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

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