This is ADBA’s DRAFT response to DECC’s RHI Consultation, for member comments. Areas where we are
particularly keen for comment are [highlighted in square brackets], but we would welcome comments on any
elements of the draft.
Introduction to draw particular attention to the importance of gate fees, and the definition of a ‘large’
biomethane plant.
1. Is it appropriate to set tariffs for all plant on the basis of waste plant costs, which assume a 20
year revenue from current gate fees? Is it appropriate to assume gate fees at all scales of plant? If
not, please provide reasons why.
Plant design assumptions
In order to better reflect the current market, we do not believe it is appropriate for the model to assume that
a plant uses food waste for all of its feedstock. Waste-crop hybrid models are increasingly common, as they
balance the ability to use more profitable waste feedstocks with the process and supply stability that crop
feedstocks provide. Where there are uncertainties over waste availability, crop feedstocks offer investors the
certainty they need to invest, which ultimately will improve the capacity for waste digestion.
In considering the evidence we have gathered, we have used a model with a third crops and two thirds food
waste, and we would encourage DECC to base their model on a similar reference plant. While capital costs
do not change considerably in this model (given that most of the food waste treatment infrastructure still
needs to be put in place, but note that silage clamps may also be required), opex costs will increase since
there is a cost for feedstock.
We also recommend that in analysing the tariff levels, a farm waste and crops model should be considered.
Even if this is not used to set the tariffs themselves, this is an important part of the AD market and such
information will allow DECC to determine the likelihood of further development under the new RHI structure.
[This answer reflects what we believe to a realistic view on the plant models that DECC are likely to use, but
we would welcome views on alternatives.]
Gate fees
It is absolutely not appropriate to assume a twenty year revenue from gate fees. No commercial developer
or funder would do so, because gate fees already have been and are likely to continue to reduce over time.
Moreover, they are out of the operator's control so are considered a risk. During the course of this
consultation, many operators and funders have told ADBA that they discount gate fees completely from their
business plans because of these risks.
The WRAP data quoted in the consultation document does not accurately reflect current gate fee levels
because they are based on a small sample and are skewed by historic long term municipal contracts; even
then our evidence suggests £41 is at the higher end of the scale for existing contracts. Over ten of our
members and others in the food waste industry have provided us with evidence on the gate fees they
receive today. The £41 ‘average’ gate fee figure is completely inaccurate for new plants using relatively
uncontaminated, source-segregated unpackaged food waste.
When referring to gate fees, DECC needs to be clear that the price paid to operators will vary according to
transport distance, local competition and waste type/quality. It appears that the model is built on the
assumption that the ‘reference’ plant uses solely relatively uncontaminated, source-segregated, unpackaged
food waste. The SKM figures in their 2011 “Analysis of characteristics and growth assumptions
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regarding AD biogas combustion for heat, electricity and transport and biomethane production and
injection to the grid” were based on ‘source segregated’ food waste. DECC’s capital and operational costs
for ‘waste pre-treatment’ are more reflective of an entirely unpackaged food waste plant. Even this relatively
‘clean’ material will still require pre-treatment such as shredding and maceration, with more heavilypackaged material requiring additional processing on top of that.
The industry evidence we have collected shows that relatively uncontaminated, source-segregated,
unpackaged food waste today ranges from zero gate fee to around £25/tonne. As mentioned, the location of
the AD plant and the distance between the source of the waste and the AD plant, as well as the location of
other food waste treatment facilities in the area all impact on the amount that is charged. Gate fees also
depend on the type of plant: for example, whether the plant is a merchant plant taking waste from a number
of sources and businesses, or whether it has a longer-term contract with a local authority or other body
which has a longer-term relationship with the operator.
[We currently have six specific data points on current gate fee levels, for different types of waste/lengths of
contract to support this – to make the strongest possible case we need help to expand this.]
2. How are gate fees likely to change in future (if at all)? What are the factors driving any potential
changes?
As discussed the market for food waste is complex, with gate fees being affected by the amount of food
waste available, the type of collections, the availability of different treatment facilities and location, the
quality/degree of separation and other factors. Gate fees are likely to continue to reduce over time, for a
number of reasons. These include:

More AD plants. Although food waste treatment markets are fairly localised, the increasing
deployment of AD is naturally leading to more competition for waste streams, so ‘merchant’ gate
fees in particular are reducing.
