Brexit casts uncertainty on Italy’s guarantees of origin

LONDON (ICIS)–Buying interest in Italian Guarantees of Origin (GOs) has remained generally high at auctions in the last two years, with an allocation rate of over 98%, according to data from energy services operator GSE, a state agency.

But growing uncertainty over faltering demand may pose a threat to bilateral trading, one market participant said.

A Guarantee of Origin is an electronic certification that verifies the renewable origin of electricity delivered or consumed. With the European Energy Certificate System (EECS) accounting as the overarching EU-wide system, all membership parties are allowed to freely exchange GOs.

As of today, the trading of Guarantee of Origin certificates constitutes a mainly voluntary market, meaning consumers are not forced by law to demonstrate the origin of their electricity. Yet, many choose to do so to showcase their commitment towards clean energy and boost investor confidence.

LATEST AUCTION RESULTS

The most recent auction, held on 21 September, covered production from January until July.

Some 6.574TWh out of the 6.588TWh on sale was allocated, which was in line with previous tenders.

The weighted average price across wind, hydro, solar and biomass was €0.54/MWh, up from €0.34/MWh in the June auction.

Solar remained the most expensive technology, replicating a trend emerged also during the three preceding auctions, while hydropower stood out as the cheapest source.

Solar is set to maintain the highest value, at least in the immediate future, while biogmass is seen as the next promising source, Jury Mancinelli, sales director at Inxieme Energia, told ICIS. The company, which is part of Gnera Group, is specialised renewable trading and offers services of GO management.

OTC UNCERTAINTY

While largely subscribed auctions pointed to a stable appetite for Italian GOs, on the over-the-counter (OTC) market the picture is different.

Italian GOs can also change hands bilaterally on the over-the-counter market, currently holding the largest share of the traded volume, or on national exchange GME, which manages monthly trading sessions on its platform.

This is because in Italy the auction system sees a major involvement from large institutional players, whose demand forecast tend to be easier to predict.

“First Brexit, then the coronavirus crisis opened the door to increased uncertainty on the OTC market, which was reflected in a significant weakening of prices,” Mancinelli said.

According to Mancinelli, the prospect of a no deal Brexit may prove particularly grim for the Italian GO market, which has long benefitted of the favourable conditions made possible by British regulation.

UK REGULATION

Alongside their Renewable Energy Guarantees of Origin (REGOs), UK businesses tend to buy a large number of EU GOs to comply with the fuel mix disclosure obligations. Sergio Cavallaro, portfolio manager at 3Degrees Group, an energy consulting firm, told ICIS that the EU GO market reached 600TWh, with 50TWh being traditionally exported to the UK and only 10TWh taking the opposite direction.

This means that a hard Brexit may result in an additional supply of 40TWh.

“The UK set up specific fiscal incentives which allowed European GOs – and Italian ones in particular – to be sold at three times the value they would have otherwise had on the European market,” Mancinelli explained.

“But nowadays, with Brexit looming large, no UK end user has shown interest for 2021 capacity, which is at odds with what we were used to see,” he said.

OUTLOOK

The next auction round is scheduled in December.

ICIS analysts anticipate that a general push towards a greener power mix could result into a strengthened internal demand for GOs, which is likely to translate into a price rebound.

Cavallaro said he expects demand to outweight supply within five years.

However, the immediate future may still be characterised by a slow growth rate.

“I do not expect the market to come back to normal before late 2022,” Mancinelli said.

By Federica Di Sario