bmp-greengas insolvency forces market players to adjust existing raw biogas and biomethane supply contracts

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published on 12th October 2023
 

The German market for biogas, especially for biomethane, is in a phase of upheaval. In the early phase of the Renewable Energy Sources Act (EEG), the development of agricultural biogas production from energy crops was promoted through high subsidy rates with a guaranteed subsidy period of 20 years. The requirements for feedstock, electricity and gas generation technology and operation have been tightened with each amendment to the EEG – in the meantime, a distinction can be made between 8 major amendments, each with a different version of the law, depending on when the electricity generation plant was put into operation – so that different biogas qualities are required in order to be eligible for support under the EEG. With the so-called "gas exchange regulation" of the EEG 2004, the legislator had initially made it possible to convert fossil-fuelled CHP plants to biogas. In this process, so-called "raw biogas" is upgraded to natural gas quality, fed into the natural gas grid and then the regenerative property is virtually added to the - physically predominantly fossil – natural gas supply via a so-called "mass balance system".


This biogas is called biomethane. Since the subsidy period for CHP plants under the regulations of the Combined Heat and Power Act (KWKG) is limited to a period of use of the plant, which is usually exhausted after approx. 10 years, there was a high demand to claim further subsidies under the EEG by converting to biomethane. Since the 20-year subsidy period of the EEG was dependent on the date of the first fossil commissioning, there were often still considerable residual subsidy periods of approx. 10 years with the sometimes high subsidy rates of older EEG versions. This created a separate market for bio-methane with specialised trading companies that brought together the supply of agricultural biogas production and the demand of mainly municipal CHP plant operators, taking over the relatively complex biomethane gas balancing and biogas certificate processing requirements.

With the reduction of the subsidy rates, the replacement of the fossil commissioning concept by a regenerative commissioning concept, the replacement of the legally fixed feed-in tariff by a contingent tender subsidy system and finally the expiry of the transitional regulations for the conversion to biomethane, the German legislator has successively said goodbye to biomethane electricity generation since the EEG 2014. With the promotion of biomethane in the fuel market through the Greenhouse Gas Quota Act (§§ BIm-SchG - also abbreviated as "THG"), on the other hand, a competing market was created, which in part offered higher marketing revenues for biomethane compared to the electricity generation market.

The biomethane market was finally shaken up by the sharp rise in natural gas prices, but also by the dislocation on the agricultural markets caused by the war in Ukraine. Since then, the prices of raw biogas, processing and biomethane supply contracts, which were agreed on a long-term basis due to the duration of the EEG subsidy, often no longer cover the cost developments of the raw biogas producers and collide with alternative sales opportunities for energy crops. But also on the biomethane sales side, the long-term agreed biomethane prices no longer correspond to the market opportunities.  Both in the fuel market and through new customers in the electricity and heating market, who have to switch to biomethane due to the regulatory pressure of the so-called "heat turnaround" and the increased prices for fossil energies due to the Ukraine crisis and national emissions trading, demand and prices for biomethane have increased many times over the biomethane prices agreed in long-term contracts. Biomethane traders who have not covered long-term supply obligations with long-term purchase contracts are therefore currently facing considerable problems in securing their obligations - at least at cost.

Effects of the bmp insolvency on the German biomethane market

The still young German market for biomethane is dominated by a few young biomethane traders. This market has already been in a consolidation phase for some time with numerous changes of shareholders and market adjustments, which has now been exacerbated by the insolvency of one of the two largest biomethane traders, bmp greengas GmbH. bmp is a second-tier subsidiary of the EnBW Group, which is essentially controlled by the state of Baden-Württemberg and an association of Baden-Württemberg districts. 

Since the biomethane trade involves large sums of money with considerable credit risks and risks of damages under the Renewable Energy Sources Act (EEG), the supposed security against default of the subsidiary of one of the largest German state-owned companies in a green-governed federal state was an important motivation for the establishment of long-term business relationships of municipal biomethane CHP plant operators with bmp without the hedging instruments that are otherwise customary in the sector.