We are aware of around 70 waste-based plants with planning permission, which could treat
approximately 1.5 million tonnes of organic waste if half of those were built. It is clear that
competition for food waste between AD facilities will increase due to current electricity plant growth,
which is likely to drive down gate fees further for potential biomethane plants.

Increasing competition from other technologies. According to WRAP, composting volumes also
increased 4% between 2010 and 2012 (see http://www.wrap.org.uk/content/ad-continues-driveorganics-recycling-sector-growth ). This demonstrates that food and organic wastes are
increasingly been seen as resources rather than wastes by local authorities and business, with the
result that the producers of food and organic waste would expect to be paying lower amounts over
the next 20 years for disposing of this waste given the number of plants that may be able to treat
their material.
The increasing use of waste combustion to treat residual waste (where containing food waste) will
limit the amount of food waste that will be separately collected. DEFRA has estimated that the
amount of residual waste treated through waste combustion could triple by 2020 compared to 2010
(see page 64 of
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/69401/pb13540waste-policy-review110614.pdf ).
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
Extraction of food waste not keeping up with industry development. In England in particular, there
is insufficient drive to separate unavoidable food waste and make it available for AD, and we
therefore expect the collection of food waste from households and businesses to increase only
slowly over time. This is in stark contrast to the Waste (Scotland) Regulations, which have set a
clear framework to institute such a collection regime.
Overall, these factors are extremely likely to drive down the cost of disposing of organic wastes over the
short to medium term, thus lowering fate fees. [Therefore, we suggest that DECC assumes a gate fee of no
more than £20 for feedstock provided to operating plants today. In setting tariff, however, DECC also needs
to consider how developers and financiers put together their business case: these typically assume zero
gate fees within 5-10 years.]
Using these assumptions (along with those detailed under question five) will result in new proposed tariffs.
ADBA members are happy to work with DECC to demonstrate the impact of such new tariffs in their models.
This will be critical to ensuring new tariff levels will effectively incentivise the market.
3. What are your views on the tiering scenarios presented here, both in terms of the number and
level of tiers and the tariff assigned?
First, we strongly prefer tiering to banding as a structure for the tariffs: it suits biomethane as there is no
‘nameplate’ capacity as there is on a CHP engine. We cover some of the problems we see with banding
below, but tiering appears the simplest solution both for operators and administrators. However, we believe
that the current tiering structure is wrong, and in particular that the tariffs proposed are too low and would be
completely insufficient to drive growth in biomethane.
To assess the costs of developing a biomethane project, we initially gathered first-hand data from over 15
ADBA members. Although relatively limited, this had a range of data representing all of the major sectors
and feedstock types. We then put a model together and published this on the ADBA website, as well as
presenting the data to members at a number of events. This meant that around 350 companies in the AD
industry have had the opportunity to review and comment on the data. We have received comments (both
via email and verbally) from more than 50 members since February 2014 and have incorporated these in
our calculations.
We have used this model to compare the possible outcome of the assumptions we have suggested in this
response on gate fees and costs to the model in the consultation document. This demonstrates that the
underlying assumptions (as well as the models themselves) make a significant difference to the tariff
required. On the basis of this, and our members own modelling, it is clear that the tariff tiers proposed in the
consultation document will be insufficient to reach even DECC’s target return, and completely insufficient to
stimulate the market.
Models of this nature are of course only illustrative and cannot capture the range of uncertainties
and costs that are exhibited in the market. The principle point, however – that the tariffs proposed are
completely insufficient to stimulate the market – has been backed up by members who have used the
proposed tariffs in their model.
Once DECC have considered the evidence gathered in this consultation, they should test their model
against the models that developers and investors use to determine whether investments are made – this will
be the only real way to test whether the model will bring on the expected deployment.The three important
differences in assumption we make are:
1. We believe, based on feedback provided by financiers and those seeking finance for biomethane
plants, that an internal rate of return (IRR) of 16% is required to drive growth in the sector (DECC
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assumes 12%). This is reflective of policy uncertainties in the sector (including the potential for
degression), the perceived risk of anaerobic digestion itself and of the upgrading technology,
uncertainty over regulatory requirements and gate fee uncertainty.
