Industry calls for domestic guarantees-of-origin power policies

LONDON (ICIS)–Policymakers should make sure that countries trading European guarantees-of-origin (GOs) purchase certificates for domestic use, rather than only using green certificates as a way to maximise profits from their own renewable production, industry experts say.

A similar obligation, that could come under the form of full disclosure, would result in improved regional demand, thus propping up price levels and spurring investor appetite for the relatively new market, said Rodolphe Schennen, managing director at Commerg, a brokerage house betting on guarantees of origin.

“With the current set-up and price levels, no one wins”, he said. “Not even the buyers that can currently claim 100% of green power label at a very cheap price, because their commitment lacks credibility.”

A guarantee of origin is an electronic certification that verifies the origin of electricity delivered or consumed.

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.

“Poland is a telling example,” he continued. “Many Polish GOs are sold on the market but the country itself does not purchase in return, and this discrepancy inevitably leads to a situation of oversupply.”

A FRAGILE MARKET

Schennen said the GO market is still in its infancy, being predominantly driven by supply and demand fundamentals, with limited room for speculative behaviours.

“This is proved by the lack of hedge funds and trading houses operating in the sector and the fact that GOs are hardly exchanged twice during their lifetime,” he said. “All that combined makes it a very fragile market, in need of the right policies [to consolidate].”

But in 2020, abundant hydropower paired with significant volumes put up for auction and Brexit-led uncertainty kept GO prices on the over-the-counter (OTC) market hovering well below €0.50/MWh.

AGGRESSIVE SELLING SPARKED UNBALANCES

According to Schennen, alongside fundamentals, a primary driver responsible for keeping prices subdued can be found in auctioning mechanisms flooding the market through a large amount of new certificates coming from subsidised production.

France, for instance, launched monthly auctions in September 2019 which are held on the Powernext exchange, while Italy, another major producer of high-level certificates, holds five tenders per year via the agency GSE. Other EU states relying on a competitive bidding process include Luxembourg and Croatia, but their volumes are dismissed as too modest to affect the market.

But the Association of Issuing Bodies (AIB), a regional hub in charge of developing and promoting a standard use of GOs within the European space, does not hold the same view.

“As in any market, demand will always take a while to react to [the development of the offer],” Liesbeth Switten, secretary general with AIB told ICIS. “However, I would certainly not go as far as to say that this is slowing down investments, on the contrary.”

A mixed position was expressed instead by Salvatore Coco, head of origination at Nvalue, an Amsterdam-based trading company: “In an immature market in which demand is still in consolidation phase, it was recommended to wait until letting national registries offer additional GO volumes deriving from plants that are already benefiting from state subsidies.”

“But at the same time,” he said, “with prices being so appealing, end-users may be prompted to increase their percentage of renewable generation within their mix.”

BREXIT

The prospect of a no-deal Brexit compounded bearishness on prices during 2020. With the UK traditionally supporting demand in continental Europe, growing uncertainty over the regulatory framework under which flows were to take place hit the market.

Alongside their renewable energy guarantees of origin (REGOs), UK businesses tended 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, said. He told ICIS that the EU GO market reached 600TWh, with 50TWh being usually exported to the UK and only 10TWh taking the opposite direction.

Currently, if UK buyers keep purchasing European green credentials under the new set-up, this only happens at a significantly higher risk premium applied to European GOs.

The scenario remains unclear for market participants like Coco, who admitted that a clearer outlook will emerge only around mid-2021.

But according to information released by AIB, changes could materialise shortly, as both the EU and the UK are reconsidering the situation, given the lack of a bilateral agreement regulating GOs flows. In particular, the UK was said to be have concerns regarding the efficacy of European green credentials as a way to claim green generation. Should the UK cease any purchases of EU GOs, bearishness could intensify.

FULL DISCLOSURE, THE MAIN SOLUTION?

One of the most effective ways to enhance demand for GOs is usually identified in the establishment of full disclosure. By making it mandatory for market participants to reveal the origin of their electricity consumption, end-users would be obliged to purchase green credentials. But so far, only a few countries, such as the Netherlands and Austria, have adopted this method.

Coco agreed that “the full disclosure would be a rapid and efficient tool, capable of offsetting the oversupply that is currently present in the market, especially from the Nordic states.”

“If all countries belonging to the AIB hub were to enforce a higher level of transparency, this would substantiate in a closed scheme imposing selling companies a clear-cut trade-off: either they use renewable GOs, or they use non-renewable GOs.”

By Federica Di Sario