Businesses and consumers are becoming more picky about the origin of their electricity supply, motivated by a growing sense of urgency to act on climate change. European utilities have noted a strong rise in demand for green electricity – that is, electricity from renewable sources. An important part of the response has been the use of Guarantees of Origin (GOs) – tradable tags that certify the provenance of power supply, down to quite specific details of the generation technology involved and the geographic location. So how do GOs work and how significant is the trend? Let’s take a closer look… What is “green demand” and who is driving it? Businesses are a key source of demand, driven by Corporate Social Responsibility (CSR) principles, as they seek to show customers and investors they
Mario Perez considers the following as important: electric power, ESG, EU, renewables, trading, utilities
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Businesses and consumers are becoming more picky about the origin of their electricity supply, motivated by a growing sense of urgency to act on climate change.
European utilities have noted a strong rise in demand for green electricity – that is, electricity from renewable sources. An important part of the response has been the use of Guarantees of Origin (GOs) – tradable tags that certify the provenance of power supply, down to quite specific details of the generation technology involved and the geographic location.
So how do GOs work and how significant is the trend? Let’s take a closer look…
What is “green demand” and who is driving it?
Businesses are a key source of demand, driven by Corporate Social Responsibility (CSR) principles, as they seek to show customers and investors they are taking climate change and environmental impacts seriously.
Local councils and government departments are also paying attention to the source of their electricity supply, to meet green targets.
Perhaps even more important has been the trend of consumers opting in or changing their power tariffs to so-called “green tariffs” – enabled by widespread liberalization in Europe’s retail electricity markets. Several new entrants have capitalized on this demand, branding themselves as 100% green power suppliers.
How can anyone guarantee green power supply from intermittent renewables?
Since 2007 electronic certificates known as Guarantees of Origin (GOs) are used for this purpose. They verify to an electricity customer that a quantity of power – measured from 1 MWh – corresponds to a quantity or share of power produced from a specified, renewable, energy source.
It also includes details such as location, type and capacity of the installation where the energy was produced, so that no double counting occurs in the system.
However, to reflect an ever more integrated European power market, legislation has been updated so that producers of renewable generation that receive no subsidies may export their GO certificates across Europe.
As countries have opted into this mechanism, tracking of their GOs has been enabled via the European Energy Certificate System (EECS).
How are these GOs traded domestically or across Europe?
They tend to be traded bilaterally, predominantly via brokers and more recently bundled in with Power Purchase Agreements, which has given the market a new dynamic. PPAs are long-term agreements between power consumers and producers, which fix a price and a quantity for future delivery periods.
In countries such as Spain, bundling of the GOs in PPAs has permitted renewable projects to receive finance. This is because the GOs were seen by the financing agent as providing cash flow of the project.
How do the demand/supply dynamics play out in the GO market?
The typical market logic that assigns value according to abundance or scarcity applies to GOs too. GOs underpinned by the most abundant technology – hydroelectricity – have lower prices while those associated with solar, which is relatively scarce, command higher prices.
However, region specifications have also played a role in the demand/supply dynamics. Government bodies have been seen to demand “homegrown” green energy – for example, a Dutch council might opt for GOs from Dutch solar plants rather than Belgian ones, incurring a hefty premium.
But it’s the customer that best knows their needs, and they could equally go for the cheapest “non-specific” or “bulk” GO products such as Large Nordic Hydro or unspecified EU Wind, or buy GOs for power plants or technologies in certain locations.
Which European countries are leading the way in supply?
The key origins for GOs have historically been the Scandinavian countries due to their hydroelectricity capacity. Italy and Spain are next, but have fewer exportable GOs due to their subsidies for solar and wind projects. Hydro-rich Portugal is getting set up to implement the GO system in 2020, sources close to the matter have told S&P Global Platts.
GO supply is still largely inelastic due to the limited share of renewables in the overall European electricity production. However, due to 2020 renewable targets some countries are set to see a ramp up of non-subsidized green generation capacity. Spain, for example, is looking at 8 GW of possible unsupported wind and solar generation.
How big is the GO market?
According to data from the Association of Issuing Bodies, which facilitates the EECS, supply reached 602 TWh of in 2018, and is projected to rise to around 650 TWh in 2019.
Demand stood at 508 TWh in 2018, projected to reach around 550 TWh in 2019.
For comparison, total EU power production from hydroelectric, solar and wind generation is estimated at 853TWh in 2018 by environmental group Sandbag.
Both the demand and supply of renewable GOs grew in 2018, but supply/demand gap is set to continue to increase, especially as GOs expire (less than 30 TWh in 2018).
Expired GOs are certificates that have not been cancelled, i.e. redeemed to cover power consumption for a given period, before the expiration date of the certificate, hence forgoing the value of the certificate. Some utilities have been heard to lose track of purchased GOs, later realizing they had lost millions as the GOs expired.
European countries continue to invest in renewable energy generation capacities and renewable generators fall out of support/subsidy systems and become eligible for GOs, increasing supply.
What are the latest regulatory developments?
The most recent regulatory change for GOs occurred on June 13 2019, when the UK government implemented a VAT reverse charge for GOs. This means that the power customer is liable to account for the VAT rather than the supplier, thus removing the opportunity for the VAT to be stolen. This risk was a concern for some bigger institutions as they looked into the GO market, so the change could foster more participation.
However, there are still some issues caused by uneven regulation across Europe, such as differences in validity period, which in Germany is 9 months instead of the more common 12-months.
Some countries have set up auctions, where profits from the sale of the GOs go back to the national treasury. Auctions take place in France, Poland, Italy, and UK which has a market-driven auction as opposed to a government-run one.
S&P Global Platts has proposed to launch European Guarantee of Origin price assessments in the near future and is inviting feedback.
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