2. We believe that a model of 33% crops should be used to reflect the increased security that
investors require of feedstock tonnages. DECC assumes 100% food waste
3. We assume average gate fees of £10 over the 20 year period, using £20 for 10 years then £0 for
10 years (DECC assumes £25 or £41)
Even where we change our IRR to 12% we still find that the RHI required under ADBA’s analysis is still
significantly higher than DECC’s model produces at all scales (although the two models appear to be
converging towards the larger scales). We use an example 12% IRR here solely for illustrative purposes as
it is more easily comparable to DECC’s, clearly showing that the assumptions used in the model for the
consultation document are flawed.
[We believe that the approach of using DECC’s target IRR most usefully makes this point about their current
assumptions, but would appreciate member views, particularly if these are supported by more evidence for
using a 16% IRR.]
The following chart shows the difference between the model we have used and that used in the consultation
document (using DECC’s 12% IRR assumption for ease of comparison). Please note that the below is
based on a £/MWh.
Comparison of indicative RHI required
£140
Current RHI
(£75/ MWh =
7.5 p/kWh)
DECC 12% IRR,
£25 gate fee
£120
£/ MWh RHI
£100
ADBA 12% IRR,
£10 gate fee
£80
£60
£40
£20
£0
250
500
750
1,000
1,250
1,500
m3/ hr biomethane injected
The proportion of waste in the plant model and the level of gate fees assumed are the largest factors in the
difference between the models – emphasising that these assumptions are among the most important parts
of the evidence base for DECC to revisit.
Chart 1 of the consultation document suggests that, with a £25/t gate fee, the current tariff is appropriate up
to about 2.5-3 MW biogas capacity. Our model indicates that the current tariff is required up to a much
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higher level, around 6.5 MW biogas capacity (650 m3/ hr) with an IRR of 12% (and even higher with an IRR
of 16%). This is supported by the plant pipeline: of 40 biomethane plants we are aware of (including those
commissioned), only two are exclusively food waste plants under 6.5 MW biogas capacity, so there is no
evidence plants at this scale are being overcompensated.
In addition, we believe there is clear merit in having three ‘tiers’ in the tariff structure as this ‘smooths’ the
IRR across different capacities, reducing the danger of overcompensation or size capacities where
development is unviable.
[Based on this, we believe the following three tier structure could be appropriate for biomethane, subject to
further testing in developers’ models: ]
Tier
Tier 1
Tier 2
Tier 3
Pence per kWh tariff
7.5
3.8
1.5
Tier threshold (MWh)
40,000
Between 40,000 – 80,000
Above 80,000
This is based on trying to reach the ‘targets’ for RHI (called “Ave. tariff required) detailed in the table below.
Note that this is listed in £/MWh. Please note that the “Ave. tariff required (12% IRR)” is the amount
(£/MWh) that the plant requires, on average over all the MWh it injects on to the grid in order to meet a 12%
IRR, which we have used for ease of comparison with the model in the consultation document, although this
is too low.
The average tariff required can then be compared to the lowest row, which is the actual average tariff
received by the plant for all the MWh injected. If this “Ave. tariff based on tiering structure” reaches the
target tariff required then the tiering structure should be sufficient to support this scale of plant. For the
smaller scale plants our model indicates that the tariff required is above the current RHI: DECC will need to
raise the tariff if they want to incentivise plants at that scale.
Tonnes (food waste and crops)
Approx. MWth raw biogas
MWh injected per year (excludes propane)
Ave. tariff required (12% IRR)
Tariff up to tier break 1
Tariff between tier break 1 and tier break 2
Tariff thereafter
Ave. tariff based on tiering structure
17,500
2
13,276
£145
£75
N/A
N/A
£75
35,000
4
26,877
£100
£75
N/A
N/A
£75
70,000
8
54,401
£65
£75
£38
N/A
£65
140,000 Tier break
15
110,097
£47
£75
40,000
£38
40,000
£15
£45
[Biomethane plants in the pipeline are at varying stages of progress. Those that are already under
construction will clearly be particularly affected by these changes. An early statement by DECC that the tier
break at the current tariff will be set at 40,000 or above with an unchanged tariff below that level would allow
the sector to progress quickly to completion of these and other projects. We then strongly recommend that
DECC works with AD developers and funders to ‘test’ a new tariff structure before publication of the
response, and would be happy to facilitate this.]
