Giulio: Hi, Hannah. Thanks so much for having me. Really happy to be here.
Hannah: Yeah. It's great to have you. So today, we're just going to be really just having a chat about what's been going on in the REGO market, how that interlinks the biomass market.
Giulio: Yeah.
Hannah: Yeah. And I think we were going to split it between the past, so what's been going on over the last year or so, then the present, what's happening now, and then some forward-looking statements.
Giulio: Yes, that's right. I'm happy to get started here. Yeah. Looking back, especially the second half of the year, which is what we're going to focus on, this summer, interestingly, we saw a spike in REGO forward prices, so that's for compliance period 20... CP26 and CP27, especially starting from biomass. Because as we discussed in the past, the main difference that we have in terms of REGOs is between biomass and non-biomass REGOs. So, focusing on biomass, prices really spiked starting from July up to the end of August, and that in turn had a sort of spillover effect into wind, solar, hydro as well. And what we were hearing around that time for market participants was that that was partly the result of some uncertainty around biomass-fired power generation in the UK from 2027 onwards, which was due to the fact that utilities and the UK government were still negotiating a new contract for difference deal for biomass generation. But I'm sure, obviously, at this point, I'll actually let you say something more because I'm sure you're even more than me on this.
Hannah: Yeah, no. Yeah. I mean, that's been pretty much talk of...that's all anyone's really been able to talk about in the industry this last year. Yeah. So, UK generated Drax. They closed their contract for difference deal for all four of its biomass-fired units for April 2027 to March 2031, and that was just at the start of November. So, you're talking about the period just before that when no one knew what was going on.
Giulio: Exactly.
Hannah: And yeah, I mean, it was...it's interesting because you're... Are you saying that REGO demand...the demand for those certificates increased for that period just beforehand?
Giulio: Yes, exactly. Increased on the uncertainty, and I think the general expectation that that was probably going to be less subsidized biomass-fired power generation. So, the idea was to secure more volumes for those forward years when potentially there could be less production. And yes, that drove prices higher.
Hannah: Yeah. And that is literally what happened. So, when the new contract for difference came out, there was a generation collar, which capped annual loads, factors eligible to be subsidized at 27%, which is well below...there's around 66% subsidized at the moment.
Giulio: Yes.
Hannah: So yeah, the CfD will cover around six terawatt hours per year of generation. And just for context, last year, Drax generated around 14.6 terawatt hours, and the year before that 11.5. So, this subsidy actually applies to less than half of the recent annual output.
Giulio: Well, that's quite significant, and explains why we were seeing those moves in summer around that uncertainty.
Hannah: Yeah, for sure. It also... I mean, interestingly, and we're going to come onto this in a bit, I'm sure, but there were also stricter rules on sustainability. So, 100% of the biomass feedstock has to be sustainably sourced. At the moment, it's 70%. So, there were a lot...so yeah, this new deal has definitely sort of tightened the reins a bit on what's allowed and what's available.
Giulio: Yeah. No, that makes sense. And actually, that brings me a bit closer to the present day because actually, recently, I believe we've had the UK government launching a new consultation on sustainability criteria for biomass. And just before I let you say more on this, because I'm sure obviously you know more once again, but in terms of from a REGO point of view, I can tell you that since that spike that we saw up to the end of August, prices actually declined quite significantly. And they still are to this point.
There's a general bearish sentiment on the REGO market. We think that many sellers came back in September with lots of volume to have flowed, and that applied some pressure to prices. And then seeing that prices started declining that much, they continue to sell. So, that has continued that type of pressure. And I think coinciding with all of this, with the bearishness that we're already seeing across the REGO market, certainly some doubts, if you like, or some uncertainty around sustainability criteria for biomass definitely adds to that. So, I think it's interesting that also we're seeing this currently.
Hannah: Do you think there's an oversupply of REGO certificates at the moment?
Giulio: Yes.
Hannah: Okay.
Giulio: That's the general understanding in the market. On the current compliance period, definitely the market is long. And I was also looking at figures for biomass-fired power generation in the UK in the past few weeks, and it's pretty strong year-on-year. So once again, that sends a generally bearish signal to the market, yes.