The fact that ESW Erdgas Südwest GmbH, as the parent company of bmp, itself initiated restructuring proceedings in accordance with the Corporate Stabilisation and Restructuring Act (StaRUG) and that the cash pool agreement between the EnBW group companies was therefore terminated in camera, but above all, that bmp's losses, which had already been high for several years, were no longer compensated despite the high profits of the EnBW group and that it had to file for insolvency, has therefore caught many biomethane customers and suppliers unprepared and will therefore most likely lead to considerable consequential distortions in the biomethane and renewable heat market.

In addition, bmp took advantage of the current lack of free biomethane volumes on the market and the high price level in the run-up to the opening of insolvency proceedings to put biomethane purchasers under pressure in contract adjustment negotiations by threatening them with the insolvency law institution of refusal to fulfil the contract (§§ 103 InsO ff.) after the opening of insolvency proceedings and the tight deadlines of the insolvency opening proceedings. A high proportion of the often considerably smaller biomethane customers from the segment of municipal CHP operators or citizen-owned bioheating companies have therefore accepted the reduction of purchase volumes with a simultaneous increase in biomethane prices. Other operators have only discontinued the operation of renewable generation plants. The lost biomethane volumes are probably mainly compensated by the use of fossil fuels. The CHP operators will try to refinance the lost revenues from EEG operation and the increased biomethane and natural gas procurement costs through increased electricity and heat prices. Corresponding price adjustments during the current period of the electricity and heat price brake regime are not only fraught with regulatory risks, but also with high contractual risks due to consumers who are already burdened with extreme price increases. Therefore, a considerable number of subsequent insolvencies of district and local heating suppliers, the closure of municipal facilities such as swimming pools, sports and educational facilities, and budgetary distress of the municipalities and municipal enterprises concerned are to be expected.

But also in the biogas market, the bmp insolvency will lead to subsequent insolvencies of smaller biogas producers or the typical project companies there, which are characterised by low liquidity reserves, as they will not be able to absorb the damages resulting from the realisation of their trade credit risks. At the same time, the restructuring of bmp with the adjustment of the contracts is anything but guaranteed, since it is questionable whether the insolvent company can cover the security requirements for its biomethane purchases or whether upstream suppliers, for their part, will cut off the long-term supply contracts as essential assets of a trading company by exercising extraordinary termination rights. At the same time, the market and bmp's competitors are greedy for free biomethane volumes, so that there is a high incentive to break away from the fragile business relationship with an untrustworthy business partner in need of restructuring. Against this background, it could become difficult to extend expiring biomethane purchase agreements or to acquire new volumes on the market during the restructuring of bmp.

For this reason, bmp's competitors have already publicly courted bmp's customers and suppliers and put themselves in play as acquirers of EnBW's second-tier subsidiary. In self-administration proceedings, in addition to the desired restructuring through an insolvency plan, the possibility of a transferring restructuring is always examined and an investor process is initiated (dual track) to ensure that the creditors are not placed in a worse position in the insolvency plan. Therefore, a sale could also be considered here as a real alternative. In this case, a transferee of a transferring reorganisation within the framework of an asset deal is in a position to decide whether and under which conditions it is prepared to take over or conclude new supply or sales contracts of bmp by agreement. The contracts are not automatically transferred. They are either taken over through agreements with the contracting parties or de facto terminated through the insolvency law instrument of refusal of the choice of performance by the insolvency administrator, so that only a new conclusion of the contract between the contracting party and the transferee remains.

It is not yet clear that bmp will be the last trader to go bankrupt in the German biomethane market, as all biomethane traders are struggling with the same market exploitation, with low trading margins due to declining subsidy revenues and increasing price pressure due to consumer-friendly legislation and jurisdiction.


