Green certificates in Ukraine; quo vadis?

Green certificates in Ukraine; quo vadis?

Ukraine has committed to implement the GOs system back in 2012 through a Ministerial Council decision 9. Based on Article 15 of the RED I, Energy Community Contracting Parties (including Ukraine) agreed on developing relevant national legislation and designate an authority responsible for the implementation of GOs. A year later, Ukraine adopted a Decree On approval of the Procedure for issuance, use and termination of the GOs of electricity for economic entities that produce electricity from alternative energy sources (2013) 10. However, as stated in the latest Energy Community (EnC) implementation report from November 2020, the State Agency on Energy Efficiency and Energy (SAEE) as the designated body has failed to implement an electronic system compatible with the European Energy Certificate. EnC encouraged Ukraine to establish the GOs system without further delays 11.

In all fairness, it must be acknowledged that the SAEE has since the change of management taken some concrete steps towards the GOs implementation. In October 2020, working group on GOs implementation met for the first time 12 and drafting of national legislation is underway 13. In the meanwhile and possibly in order to speed things up, EnC secretariat has issued a Discussion Paper on the implementation of the GOs system in the EnC, proposing to Contractual Parties (CPs) a regional/ EnC-wide approach to the GOs implementation 14. Under such approach, EnC secretariat would assist in setting up a regional GOs system, covering the national markets of all or selected CPs. Secretariat would also centrally procure a software provider of a regional electronic registry software and possibly help with negotiating better conditions with insurance companies. At the same time, the EnC secretariat would facilitate an “observer status” for the CPs in the AIB and enable AIB countries to export their GOs to the CPs’ national markets (while the opposite direction would not be available during the first phase). In essence, the AIB and the EnC regional GOs market would co-exist for some time and once the EnC countries reach sufficient level of maturity and readiness, the two markets would merge.

Gradual approach to the GOs market development and continual know-how transfer from more experienced AIB members make sense and therefore, the EnC proposal should be welcomed. As always, the devil is in the details and shedding more light on some of them would be useful. For example, if we agree that trust is the single most important factor that will make or break any system then being able to credibly prove to all parties involved in the GOs exchange that the GOs issued, transferred and cancelled correspond to objective reality is an absolute must. It implies that the responsible national authority must at all time be able to confirm that data submitted by the RES producers entitled to GOs are credible and double checked against the metering data of DSOs and TSO. These kind of things and processes are outlined in the national Domain Protocols, approved by the AIB and to avoid possible frauds, national issuing bodies are regularly audited by AIB. It is unclear who would assume such responsibility in the proposed regional GOs system. It is unlikely that the EnC secretariat itself would given its lack of expertise and competences in the field. Establishing national registries and connecting these with each other through a joint software provider is one thing. Ensuring that all data entered into the database are correct and fraud-free is another. So far, AIB has successfully fulfilled the role of the ultimate guarantor and the central authority. It is unclear if some other organization would.

It would also be wrong to over-rely on innovative solutions like blockchain to guarantee the correctness of the GOs related data. Blockchain ensures that no one tampers with the data once they are entered into the system. What is needed though is that the data entered have already undergone a reality check and are verified. Again, a centralized authority with clear responsibility and access to relevant data from grid operators is more apt for a functioning GOs system than a decentralized solution. Therefore, creating a parallel system to the current EECS based system operated by AIB might be a risky affair. Gradual and continuous convergence with the existing European system and eventually a full membership in the AIB is probably a better approach.

Yes, full membership might prove to be problematic, given the wording of the new directive 2018/2001/EU (RED II) 15. Article 19(11) provides that the EU countries shall recognize GOs issued by a third country only if the EU has concluded an agreement with the third country in question and only where there is direct import or export of energy. However, the directive does not contain a definition of the term “direct import or export of energy”. It can be assumed that “direct” points to an existence of an interconnector between the EU and the third country, existence of a common border between the EU and the third country or, possibly, that the import or export is not dependent on a transit country. Therefore, while conclusion of an agreement on mutual GOs recognition between the EU and a given third country should not be impossible (Serbia, after all, is a precedence), signature of such agreement is dependent on the European Commission’s interpretation of the term “direct import”. Be sure that it is not a theoretical mumbo jumbo exercise for lawyers. The interpretation will have an impact on whether Montenegro, Kosovo, Georgia and/or Russia (imagine large PV installations in Kalinigrad or green hydrogen via the Nord Stream) will be able to trade their GOs via the AIB system. A quick win would be a clear definition or an appropriate wording amendment in the upcoming RED III directive, to be revealed in the second quarter of 2021 16. In any case, this is an area where the EnC secretariat’s help is useful and even necessary. Speaking with the Commission with one voice on behalf of all CPs is certainly more efficient than an individual approach.

