A universal guarantee of origin?
Voluntary market development
Towards a regional market in Scandinavia

The European Union admitted in 2004 that it was not on course to meet the targets it has set for renewable energy and that it was looking at ways of spearheading efforts to meet those targets. The EU as a whole, including the 10 member states that joined in 2004, has a target to increase renewable energy as a share of all energy consumption from 6% to 12% by 2010, as set out in the EU's White Paper for a Community Strategy. A separate target, specifically for electricity, was set in the EU renewables directive (2001/77/EC). This calls for national targets, which if met would see the proportion of power generated from renewables rise from 14% in 1997 to 22% by 2010. The European Commission conceded in late 2004 that this target would also be missed and that an 18-19% share for renewables was a more likely result for 2010.

As well as setting targets, the renewables directive calls for national support schemes as mechanisms for meeting the targets. However, it also rules in the possibility of a harmonized support scheme being introduced across the EU in the case that national support schemes are not met. As the reality dawns that the EU's targets for renewable energy are not being met, the case for a harmonized support scheme becomes more compelling.

In October 2004, the Commission reported on member states' progress towards their renewable energy targets and concluded that most member states were lagging behind and the targets would likely be missed by a wide margin. In October 2005, the Commission is to report again, but this time on the effectiveness of national support schemes in meeting the targets. Debate has already begun on a harmonized scheme that would replace national schemes if, as appears likely, they are found to be delivering less than the desired result. Many observers believe the EC will indeed seek to introduce a harmonized support system.

According to Alfonso Gonzalez Finat of the EU Commission's Directorate General for Energy, the next steps for the EU are to "deeply study the national measures taken to implement the two directives (electricity and biofuels) in the 25 member states of the the EU and to take legal action, if needed…. In 2005 the Commission will publish a report on the support schemes (and any degree of coordination) and [any] administrative barriers."

At the moment, support measures vary from state to state. Some, like the UK, have an obligation/certificates system, known in the US as Renewable Portfolio Standards. This requires all licensed energy suppliers to source a proportion of their power from eligible renewable sources including wind, solar and biomass. Power from eligible generation is awarded certificates that suppliers must acquire to prove that the required percentage of their power sales comes from renewable generation. There are other variations of the obligation/certificates system, such as in Sweden where the obligation is on consumers rather than suppliers, but the distinction is academic, since in practice suppliers source the certificates on behalf of their consumers

Others, like Germany, favor feed in tariffs, which effectively subsidize all power production from renewables by guaranteeing a premium price for all power produced by eligible plants. In Germany the feed in tariff is paid by the relevant local distribution company into whose grid the green power is fed. Feed in tariffs are not target driven and therefore place no limits on the amount of capacity installed, since any plant that qualifies as renewable under the scheme is eligible for the feed in tariff. Some other countries give direct subsidies to renewables production.

If the EC decides that a harmonized support system is needed, it will have to choose between one of these, and the smart money is on it opting for a green certificates based system. The European Wind Energy Association said in late 2004 that it expected the EC would favor a renewable energy certificates trading scheme over feed-in tariff mechanisms, which could create problems for member states that have adopted non-market based models "The indications we have are that the Commission is likely to introduce a green certificates model, but whether that will be a mandatory, harmonious requirement across the EU and when it would be implemented is not clear," EWEA's policy director Christian Kjaer told Platts at the 2004 Wind Energy Conference in London. But he warned that if the Commission opts for a mandatory scheme as early as 2006, which is possible, then the consequences for wind developers in those countries with feed-in tariffs could be severe.

A universal guarantee of origin?

However, there is a strong European lobby in favor of some sort of certificates scheme, and this need not be at the exclusion of feed in tariffs or other mechanisms, according to Peter Niermeijer, General Secretary of Recs International, an industry funded body set up in 1999 to promote the use of renewable energy certificates in Europe. Recs issues certificates that are available to producers of renewable energy as guarantees of origin. One Rec certificate is issued for 1MWh of certified renewable energy.

"We want a pan-European [certificates] system--that is the clear aim of Recs since the organization was founded five years ago," Niermeijer told Platts. "But this needs to be an information system that supports all support systems. Certificates by themselves achieve nothing. They only work because there are policies [like renewables obligations] that create a market for the certificates. But they can also work with feed-in tariffs." Niermeijer points out that feed-in systems without any certification system could lead to a lack of consumer confidence in green power if there is a risk that green power is double counted--earning a feed-in tariff in its domestic market, therefore subsidized by domestic consumers, but also commanding a premium price in export markets. This, claims Niermeijer, is what happens when German wind power is exported, for example to the Netherlands. "We want a pan-European [certificates] system--that is the clear aim of Recs since the organization was founded five years ago," Niermeijer told Platts. "But this needs to be an information system that supports all support systems. Certificates by themselves achieve nothing. They only work because there are policies [like renewables obligations] that create a market for the certificates. But they can also work with feed-in tariffs."