4. Would these scenarios be enough to drive growth?
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As our answers above suggest, the proposals in the consultation document do not provide sufficient funding
to drive growth.
We agree that better value for money could be achieved by lowering the tariff for the very large scale plants
across all feedstock sectors. Of the 40 potential plants we are aware of, 33% are above 10 MW biogas
capacity (which represent, given their size, approximately 67% of the gas of these 40 plants combined).
Plants in the 5-7.5 MW range are not overcompensated at current tariff rates according to our analysis. For
example, of the 40 plants we are aware of, only 4 are in the 5-7.5 MW range (compared, for example, to 7
plants in the 10-12.5 MW range). If the current 7.5 pence/ kWh represented overcompensation for these
scale of plants, we would be likely to see many more of them in the pipeline already. It is difficult to pin down
exactly what is preventing this capacity range from taking off, but the DECC model clearly does not currently
account for this. The proposals in their current form (with the £25 or £41 gate fees) would probably see
plants in this range leaving the market, which represents an overall loss given they can provide biomethane
at a lower cost to smaller plants.
5. If the size of the tariff is wrong, are our underlying assumptions appropriate? Can you provide any
additional evidence to support your assertions?
As outlined above, we see the main differences in assumptions between DECC and ADBA as being down to
differences in IRR, gate fees and the proportion of non-food waste feedstocks that should be used.
Other than those we would make the following comments on the cost assumptions:
Land costs are not included in the model. These could be £200-£250k for a 4 MW food waste plant
(likely to be located as close as possible to the centres of population). Alternatively an annual rent
figure could be used in operating costs.
 Supplementary biogas scrubbing equipment required for food waste plants to remove volatile
organic compounds (VOCs) should be included. Significant extra capital and operating costs.
ADBA members will be providing detailed information on this.
 As we have outlined above in question 1, there is a need to align the gate fees with the type of food
waste that is collected by the ‘reference’ plant used by DECC to calculate the tariff. The SKM
figures assumed a source-segregated food waste feedstock but if plants are taking packaged
waste they will have higher capital and operational expenditure (under the “waste pre-treatment”
component of the capex and opex). So in the discussion about food waste gate fees, DECC need
to be clear that they are referring to the least contaminated, source-segregated food waste on the
market. Please note that even this relatively ‘clean’ material will still require the treatment as listed
in the DECC assumptions – all food waste will still require shredding and maceration, it’s just that
any more heavily-packaged material would require significantly more other processes in addition to
these more basic pieces of equipment.
 The landfill costs for disposing of packaging and contamination also need to relate to the type of
food waste collected. So the 10% figure for quantities of feedstock being rejected to landfill need to
reflect the degree of segregation of the food waste material.
 Some plant operating costs start being incurred before the plant is commissioned. Costs such as
insurance and pre-commissioning feedstock storage need to be included.
 We have included a contingency cost of 7.5% of all operating costs (excluding feedstock). AD, like
all industrial processes, carries risk and where such incidents as accidents occur it is best practice
for operators to be able to respond without cutting corners. Given that unexpected events do take
place in the waste management and agricultural industry, these should be included.
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




Most plants will use a CHP on site rather than a boiler. However, given that there are also
assumptions about the cost of electricity in the model, it probably isn’t significant to include a boiler
in the model rather than a CHP.
We note that the gas grid connection is flat at all scales. These will increase at larger scales,
although perhaps only slowly and not in line with capacity.
It is unclear whether flaring equipment is included in the costs, and if so, under what category.
Perhaps £100k needs to be included for flaring.
The operating cost of the upgrader and grid measurement and connection are approximately 9% of
the capital cost of that equipment.
No allowance appears to have been made for the capital cost of digestate treatment equipment.