Reaching an agreement with the EU on mutual recognition of GOs and establishing a GOs system in the Energy Community countries that is fully compatible with the AIB (and ideally a full-fledge part of it) is even more pressing issue in view of the upcoming Green Deal legislation and the Carbon Border Adjustment Mechanism (CBAM) that will be part of the package 17. Currently, European power sector is subject to almost 100% auctioning of ETS allowances. Third country electricity producers exporting their electricity to the EU have an advantage over their EU peers since their electricity is not subject to any carbon-pricing scheme, carbon tax or ETS. This is set to change, once the CBAM kicks in, probably in 2023. The exact effect that the CBAM will have on the electricity imports is not entirely clear but considering that last month the price per CO2 surpassed 40 EUR 18, it is unlikely to be negligible. An EU based trader will have less incentive to purchase electricity outside the EU if margins are not substantial (and on top of that, booking of cross-border capacity remains explicit). Basically, the only power source that will maintain competitive in terms of export/import is the renewable energy, since no additional tax or levy is applied. However, to make efficient use of this advantage, a RES producer must credibly prove that his/her energy is really green. We are back to square one – the GOs.

Consider now the volume of installed capacity of RES in Ukraine and the importance of electricity and gas import/export for the Ukrainian economy. The necessity to have a functioning GOs system in place in some relatively near future becomes too obvious. In fact, among all other Energy Community members, Ukraine is probably the country that needs the GOs the most.

Last year, Ukraine exported twice as much electricity (4,7 TWh) as it imported (2,3 TWh). Basically, all electricity produced in the Burshtyn island goes to either Hungary, Poland or Slovakia 19. Given the current overcapacity of the Ukrainian system (growing volume of RES with priority dispatch has led to limitations in nuclear production but RES are subject to curtailment too) the electricity export share could probably be even higher would the grid infrastructure be fit. It will be in 2023, when Ukrenergo performs technical synchronisation with the ENTSO-E system. It would be a missed opportunity if around 7,5 TWh of RES produced annually in Ukraine could not be exported, benefiting from the fact it is excluded from the CBAM (assuming that green electricity and gas could be). Income that the Guaranteed Buyer would generate could be used to cover part of the debt it has vis-à-vis the RES producers. The same holds for the GOs. Income from the sell of certificates may be used to boost the RES support scheme and improve the payment discipline of the Guaranteed Buyer.

This presupposes that the Ukrainian GOs system is designed in a way that enables the income from GOs to be channelled back to the RES support system. Several approaches are possible but one that has proved to be working elsewhere is obliging RES producers that already receive feed-in-tariff to hand over their GOs back to SAEE, as the issuing authority. SAEE would then sell these GOs through a public auction open to Ukrainian companies and later, once the system is connected to the AIB, to businesses across the EU. The auction income would then go back to the RES support system or any other initiative linked to renewables. Similar architecture have been implemented in Slovakia and it is very much in line with Article 19 of the new RED II (that will soon need to be transposed by the EnC countries), asking member states to ensure “that when a producer receives financial support from a support scheme, the market value of the guarantee of origin for the same production is taken into account appropriately in the relevant support scheme“. Directive further states that „the market value of the guarantee of origin has been taken into account appropriately, where the guarantees of origin are not issued directly to the producer but to a supplier or consumer who buys the energy from renewable sources either in a competitive setting..“ 20. Those RES producers that do not receive any feed-in-tariff would off course be able to sell their GOs as they see fit.

A final but very legitimate question to ask is how much money could be generated through the GOs in Ukraine. As with most of the things, it all depends on the price and the price is an expression of demand. It has been mentioned above that in countries that have introduced additional stimuli for the GOs consumption the GOs prices tend to be higher. Suppose that Ukraine introduces consumption tax discounts for companies purchasing GOs (as done in Slovakia), obliges the companies to use certain amount of GOs (example of Sweden), or a combination of both approaches. Effectively, the GOs price could reach at least 0,20 EUR/MWh and with accession to the AIB, even higher levels. Depending on the price levels and the amount of RES capacity for which GOs will be issued, additional 2-3 million EUR could be added to the system each year. The number might not be impressive but given that last year, the Guaranteed Buyer reimbursed 63% and during the January-March period around 90% of the due payments to RES producers 21every penny should count. Moreover, GOs could help to improve the tarnished image of RES in Ukraine 22 and demonstrate that Ukraine is serious about joining EU’s Green Deal and align with the blocks carbon neutrality objectives 23.

Whether Ukraine choses to implement the GOs system with the help of the EnC or adopts a national approach is not entirely important. What is important is that Ukraine proceeds with the GOs system implementation sooner rather than later. And selects a system that will allow it to become an integral part of the European AIB system.

Kristian Takáč