New Renewable Energy Directive: Comments related to Guarantees of Origin

An OPEN LETTER to Rapporteur for RES Directive


Background

The use of Guarantees of Origin (GO) and national fuel disclosure to track, document and enable consumer choice of electricity supply, was established by the EU in 2001. The EU strengthened the policy framework in 2009 as part of its “2020 target setting process”.

In most respects this has been a huge success – creating real consumer choice of power products, as well as choice of supplier. The number of customers actively choosing a renewable product has increased steadily every year since the start. Both the growth in volume and value of this market clearly shows that consumers, organizations and businesses increasingly want this choice and are willing to pay for it.

Guarantees of Origin (GOs) in Europe and its counterpart system in the US called Renewable Energy Certificates (RECs), play an increasingly important role for corporate consumers in documenting its energy use and related CO2 footprint. This has happened as numerous international stakeholder organizations, NGOs and sustainability reporting agencies point to GOs and RECs as the preferred method for documenting this choice. During the last 2-3 years – based on best practice from Europe and the US – a similar system, International REC, has rapidly been deployed across new markets in Asia, Latin-America and parts of Africa.

In Europe, in conjunction with the open consultation process completed during 2016 for a revised Renewable Energy Directive, a broad base of interest organizations came forward with strong and consistent support for the system of GOs. Many also contributed actively with suggestions of how to improve its implementation and thus future relevance.

On November 30 2016, the European Commission released its vision of a new renewable energy directive (REDII). The draft proposal is broad and ambitious, and the Commission has in most aspects succeeded in providing a reinforced policy framework for the use and implementation of GOs.

Key changes that will follow from the REDII proposal are:

  • Use of GOs will be mandatory for making renewable electricity claims
  • Expansion of the GO systems to other key energy areas like gas, heating and cooling
  • Continued pressure to simplify and harmonize implementation across member states
  • Increased openness, competition and liquidity in the market to strengthen consumer choice

 

One area of critical concern: introduction of mandatory Auctioning Scheme

There is however one critical area where business consumers, market players, environmental groups and many national governments have a strong concern. This concern is directly linked to article 19:2 of the draft text, and its reference to allowing member states to “expropriate” GOs from power plants receiving support or subsidies, further allowing the GOs to be auctioned by the governments.

On a general note market players are positive to growing the total market for renewable power in Europe, and the creation of a larger marketplace with increased transparency, liquidity and competition is welcomed. The fear is that the current proposal may have the opposite effect, and that the proposed auction scheme would limit consumer choice in the electricity market and restrict the ability to support specific renewable projects.

 

Current market situation

Consumers are having a real impact on the European electricity market. The ambitions for market liberalization, including choice, competition and reduced costs are increasingly being fulfilled. Market participants and large end-consumers led by major companies, have driven growth in terms of choice of electricity products, long-term agreements and renewable Power Purchase Agreements (PPAs). The European Commission – and a large share of relevant stakeholders – support increased consumer activity as an important element in the transition to more cost-efficient, locally produced renewable energy.

Today member states can, on a voluntary basis, decide to exclude GOs issued by power plants receiving support, from national and European marketplaces. This limits the power plant owners’ ability to generate incremental revenue from trading the GOs in an open market. Among the member states practicing this today are Germany, France and Ireland, all viewed as the least attractive markets for corporate renewable PPAs, as the GOs from the chosen project are not made available for the corporate off-taker to document the renewable attributes.

On the other side, numerous other countries allow GOs to be issued and sold from supported power plants, enabling the market to decide the value of such GOs on a voluntary basis. Among these are Holland, Denmark & Sweden, which are among the most attractive PPA markets in Europe today.

 

Proposed practice – problems and recommendations

The proposed system of government auctions is likely to commoditize “the product” renewable electricity and could limit the choice of renewable products available to the consumer. The proposal could severely impact existing long-term agreements as well as new renewable projects in Europe by reducing the future possibility of generating income from the trade of GOs.

