ICIS Power Perspective: Demand for Guarantees of Origin grows, but regulatory outlook remains uncertain

19 March 2018 11:18 Source:ICIS

Both the demand and supply of Guarantees of Origin (GoOs) issued for renewable energy production continued to grow in 2017, according to the latest statistics published in March by the Association of Issuing Bodies (AIB). However, the regulatory outlook for GoOs from 2021 remains uncertain as the European Parliament and Council continue trilogue negotiations on the recast Renewable Energy Directive.

Background

  • GoOs are an EU traded commodity used to verify the origin of renewable electricity, required by the 2009 Renewable Energy Directive (please see the summary of the Directive on the Power Perspective Portal)
  • They make it possible for producers to guarantee to consumers that the energy they are receiving comes from a renewable source, and are of the standard size of 1MWh
  • The production, trade and sale of GoOs also allow renewable producers to receive additional revenue, above the price of the physical electricity
  • A GoO can be transferred independently of the energy to which it relates, from one holder to another, and can be traded across borders
  • The implementation of GoOs in the majority of the EU countries and Norway is based on the European Energy Certificate System (EECS) operated by the AIB
  • The trade of GoOs usually take place via bilateral or brokered agreements

The GoOs market

  • The latest statistics show that 525 TWh of RES GoOs were supplied (issued) and 471TWh of GoOs demanded (cancelled) in 2017 among the AIB members (please see the figure below)
  • Even though there has been more supply than demand since 2012, in 2017 the demand grew faster than supply: the demand of GoOs grew year-on-year by 28.3% in 2017, while supply grew by 12.1%
  • Based on the information provided by market participants, a usual GoO price is €0.70/MWh, but cross-border prices of GoOs in some occasions reached €4.00/MWh in 2017

  • According to AIB, based on national implementation, at least six EU countries do not issue GoOs to the RES producers that receive support from national subsidy systems, namely, Croatia, France, Germany, Ireland, Luxembourg and Portugal
  • In 2016, in all those countries together 237TWh of RES power was supported in national subsidy systems and, thus, no GoOs issued (please see the table below)

Revision of the GoOs system

  • EU legislators are currently revising the Renewable Energy Directive, including the GoOs system, with trilogues between the Council and Parliament having begun in February - see the positions on the Clean Energy Package of the European Parliament and of the Council on Power Perspective Portal
  • Regarding the GoOs market, the biggest disagreement between the EU co-legislators are over the treatment of power producers that receive support from national RES subsidy systems, to which selling GoOs mean additional income:
  • Commission‘s original position:
    • No GoO to be issued to a producer that receives financial support from a support scheme for the same energy to avoid “double compensation“
    • In this case, member states shall issue the GoO and then transfer them to market for auctioning, with the revenues used to offset renewable energy subsidy costs to the public
    • Unclear whether this applies retroactively to all RES sources or just to new RES sources
  • Council‘s position:
    • Partially adopted the Commission’s position with adjustments
    • Double compensation to producers benefitting from a support scheme to be avoided either by issuing and then cancelling the GoO (own position), or through transferring them to the market for auctioning (Commission position)
    • Unclear whether this applies retroactively to all RES sources or just to new RES sources
  • Parliament‘s position:
    • To avoid double compensation to producers benefitting from a support scheme, the GoOs shall be issued for statistical reasons and then cancelled (as in Council position)
    • However, no double compensation shall be assumed when:
      • Financial support is granted through a tender procedure or tradeable Certificates of Origin (CoOs, often known as “green certificates”)
      • The market value of the GoO is administratively taken into account in the level of financial support
      • The GoO issued to the supplier rather than the producer if a long-term power purchase agreement (PPA) has been signed
    • Only applicable to renewable installations commissioned after entry into force of the directive (2021)
  • Neither the Council or Parliament position clarify how auctioning of GoOs, if implemented, would be organised

Analysis

  • The direction of future GoOs prices will depend on the position adopted in the recast Renewable Energy Directive
  • If the initial position by the Commission was adopted then countries that currently do not issue GoOs for supported production may start issuing and auctioning them (237TWh in 2016)
  • This would likely result in increased supply of GoOs, which would put downward pressure on their price
  • Based on the Council’s position, if adopted, the market of GoOs could go either way
    • If GoOs get cancelled all across the EU when they are issued for RES producers already benefiting from national support schemes, it would decrease the supply of GoOs and put upwards pressure on their price
    • If countries that currently do not issue GoOs for supported production start issuing and auctioning them, it would put downward pressure on their price, as would be based on the Commission proposal
  • The Parliament’s position, if adopted, would have the least impact on the future development of GoO prices
    • It would apply only to new installations installed after the coming into force of the draft Renewable Energy Directive; therefore, it would not affect the supply of GoOs coming from the RES power producers that are online currently
    • Moreover, the Parliament’s proposal would not impact RES producers that enter the national RES subsidy systems via tendering or auctioning procedures or trade CoOs (“green certificates”)
      • When designing support systems for new RES installations, EU countries are increasingly moving towards such kinds of competitive procedures to distribute subsidies to RES producers
      • Currently France, Germany, Greece, Hungary, Italy, the Netherlands, Poland, Portugal, Slovenia, Spain and the UK support RES producers via auctions and tenders, and in Lithuania new auctions for RES support are planned
      • In addition, Belgium, Poland (only power production from biogas for new installations), Norway and Sweden base support systems for new installations on tradable CoOs
      • Please see the renewable subsidy system overview table on the Power Perspective Portal

Next steps

  • The next trilogue meeting on the Renewable Energy Directive is due to take place on 27 March 2018
  • Austria, who will take over the presidency over the EU from Bulgaria from July 2018, said that it planned to finish the negotiations during its presidency
  • It is not yet clear whether the Parliament or Council with regards to GoOs will be adopted

Vija Pakalkaite is Analyst - EU Carbon & Power Markets at ICIS. She can be reached at Vija.Pakalkaite@icis.com
Matthew Jones is Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Matthew.Jones@icis.com

This story has originally been published for ICIS Power Perspective subscribers on 15 March 2018 18:18 CET.

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By Staff Reporter