When power plants in Europe produce 1 MWh of renewable energy, a certificate is issued indicating how, where and when that unit of energy was produced. Companies can purchase these certificates, or Guarantees of Origin (GoOs), to claim that they buy clean energy and report on the reduction of greenhouse gas emissions.
In 2019 we wrote an article defining what GOs are, and their lifecycle and went on to address what happens to these certificates in the market.
The price revolution after the summer of 2022 it led us to ask “What about Guarantees of Origin certificates in Europe? To better understand the situation, we start by understanding their role in role in the EU energy market.
Energy Attribute Certificates (EACs)
On the grid, renewable electricity is mixed with nuclear and fossil energy, but with Energy Attribute Certificates (EACs) companies can trace the origin of electricity. Different certifications exist in different global economic regions:
- Guarantees of Origin (GO) in Europe.
- Renewable Energy Certificates (RECs) are issued in the United States and Canada.
- I-REC is a more recent global standard introduced in countries where no market mechanism existed, based on best practices from the North American and European systems. I-RECs are currently available in Asia, Africa, the Middle East and Latin America.
- And national systems such as the UK, Poland, Australia, Japan and New Zealand have national EAC systems. In some cases, national certificates can be used to document consumption across borders.
If we focus on Europe, we have a single market HUB, the Association of Issuing Bodies (AIB). A platform for GOs that allows them to trade across national borders to other countries. This unique standardized instrument allows consumers to trace the origin of electricity and to comply with environmental standards, such as the Scope 2 Guidance of the Greenhouse Gas Protocol.
At this point it is worth a reminder: the GHG Protocol classifies corporate emissions according to different business processes called Scopes:
In January 2015, the Greenhouse Gas Protocol Secretariat published a document entitled GHG Protocol Scope 2 Guidance, which provides a framework for assessing and reporting carbon emissions from electricity.
The framework considers Energy Attribute Certificates (EACs) such as GOs, RECs and I-RECs as part of the best practice system for documenting and tracking electricity consumed from renewable sources.
International corporate standards such as RE100, SBTi and CDP also rely on the same Guidance for their reporting mechanisms.
The GHG Protocol Guidance clarifies how companies can credibly procure clean energy and provide corporations with the tools to transform their energy purchasing practices.
Therefore, in addition to compliance with corporate environmental standards, GOs can also help companies to;
- document renewable energy consumption and reliably claim GHG emission reductions
- Track the origin of electricity and choose between renewable technologies
- Source renewable electricity across national borders in more than 28 countries within the European single market
- Follow EU regulations on renewable energy and improve their sustainability rating
- Become more attractive to investors, customers and employees
- Contribute to the UN Sustainable Development Goals (SDGs).
Is green paper worth gold?
Weather patterns, policy changes and geopolitical events can affect the price of certificates. But the debate about the best way to buy renewable energy has heated up recently after strong demand from corporate buyers helped push European certificates to record prices.
The Platts index valued the most traded GOs – Nordic hydro 2022 – at €9.82/MWh on 30 November 2022. Prices have been rising since early September and compared with levels of less than 1 Eur/MWh as recently as the end of 2021.
Much of the rise is due to a shortage of hydropower after a summer of drought in Europe, but also to strong demand from corporate buyers eager to meet emissions targets by buying renewable energy and doing so with certificates.
Another bullish reason is that power producers often sell their planned volume a year in advance, meaning that the GOs for 2022 and 2023 were almost all sold by 2021. Many producers, who had to reduce production during 2022, are currently in the market to buy the certificates they could not issue themselves.
Tighter certification requirements
In a perfect storm, the tightening of reporting requirements also reduces the number of exchanges available to companies wishing to comply with international standards. The siting and adoption of a system of matching supply and demand on an hourly rather than a yearly basis could help improve the impact of certificates, but at the same time raise prices.
In October, RE100 – a group of large companies committed to 100% renewable energy – stated that its members should only claim green power from projects less than 15 years old, in another move to help increase demand for new capacity.
And what is the outlook for 2023?
In early 2023, we see an increase in hydro and wind generation in the Nordic countries and Iberia, which could lead to more supply entering the market and thus impact prices.
However, although European hydropower production is expected to pick up in 2023, corporate demand for GOs and other regulatory constraints in the market will keep prices above the historical level. A price level above 7-8 EUR/MWh is expected unless corporate demand is reduced considering the economic downturn and companies focus on cost optimization.
If the UK leaves the European IBA system in April 2023, market participants may witness an increase in the certificate undersupply gap. The UK imported a large amount of GOs from the EU in recent years as corporate demand increased, accounting for more than 50% of the GOs exchanged.
As for Spain, prices increased significantly and prices in 2023 are likely to remain at this higher level, mainly attributed to the current dry weather conditions. In addition, due to the arbitrage opportunity between the Iberian and Central European energy markets, we can see how unsubsidized renewable installations are incentivized to export domestic GOs to other parts of Europe, such as Italy, where market prices are around 10 EUR/MWh, thus limiting the local supply of GOs while corporate demand is increasing.
The market of 2023 promises to be stimulating for all GOs participants. There will be no room for boredom, and it will be an exciting time for those willing to adapt and embrace change.