Niermeijer points out that feed-in systems without any certification system could lead to a lack of consumer confidence in green power if there is a risk that green power is double counted--earning a feed in tariff in its domestic market, therefore subsidized by domestic consumers, but also commanding a premium price in export markets. This, claims Niermeijer, is what happens when German wind power is exported, for example to the Netherlands.

"We want German [green power] output certified so that the renewables quality cannot be double counted. The German government should certify every kilowatt hour from renewable plants for both feed in power and power that is exported." Without certification, according to Niermeijer, there is a risk that power that is produced in a country with a feed-in system gets feed-in subsidies there and is then exported to a country with a certificates system.

Recs has proposed that all governments should publish clear standards for guarantees of origin. The EU's renewables directive requires all member states to implement a guarantee of origin system to prove that power is from renewable sources. However, these systems vary from country to country. Recs has called for a degree of harmonization so that GOOs specify whether the renewable power has benefited from any form of subsidy--including feed in tariffs--and should contain as much additional information as possible including the type of generation used, location and age of the plant form which the power was generated and even the total installed capacity of the plant.

"The more information there is, the better for the customer. Customers can rely on the guarantees of origin to help them make an educated choice. Some customers might not want to pay a premium for power that is already subsidized, and they might want to buy green power from a specific type of generation, like wind, and make sure that the power they use comes from fairly new or small installations rather than large established hydro.

To further these aims, Recs has sponsored the setup of the Association of Issuing Bodies, a European umbrella group for national bodies that issue and monitor green certificates. And the AIB has come up with its own set of guidelines issuers of green certificates under the European Energy Certificates System, which can also be used for certifying the origin of non-green power, for example power from conventional combined heat and power plants.

"Our ideal scenario is that governments appoint issuing bodies to issue their GOOs and that these are members of the AIB and so issue harmonized EECs. But in reality some governments have appointed their own issuing bodies and their certificates all have different characteristics," says Niermeijer. "This is not good for trade across international boundaries." He cites the example of the UK, whose renewables obligation requires all power suppliers to source a percentage of their power (4.9% in 2004/05; 5.5% in 2005/06) from eligible renewable sources. The UK has its own certificates for this scheme, renewables obligation certificates, but these are not interchangeable with any other certificates--they cannot be exported, nor can certificates from other countries be imported.

However, six European countries, Finland, Norway, Sweden, the Netherlands, Austria and Germany have adopted EECs for their green certificates, and Niermeijer hopes that other countries will follow suit.

Both Recs and the AIB are pushing for EECs to be adopted on a pan-European scale to allow cross-border trade of energy certificates. "We should be trying to meet the EU overall target in the most cost effective manner possible," says Niermeijer. "If it is more cost effective to build renewables capacity in one country rather than another, then developers should be free to export green power to other countries.

Voluntary market development

As with many other markets, policy uncertainties have not deterred the development of trading in green certificates. Figures from the AIB show that over 26 million certificates (each for 1MWh of green power) were issued in 2004, of which over 15 million were redeemed. Finland issued the most (over 7 million) closely followed by Nordic neighbors Norway and Sweden, all of whom have ample supplies of certified hydro power. The three Nordic countries were also the biggest exporters of certificates.

The Netherlands redeemed more certificates than any other country--over 7-mil--and was also the biggest importer--buying over 8-mil certificates from abroad. But Dutch demand for green certificates has been fuelled by a previous national policy that exempted green power from taxation. The effect of this had been to lower the price of green power sometimes to levels lower than the price of 'conventional gray' power, prompting over a million Dutch end-users to switch to green power tariffs and creating demand for green energy that far exceeded Dutch national production. Realizing that the market had become flooded by imports, the Dutch government abandoned this policy and opted instead for a production subsidy through a feed-in tariff. Tax breaks on green power were gradually phased out until they were removed completely in January.

Austria, too, is a major buyer of GOOs given that there is a national requirement for all power suppliers to disclose the fuel mix used in the production of the power they sell. In an environmentally-conscious and anti-nuclear country like Austria, suppliers are keen to prove that all or most of their power generation comes from domestic hydro or other renewables either at home or abroad. Those who do not disclose their fuel mix have to display instead the standard fuel mix in the west European UCTE grid, which includes a large portion of unpopular nuclear.