For food waste plants, further treatment of digestate is required to bring it to the level of quality
required for land spreading. This includes screening and separation of liquid and solid fractions for
transport and ease of spreading. Storage will also be needed.
Including most of these changes would have the effect of increasing the cost of the AD plant in DECC’s
model.
6. What are your views on the banding options presented and the associated tariffs?
What are the relative advantages and disadvantages of banding options 1 and 2?
We are concerned that either banding option would drive inefficient behaviour around the tariff boundaries,
notably that plants would be artificially sized to take advantage of higher tariffs rather than maximising their
efficiency. This is partly remedied by option one (the tariff curve), but even this could drive inefficiency by
effectively penalising plants which generate more biomethane by reducing their tariff.
Banding options also require capacity to be accurately determined – we cover some of the issues with this
below.
7. Would these options be sufficient to drive growth?
8. If the size of the tariff is wrong, are our underlying assumptions appropriate? Can you provide any
additional evidence to support your assertions?
Our comments on the underlying assumptions above apply to questions seven and eight too.
9. What is your general view on the relative merits of banding and tiering? Which mechanism is
more effective at providing a fair tariff across the capacity range and addressing any potential
overcompensation?
10. Are there any unintended consequences of the banding / tiering options presented that we
haven’t considered?
As stated above, we strongly support the tiering proposal. We believe that this will be much more simple to
administrate, and using our model we believe it would reflect economies of scale for larger plants while still
providing sufficient incentive for smaller and medium-sized plants.
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11. What tariff levels are required to maintain a comparable incentive for biomethane to grid
compared to other uses of biogas?
[Ideally the subsidy regime would operate so that where biomethane is the more economically viable and
efficient choice (e.g. in areas of high gas grid capacity), operators would install biomethane plants, while
where electricity plants are economically preferable (e.g. where there is potentially a high heat demand
locally which can be met by a CHP plant), electricity plants would be chosen.
This is a complex area because biomethane may have certain costs that electricity plants do not (upgrading
to grid quality, GCV measurement equipment, propane, higher electricity use etc.), electricity plants of
course have other costs (such as the larger CHP unit). The relative prices of gas and electricity on the
market also interact with the revenue generated by the different projects and therefore the subsidy required.
Funders may also ask for higher returns from biomethane projects to compensate for perceived and real
higher risk (e.g. in upgrading equipment).
In terms of income alone, the current tariff rates provide greater returns for biomethane over electricity. If
DECC want to maintain investment in biomethane where it is technically possible, this differential should be
maintained. Our view is also that the FITs 500kW-5MW tariff is not sufficient to drive the kind of growth we
would like to see in this sector, although the best plants are clearly still able to come in under FITs.
The degression mechanisms of the two schemes will also naturally tend towards convergence of the two
options. If one scheme is providing greater returns than the other then degression will often take effect for
that technology in that scheme. The risk of this will lead to operators considering the alternative scheme.
This helps balance any returns to operators.]
12. Should we be considering a combination of banding and tiering? Are there any other possible
policy solutions that could meet the objectives of the review in another way?
For the reasons given above, we believe a pure tiering system is the best policy option.
13. What are your views on our proposals to determine system capacity? Which option best
promotes accuracy of measurement, minimising costs for operators and the scheme administrator
and avoiding unintended consequences? Are there any other alternative options to determine
system capacity that are not presented here?
The difficulty of determining system capacity is one of the major problems in establishing a banding system.
Both options identified in the consultation document are flawed. The NEA does not always reflect the actual
capacity of a project, as it may be based on an agreed maximum flow rate rather than the operating capacity
of the installation. Under a banded tariff a developer would be incentivised to restrict the capacity in their
Network Entry Agreement rather than to make their plant as efficient as possible, and deliver more
renewable gas.
The second option, to use the output of the upgrading equipment, may also not provide an accurate way to
demonstrate capacity. Developers may use equipment which has a higher theoretical capacity than they
actually require, and could be penalised for doing so under a banded tariff.
The best option is therefore to use tiered tariffs, which reflect actual generation rather than an artificially
determined capacity.