Hannah: Yeah, for sure. In terms of other factors affecting the bearishness, the EU has... I mean, actually, today it's confirming the new EDR because there are some amendments being made to it today. But the EDR, that's the deforestation regulation in the EU, that's just been...it was meant to come into force at the end of this year, so 31st of December, prolonged to the end of 2026. So, I mean, this delay could have also just eased some compliance pressure for importers of pellets and relieved the UK Biomass Sustainability Consultation, which was a consultation which covered land use, greenhouse gas savings. If this, for instance, tightened sustainability standards and then sort of left the volume of biomass deemed eligible for subsidy or issuance by REGOs, because I know there has to be compliance for REGOs as well, if there was less sustainable supply of biomass, that could also reduce REGO supply. I mean, I'm not sure. I'm just...it's just interesting that there are these two sort of consultations around sustainability that could have opposite effects on supply.
Giulio: They could. Yes, exactly. And ultimately, yes, even there's a constraint on the supply side. I think it's interesting to also consider the type of demand, because if at the same time the sustainability of biomass has been put into question to some extent, that could also affect demand for the equivalent biomass REGOs, if that makes sense. And especially at a time when right now we're seeing really low prices on both biomass and non-biomass, if the difference of biomass is historically at a discount in terms of REGOs to non-biomass, but if the price difference is actually not that significant, now the prices are so low across the board, that could potentially incentivise people to just buy non-biomass even more, if that makes sense.
Hannah: Interesting. Yeah. And that leads completely again into Drax's new CfD scheme because now if there are other renewables available. So, Drax are only supported to generate power when the system and the consumers need it. So, when intermittent renewables are available, Drax just won't generate, so.
Giulio: Yes. Exactly.
Hannah: Yeah.
Giulio: Exactly. You're right, though, that there are opposing forces, if you like. On the one hand, there could be a potential constraint on supply for biomass generation, and therefore biomass REGOs, but on the other hand, it depends as well on the willingness to buy, at least from a certificates point of view, REGOs specifically from biomass. I can actually tell you that in the past two weeks, we've seen more market activities in terms of activity in the REGO world on the biomass and the non-biomass side, and that's because we hear there are quite a lot of volumes available, because as I was saying, biomass generation is pretty strong year-on-year, and actually prices have declined quite a bit at the moment. CP24 biomass REGOs are trading at around 15 to 20p per megawatt hour, so that's quite a low price. So yeah, but it's definitely interesting.
And I guess, you know, if I were to look ahead to the year ahead in 2026, from my side, first of all, I'm definitely expecting a really quiet end of the year. We are in this Christmas lull at the moment, because as we said initially, we're recording this in December, just a week before Christmas, and this is probably going to continue until the end of the year. We are expecting market activity to pick up a little bit in January. Obviously, let's remember that the compliance period for REGOs ends at the end of June. So, normally, market activity picks up with especially retailers, electricity suppliers having to procure their certificates for their compliance purposes. So, we are expecting definitely a comeback, if you like. It's hard to predict the extent to which that will be, but it's definitely not going to be as quiet as the market has been the past few weeks. Is there anything on the biomass side specifically, like regulatory or otherwise, that we should be watching out for?
Hannah: Well, yeah, I mean, it's kind of similar from the biomass world. It's been quite a mild start to the winter, to the 2025-2026 winter season. So, most utilities have stocks that they're drawing down. Producers aren't really pressured to sell at the moment. They don't need to drop prices. So, at the moment, again, from our end, we also expect activity to pick up in the first quarter of next year once utilities have started drawing down their stocks and need to reenter the market. But yeah, I guess in terms of things affecting the biomass market in the future that we're still uncertain about, which could...that uncertainty could also be impactful to the REGO market, it's just the UK's government support for BECCS. There hasn't been any support announced yet. Drax is one of the utilities that have been testing the technology since around 2019. But yeah, we're still waiting to hear what the UK stance on that is. But I think the UK Secretary of State for Energy Security and Net Zero said that BECCS implementation will take time. And he said that in February. So yeah, I don't know how long take time is, but we're still waiting.
Giulio: Yeah. It's one of those things that you're not really sure about the schedule when it comes to certain policy or regulatory updates. But yeah, no, that makes sense. And yeah, it's definitely something to keep an eye on because again, it would have repercussions on supply of biomass, firepower and therefore, REGO certificates. So yes, I agree that's something very interesting actually. Yeah, absolutely.
Hannah: Oh, well, I mean, thank you so much for coming on, Giulio. Such a good discussion. And maybe we should...
Giulio: Also with a pleasure.
Hannah: A hundred percent. We can do another one in another...maybe do another update on the REGO market.
Giulio: We should, we should, yes. Just to see what's been going on at the start of 2026 maybe.
Hannah: Yeah, 100%. Stay tuned in the "Argus Biomass Markets Report" and visit us at
argusmedia.com.
