Brazil needs to increase liquidity and establish taxation to let gas swap contracts unlock constraints on biomethane trade, industry observers said.
Gas swap operations are commercial exchanges of products between traders in different regions that do not have a way to physically deliver. For example, a biomethane plant in one region could sell to a consumer in a different, unconnected region if it is able to get that transaction mirrored in its own region — creating a "swap" of products without the need of delivery away from the local pipelines.
This mechanism could cut logistics costs for biomethane delivery and provide a way around the single largest hurdle to Brazilian biomethane market growth — a lack of connections between the biomethane plants scattered across the country and potential customers in major cities.
The main challenges for swaps in the biomethane sector are the lack of gas market liquidity to find mirror transactions in different regions and the fiscal challenge of properly taxing the operations, according to Maria Fernanda Soares, partner at the Machado Meyer law firm.
"Unlocking the tax challenge would be a better way to make this type of transaction viable, because it would be an alternative to the regulatory prohibition of injecting gas into the distribution network," she said.
Biomethane certificates attesting to its renewable attributes can also lessen logistical challenges, as buying a certificate substitutes the need for the physical delivery.
"Today, everyone in the sector believes there is a need for certification to advance so that biomethane has an environmental validation," said Marcelo Mendonça, strategy and market director for natural gas distributors' association Abegas. "Otherwise, you are just buying a more expensive natural gas molecule."
But biomethane certificates will not be enough to create liquidity between regions, said Soares: "Many companies tend to prefer buying their biomethane with the certificates included, so there would be difficulty in having enough surplus."
Under a draft of a so-called fuel of the future bill, Brazil would create a biomethane mandate with the option of using guarantees of origin to fulfill obligations. The bill still awaits senate approval.