 

 

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Grafik: Biomethan-Lieferkette 



Adjustment of biogas contracts required

Against this background, the adjustment of current raw biogas and biomethane supply contracts to the new market conditions is an essential component of contractual risk management. On the one hand, the trade credit risk must be reduced by readjusting the payment, default, supply cessation and termination periods and appropriate sanctions, such as flat-rate compensation provisions, rights of retention and special termination rights, and on the other hand, the hedging concept must be tightened up to an appropriate extent and with sufficient effectiveness by means of contractual hedging instruments. In addition to the bank guarantee, which is unpopular due to the cost burden, the assumption of or accession to debt by group parent companies, so-called "hard letters of comfort", assignments of security, industry-specific security assignments such as the so-called "gas deposit" and enforcement subjections will in future be an indispensable component of raw biogas and biomethane supply or purchase contracts.

The proof of the biomass property of the biomethane used, which is required to receive the EEG remuneration, requires the transfer of biogas certificates of origin within the framework of a recognised mass balance system. These are usually kept by private sector actors, some of which are close to the state, partly in the form of an electronic register, where electronic certificates are issued with the production and injection of biomethane, transferred along the trading chain and invalidated when the biomethane is consumed. If a raw biogas or biomethane supplier ceases to be the supplier of the certificates due to insolvency, the end consumer suffers considerable damage due to the retroactive forfeiture of EEG-legal remuneration claims or the distribution network operators' obligation to retroactively reclaim EEG remuneration already paid for up to 2 years. The same applies to other uses relevant under subsidy law, such as those required under the KWKG, the Building Energy Act (GEG), the federal subsidy for energy-efficient buildings (BEG) or other state-specific subsidy programmes. In contrast, the provision of collateral for biogas certificates - similar to the effects of emission certificate obligations under insolvency law - is still uncharted territory under contract law. For this reason, there is a regular need for improvements in the existing raw biogas and biomethane supply contracts.

Insolvency creditor advice in the crisis of the biomethane trader

Against the background of the expected subsequent insolvencies in the further value chain of biogas utilisation, but also against the background of the increased risk of further biomethane trader insolvencies, biomethane contract partners must prepare themselves for future crises. In insolvency proceedings, especially in view of the influences of European law and the special forms of insolvency proceedings that deviate from the standard insolvency proceedings, insolvency creditors must react quickly under the pressure of the deadlines under insolvency law. Insolvency creditors must limit the accumulation of further default risks, in particular by means of insolvency-proof and contestable security agreements and the establishment of a privileged position as a so-called "mass creditor" through the involvement of the (provisional) administrator or (provisional) insolvency administrator.

At the same time, both the standard insolvency proceedings and the forms of proceedings of self-administration, protective shield or restructuring proceedings also open up numerous reaction options which insolvency creditors can use to ensure that their creditor interests are protected. Just as, as a rule, only insolvency experts act and insolvent companies in self-administration now also employ an insolvency specialist as a reorganisation managing director as standard, an insolvency specialist is therefore needed to assess and defend against the reorganisation strategy of insolvent companies, which may be to the detriment of individual creditor groups, in order to protect the interests of creditors. Due to the economic context, interdisciplinary cooperation between business, tax and legal specialists is often required. As a rule, insolvency law measures can improve the negotiating position of insolvency creditors in the typical insolvency phenomenon of the race of supply creditors.

Finally, the substantiation and registration of claims for damages under biomethane supply contracts and EEG law in insolvency proceedings requires a considerable amount of legal substantiation, which in some cases leads to more complex calculations of the amount of damages. In this respect, close cooperation between experts in business administration, energy law and insolvency law is also necessary. 

Contact us if you need support in adapting your biogas or biomethane contracts, adjusting your insolvency law risk management to the changed risk situation or if you have a concrete need for support in the insolvency crisis of a contractual partner. Our experts and interdisciplinary advisory teams will be happy to help you!




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