Long-Term Contracts for Biomethane Development in the Energy Transition

Ibrahim Abada and Andreas Ehrenmann

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Biomethane has emerged as a strategic component of European energy policy following the recent disruptions of natural gas markets. While the literature has largely focused on its environmental and energy-security benefits, it has paid limited attention to the role of market risk and risk aversion in shaping biomethane investments and long-term contracts. This paper develops a dynamic stochastic equilibrium model of gas trading in which risk-averse biomethane producers invest in production capacity and exchange risk with large gas consumers through Biomethane Purchase Agreements (BPAs). Risk aversion is modelled via a time-consistent and coherent risk measure with appreciable financial and economic properties. We calibrate the model to the French gas market over the 2025-2035 period. Our results indicate that biomethane production reduces exposure to gas-market and climate risk and thereby generates welfare gains beyond its commonly cited environmental and sector-coupling externalities. Biomethane contracts further increase welfare by facilitating risk sharing and by stimulating additional investment. These findings identify risk mitigation as an additional economic rationale for supporting biomethane deployment along with long-term contracting.

Keywords: Gas Markets; Biomethane Production; Incomplete Markets; Stochastic Equilibrium Models; Risk Analysis (search for similar items in EconPapers)
JEL-codes: C72 C73 D81 Q41 (search for similar items in EconPapers)
Date: 2026-09-30
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2687

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