since the 1970’s; however, the development has been rather slow until 2012, when regulation was changed, thereby increasing profitability for biogas producers. The focus for this dissertation has been to evaluate the private economic consequences for the biogas value chain under this new regulation. This dissertation will examine the private economic challenges regarding value chains, the feasibility depends on economic support. The game theoretic implications are analysed, when support in one part of the value chain is contingent on actions in other parts of the chain. It is also examined how regulatory restrictions such as monopoly regulation can affect choices made in other parts of the value chain. It is shown that regulation affects the value chain decision in several ways regarding input types, the level of output, and final applications of the output. The overall research question for this thesis concerns the private economic profitability in the biogas value chain with focus on regulation, risk and ownership structures. The questions are treated in four journal papers based on a combination of microeconomics and policy analyses. A socio-economic analysis regarding the value of biogas in the energy system is performed through energy systems modelling in a fifth journal paper. Most new biogas plants and several old plants chose to upgrade biogas, even though model results imply that direct use in a Combined Heat- and Power plant (CHP) might be at least as profitable as upgrading. Cooperative game theory is applied together with private economic modelling and policy analyses in order to explain this development. Both quantitative and qualitative analyses are applied, based on microeconomic theory, to extract the main risk factors facing the biogas value chain and to explain the private economic incentives behind the choices made by investors regarding inputs, scale and output. This dissertation has contributed several results regarding the interaction between public regulation, private incentives, and profitability of the value chain. Specific contributions are analyses considering the interaction of flexible regulation with regard to biogas inputs, and risk for producers with suggestions for policy design. In addition, the potential value of biogas in the energy system is analysed in comparison to CO2-damage cost. A contribution is furthermore, the application of cooperative game theory on the value chain, illustrating how choices made regarding value chain design and participation can be explained by strategic behaviour and possible profit allocation.