Generators of corporate PPAs would be obliged to release the GOs for government-run auctions rather than issuing them to the PPA off-taker – undermining corporate sustainability goals. It is likely to strip end-consumers of the opportunity to have any direct contact with electricity producers and would significantly complicate the possibility for community investment in renewables.

 

Problem 1      

Severely harming the corporate renewable PPA market in Europe
A mandatory implementation of “expropriation” of supported GO by national governments coupled with national auctions may severely harm the corporate PPA market in Europe. Key corporate investors have explicitly said that they may be forced to redirect their investments toward markets in Asia and the Americas, where they have access to relevant renewable documentation comparable to GOs.

Recommendation 
Move from mandatory to voluntary implementation for member states.
Alleviate the most serious consequences for Europe by allowing members states to decide this on national basis.

 

Problem 2

Creating a commodity market – deflating current renewable values
Renewable power documented with GOs is not a commodity. Customers have different needs, and willingness to pay. Prices for renewable GO vary greatly, depending on technology, location/origin, plant size & age, profile of the producer and environmental footprint. This allows for tailored solutions, but also increased value creation. Auctions may partly destroy this established marketplace, and thus contribute to lower value creation, rather than higher.

Recommendation 
Limit the auctions in size and geographic scope. Ensure that clear principles are followed.
Move from mandatory to voluntary implementation for member states.
Note, this recommendation will not reduce the negative impact on the PPA market described in Problem 1.

 

Problem 3  

Auctioning scheme tailored for FIT markets – not alternative support systems
Creating new policy targeting the issue of double compensation may have merit. In Europe, there are various types of support systems, Feed-In-Tariffs (FIT), market-based (Swedish/Norwegian) and alternative “hybrids”. “Expropriation” of GOs may seem to have a correct impact on markets with FIT, but this would likely make less sense in member states with more flexible support systems.

Recommendation        
Allow for member states to decide on implementation.
Move from mandatory to voluntary implementation for member states.

 

Problem 4

Lack of clarity on validity timeline – risks RETROACTIVE impact
In REDII 19.2, the text is very general and does not mention necessary validity principles. The EU is normally careful in deploying new policy that has retroactive effect. In this context, it is critical to carefully define what is retroactive and what is considered “forward-looking”.
Retroactive effect will create a huge disturbance in a well-functioning market, and directly hurt all players – consumers, market players, power companies and member states. Established legal business contracts may be affected.

Recommendation     
Clearly define that retroactive effects are not acceptable. This needs to mean that no existing contract between legal entities will be affected by REDII, only new contracts after 2020.
“Expropriation” of supported GOs should not happen for any existing power plants, or any plant that come online before 1.1.2021. GOs issued from these power plants should not be affected even after 2020, since business decisions about PPAs and forward purchases of GOs may already have been done based on today’s policy framework.
“Expropriating” GOs and auctioning them should only be possible from power plants receiving support with a commissioning date after 1.1.2021. This is critical.
Note, this solution will likely limit the harm to the renewable marketplace, but will not reduce the negative impact on the PPA market.

 

Summary and recommendations

Industry stakeholders, generators and consumers alike, view the draft REDII as a constructive and positive step toward a more open and competitive European energy market with increased focus on the power of the consumer; especially in relation to enabling real consumer choice of power supply.

Only around establishing an auctioning scheme for “expropriated” GOs is there a broad negative consensus. Many will view this as U-turn in the direction previously endorsed by the European Commission. It will constrain consumers in the electricity market precisely at a time when governments and end-users are looking for ways to empower citizens and businesses.

As we have described in the above text here are clear recommendations that can alleviate some of the unintended harm.

Recommendations:

  1. Allow for voluntary implementation of auctioning scheme.
  2. Define clear rules for auctioning principles
  3. Allow for flexibility in implementation in member states having support schemes more flexible than FIT
  4. Avoid RETROACTIVE impact by restricting auditing of GOs issued from power plants with commissioning date after 1.1.2021.

We encourage you to review the alternatives and consider how they can be used partly or fully in a revised REDII.