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14. If capacity was to be based on the Network Entry Agreement capacity, can you provide evidence
of what an appropriate nominal load factor for all biomethane to grid plant should be?
First it is important to reiterate that the NEA is likely to overestimate the actual flow rate, sometimes
extensively.
Using 8,760 hours per year – as the consultation document suggests – is clearly unrealistic and will lead to
earlier degression than will be justified by actual RHI spend. Clearly there is little data on load factors for
biomethane plants in the UK at present, but for the sector as a whole the most recent Digest of UK Energy
Statistics quoted a load factor of 68%.1 Commercial operators clearly target higher operational availability,
so it would be sensible for DECC to do so too, and we would suggest the 93% availability used by SKM in
their 2011 tariff analysis (equivalent to 8147 hours per year) as the highest number which should be used.
15. What are your views on the issue of existing assets and the interaction with RO and FiTs?
It is desirable that the RHI is used to pay for new biogas capacity. However, care needs to be taken here not
to act in a way which prevents existing operators from expanding capacity in order to generate biomethane,
and therefore incurring significant cost for additional assets. We would be very happy to continue to work
with DECC on these points.
16. The RO pays less for biogas from sewage plants. Should we apply the same principle here? If so,
on what should we base the tariff?
Clearly the RHI is particularly attractive to companies treating sewage if it is compared to the electricity
incentives, where sewage gas is ineligible for the Feed-in Tariff and only attracts a ½ ROC/MWh. However,
it is also important to establish a market, and as with this consultation in general to base the tariffs on actual
costs and revenues. We suggest that DECC continues to work with industry to keep the evidence under
review.
17. What are your views on this issue? What are your views on the most appropriate way to
encourage use of the best available technology for the scrubbing process?
We do not believe the evidence supports further regulation at this stage. For plants using crop feedstocks, it
is also covered in part through sustainability criteria.
18. What are your views on the evidence base presented in the Technical Annex? Where could
evidence be improved? Note: we have highlighted some areas above in bold text to indicate where
we particularly need further evidence but we are interested in your views on all the cost and
performance metrics presented
19. In your view, how do individual capital costs change over the capacity range? How far do
economies of scale persist along the capacity range for each?
1
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/279547/DUKES_2013_Cha
pter_6.pdf
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20. Are the assumptions underpinning operating costs reasonable? Note: views on gate fees are
covered by questions in the main consultation document.
These issues are covered in our answers above.
21. The tariff calculation methodology assumes operating costs and revenues are incurred over the
full lifetime of projects. To what extent is this assumed in investment appraisals of biomethane
projects i.e. which costs and revenues are assumed to be ‘bankable’, at what level and over what
period?
22. In your view, how much potential is there for cost reductions or performance improvements in
the components of biomethane plants? Please indicate any numerical estimates you have of either
and the timescale over which you expect them to occur.
We believe there is potential for cost reductions over the longer term, not least through the proposals from
the biomethane campaign working group we established with the Energy Networks Association. We would
welcome active support from DECC through the process of Ofgem’s consultation later this year. In addition,
facilitating blending biomethane in preference to enhancing the CV with propane wherever possible could
significantly reduce operational costs.
The key to bringing the costs down more widely is strong growth in the sector and the confidence that plants
will continue to be deployed. Certainty that AD and biomethane will be supported beyond 2016 is vital to
bring costs down. With that certainty new entrants will join the market and competition will be strong among
different service companies. It should be noted that these cost reductions would be incremental rather than
dramatic - the bulk of the AD plant costs are material such as concrete, steel and copper as well as
feedstocks.
Areas where costs could come down with increased certainty and stable growth are:
 Innovation in the technology resulting in: improved biogas yields, better operational performance,
better use of digestate resulting in different income streams etc.
 Competition in the services sector: as the market grows, new entrants join the market to provide
more tailored support for specific sectors within the market
 Development and overhead costs could come down as firms complete their tenth or twentieth
biomethane plants compared to their first or second – overheads spread over a larger number of
projects, expertise built up over previous projects is carried over so that fewer staff are needed to
complete equivalent sized projects etc.
 Gas measuring equipment for biomethane injection plants and other injection costs such as
telemetry and regulatory compliance should come down with more appropriate regulation
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