Green certificates in Europe; taking the stock of the last ten years

Green certificates in Europe; taking the stock of the last ten years

Renewable energy certification is a relatively mature concept which has already been implemented in most EU countries through the Guarantees of Origin (GO) system. The legal foundation of the GO system is the Renewable Energy Directive (RED I) *1. Article 15 of that directive obliges Member States to issue GOs for the purpose of proving to the final consumer that a certain quantity of energy was produced from renewable energy source. Such information should guide the end-consumers’ behavior, eliminating the “information asymmetry” on the consumer side. At the same time, enabling an EU-wide exchange of GOs, European Commission aimed at creating an attractive market instrument for producers, traders and suppliers. An underlying assumption was that the green certificates would encourage new investments in RES.

Ten years has passed since the GO introduction. This is a sufficient time frame to take stock of the GOs impact on consumers and on business, including on new RES investments. Which is what we have done, disregarding gas aspects and focusing solely on electricity.

Looking first at the impact the GOs have had on the consumer behavior. The picture is not super clear as hard data are missing and relatively little research is available. However, electricity suppliers in most EU member states are increasingly offering “green” products and large corporate customers such as IKEA, Google or Amazon that have committed to drastically increase the renewable energy share in their final consumption, tend to be large GOs consumers. Household segment is also growing, although the level of income continues to be an important demand side variable.

The wholesale market and trading aspect of GOs is a bit easier to quantify although here too, data must be treated cautiously. While quantity data is publicly available (through the AIB), price data is not. This is because trade in GOs occurs mainly bilaterally or via brokers and price for individual GO certificates is not reported to some kind of central authority. It must also be kept in mind that the price of each GO very much depends on the maturity date of the certificate. Newly issued certificates have more value than those with shorter expiry date. As regards the quantity, the amount of issued GO certificates have been constantly increasing each year, reaching around 600 TWh in 2018 and last year, nearly 900 TWh *2. Hydropower is the most common technology behind issued GOs in Europe with a supply share of 56% in 2018. As mentioned, assessing the GOs prices and the value of the European GO market is a trickier issue but available data suggest that price per GO in 2019 was 0.40 – 0.50 MWh/EUR and forecasts for 2020 suggested 0.75 – 0.85 EUR/MWh *3, while other data suggest a range between 0,20 – 0,80 EUR/MWh. Data from a recent public GO auction carried out in Slovakia indicated a lower price, 0.15 – 0.25 EUR/MWh *4.

Data from one singe member state are certainly not representative for the whole EU but it is clear that the GO prices do not follow the price trend of ETS allowances, experiencing a dramatic increase in recent years. Reason for this is two-fold. First is the oversupply of GOs emerging due to large amount of import from old hydro power plants, mainly those in Norway and Sweden. Looking at the data from 2020, around 25% of all GOs issued in Europe were issued in those two countries, joined by Austria and Switzerland HPPs (another 15%) *5. The second reason is that in most EU countries, purchase of GOs is completely voluntary and in those countries, companies and households are typically willing to pay only a small premium (roughly between 0-2 €/MWh) in order to get guaranteed green electricity. In member states that have introduced a compliance market (Sweden) or some kind of additional incentive linked to GOs (Slovakia) the GO utilization rate and prices tend to be higher *6. Given all these uncertainties it is difficult to set any exact price tag on the overall European GO market. One assessment suggests a market value of around 120 million EUR in 2016 *7. That year the GO market was around 360 TWh. Considering that last year more than 800 TWh GOs were utilized and that an average GO price was EUR 0,40 MWh (which is a conservative assumption), the European GO market value today could be around 300 mil EUR. This is additional income that could well be channeled into new RES generating capacities but so far, the practical track-record is rather limited (due to relatively low GO price premiums). What has, however, worked in some countries is using the income from GO auctions for additional financing of the RES support system. Slovakia, where the GOs system along with an auction functionality have been implemented by the IT company Sfera, a.s. *8, is an example of such approach.

Looking back at the last ten years, the European GO market it wouldn’t probably be right to label it as a major success. While number of issued GOs is continually increasing and there is an evident growth of GOs consumption, the GO market size is perhaps not as large as initially planned. What is very important though – and this cannot be stressed enough – is the emergence of a functioning and standardized framework for GOs. GOs are based on the European Energy Certificate System (EECS) rules that each member state “transposes” into its own national Domain Protocol and these in turn, are approved by the Association of Issuing Bodies (AIB) which operates an inter-registry communication hub that is linked directly to each national GO issuing body. This system enables seamless trading of GOs across EU member states, minimizing transaction costs and room for possible fraud. This is an important prerequisite for any further development and reform of the system.

There certainly is a number of “instruments” that could be used to further boost the GOs market in Europe. Mandatory schemes requesting member states to use certain GOs amount to offset consumption could be introduced (taking Sweden and Poland as an example). Some form of “backloading” used in the case of EU ETS could address the over-supply problem and GOs prices would probably be artificially inflated. Luckily, the backloading idea did no make it way through when the European Commission reconsidered the rules for the GO system in the process of drafting of a new directive 2018/2001/EU (RED II). Luckily, because after all, the European GOs system is developing in the right direction and altering the rules along the way could damage the trust in the system. Instead, the Commission introduced new rules that could improve the attractiveness of the GOs system by extending the scope and adding new products. More details on the changes within the RED II in the next chapter. Along with some thoughts on possible GOs market development in Ukraine.

Kristian Takáč