There is also a substantial voluntary market for GOOs that are not necessarily compliant with any national scheme. Trading in these certificates allows companies to monetize the green value of their power production in countries where there is no renewables support system or where certain types of renewables do not qualify. For example, in Spain, as in other countries, large hydro power production is not entitled to support under the country's special regime for renewables. But this did not stop Spanish generator Endesaselling certificates for 219,600MWh of production from its large hydro plants to an unnamed central European company. The buyer was able to benefit from the green value of Endesa's hydro power, which would not have enjoyed any premium in the Spanish scheme.

Towards a regional market in Scandinavia

While the voluntary market is evolving, most demand for green certificates still comes from companies in countries with a mandatory scheme, like the UK's Renewable Obligation. These national schemes vary in their design, but all share the common characteristic that they are national schemes designed to promote indigenous renewable power production, so international trade in guarantees of origin are not stimulated by these national schemes.

Sweden's green certificates scheme, however, is set to take on international dimension in 2007 when Norway is to join the scheme. In May 2003 Sweden introduced an obligation on power suppliers to purchase green certificates, known in Sweden as elcerts, for a percentage of their total electricity sales. The certificates are already traded on the Nordic power exchange Nord Pool, and Norway was to join the Swedish scheme in 2006 but this has been delayed to 2007 due to changes in ministerial responsibilities in Sweden. But when it does arrive, a pan-Nordic support scheme for green power will have implications beyond the trading of certificates, according to John Ravlo, vice president of Norwegian green certificates trader Enviro Energi.

"We already have a pan-Nordic market for GOOs/Recs certificates for the purpose of green products and fuel-mix disclosure. A pan-Nordic support scheme will have the advantage that new projects are developed at the lowest possible cost by stimulating projects with access to relatively cheap renewable sources," says Ravlo. "In a common market, Norway probably will develop relatively cheap wind and hydro projects and Sweden will develop relatively cheap biomass and hydro projects. If Denmark and Finland are included [though there are no concrete plans for this yet] they will probably focus on relatively cheap biomass projects. A pan-Nordic market therefore could give cost savings and some specialisation between the countries."

But Enviro Energi, which is owned by ten regional Norwegian power utilities producing about 35TWh/year of renewable electricity, is a keen supporter of a wider pan-European market. "It is not clarified yet how the relationship between the support schemes, the documentation of origin and the counting of the production in relation to the targets in the renewable electricity directive will be handled," says Ravlo.

"So far the discussion in Norway and Sweden primarily is looking at the support mechanism. In fact, the Nordic area has access to much renewable energy, so the big advantage will be seen when there is a pan-European market. Support schemes in several European countries are at a level far above the cost of production in the Nordic area. The very large cost savings could therefore be realized when countries with expensive support schemes combine their support schemes with new renewable projects in relatively low-cost countries," Ravlo asserts.

"Some governments have appointed their own issuing bodies and their certificates all have different characteristics.... This is not good for trade across international boundaries." - Peter Niermeijer

Ravlo points out that at the moment Swedish elcerts differ from RECS in that they are not, strictly speaking, guarantees of origin: "The green attributes of the electricity produced are normally not included in the elcert, and you have to buy the documentation of origin in addition to the elcert if you want to use the production supported by elcerts as the basis for green products or for fuel-mix disclosure."

Ravlo points out that the existing EU legislative framework allows for projects in one EU country to count towards renewables targets in another providing "the authorities in the involved countries agree on how to count the production versus the target."

"By introducing a pan-European market the European targets could be reached much cheaper and still take care of security of supply and the creation of new jobs in an acceptable way," says Ravlo.

Enviro Energi has been trading green certificates, mostly Recs from hydro and wind, on a speculative basis for over three years, buying most of the certificates on the open market and selling them on at a premium. The main markets for its certificates are power suppliers in the Nordic countries, the Benelux countries and German speaking countries. In 2004 it sold certificates equivalent to 1.5-2TWh.

At the moment Ravlo agrees that the most liquid markets are Austria and the Netherlands. "But in all countries that have introduced the fuel-mix disclosure requirement specified in the new electricity market directive we see an increasing focus on renewable electricity and thereby an increased liquidity."

So even without a pan-European system for green certificates trading, the European directive on disclosure is still likely to bring new impetus to the market.

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Updated: Apr 5, 2005