Summary:

A Guarantee of Origin (GOs or GoOs) denotes one MWh of electricity produced in a particular month and contains relevant information about the power plant. GOs prices vary due to fundamental changes in supply and demand, regulatory changes, and weather, among other things. The EECS-GO market has grown significantly over the past ten years and is projected to expand due to increasing environmental awareness in Europe. Greenfact is the only market intelligence company in Europe that provides price transparency, analytics, and consultancy for the green wholesale markets. Teaming up with the largest broker house for renewable energy certificates makes it possible for Greenfact to offer insights into several European GO sub-markets.

Introduction

Increasing awareness about climate change incentivises consumers to opt for renewable sources to meet their energy needs. European regulations have put consumers at the core of the energy policy by giving them the means to choose the source of the electricity they consume. However, as producers and consumers respectively inject and withdraw electricity by being connected to a single network, and the generation and consumption of electricity happen instantly with continuous electricity flow, it is impossible to physically trace electricity from a generator to a specific consumer.

For consumer disclosure, it was necessary to establish tools to identify the production location, time and technology. The Guarantees of Origin respond to this request.

Acting as an identity of electricity, GOs provide information to consumers about the origin of the electricity and its associated impact on the environment transparently and reliably. This helps electricity consumers make informed decisions to meet their electricity needs.

What is a Guarantee of Origin (GO)?

A GO is a certificate that shows where and when a unit of power (MWh) was produced, including information about the power plant such as technology, age, location, subsidies, etc. It is issued by the government-mandated issuing bodies to the renewable energy producers that request it. This makes GOs heterogeneous products that are differentiated by characteristics, leading to several sub-markets with varying price levels and market liquidity. Cancelling GOs equivalent to their power consumption allows individuals and businesses alike to make valid claims that they consume renewable energy. As a saleable certificate, it can also provide producers with additional remuneration. A customer’s GO payment goes back to the renewable energy producers, which further incentivises renewables development, making them even more competitive.

GOs are primarily used by electricity suppliers to demonstrate that renewable electricity is delivered to their end-consumers and businesses to reduce the GHGP (Green House Gas Protocol) Scope 2 emissions. The certificates allow for making green electricity consumption reliable, credible, and reportable.

Greenfact is a market leader in Europe, offering real-time prices, market intelligence, price forecasts, and consulting services for the GO market.

What is the legislation behind GOs?

GOs were first introduced in the EU Directive 2001/77/EC, making it mandatory for the Member States to develop a reliable tracking scheme for electricity. GOs are defined in the Directive as: "an electronic document which has the sole function of providing proof to a final customer that a given share or quantity of energy was produced from renewable sources". As intangible products, GOs are separated from the actual physical electricity by design.

The Electricity Market Directive (2009/72/EC) enabled consumers to choose the source of the electricity they want to use along with the associated environmental impact. According to the Renewable Energy DirectiveII (RED II), GO is the only legal traceability tool in Europe. There is no alternative to claim electricity consumption from a specific power plant.

Moreover, GHG Protocol Scope 2 and the CDP initiative recognise GOs as an electricity traceability tool. The former is the accounting guide for the carbon emissions of purchased electricity and heat, which offers an international and transparent standard for reporting emissions and the origin of the electricity consumed. The latter provides a scoring methodology that assesses progress toward companies' action on climate change.

In 2021, under the negotiation of RED III, "Full Disclosure" was brought into the discussion, whereby all energy would be tracked. Considering that consumers would then need to explicitly choose the origin of the electricity used, it could incentivise more end-users to switch to renewable energy consumption.

What is the EECS-GO market?

The AIB Hub is the central point that enables member registries to communicate and transfer traded certificates (GOs) under a standardised system, the European Energy Certificate System (EECS).

For each Member State in the EECS system, its electronic hub must first set up a "Domain Protocol" defining how the EECS rules will be implemented in the country, which has to be approved by the AIB before the issuance, transfer and cancellation of GOs. Governed by "Domain Protocol", the EECS standard ensures that electricity is tracked reliably and properly accounted for.

The EECS certificate market is a hub designed to facilitate the EU – wide exchange of certificates, where GOs are traded on a voluntary basis. In total, 26 European states are members of the AIB (23 EU MS as well as Norway, Switzerland and Iceland) and allow international trade of GOs between their respective national registries.

What are the reasons for GO price variations?

The prices of GOs differ based on the country of origin, technology, and age of the power plant. Nordic Hydro represents the most traded GO product and is considered the benchmark price for European GOs. There are also premium GOs with eco-labels such as Naturemade Star, which trade at a premium over ordinary GOs.

There are multiple market drivers behind GO price fluctuations, both on the demand and supply sides. Fundamental factors include installed renewable capacity, weather changes, regulatory changes related to energy and climate policy, and corporate strategies, among others. At Greenfact, we provide analysis of the various factors that exert influence on the GO price levels, as well as forecasting.

How are GOs traded?

In the wholesale market, GOs are predominantly traded through brokers such as Cleanworld and ICAP, which facilitate transactions between power producers and electricity suppliers. Other popular ways to trade are via portfolio management companies, trading houses, and bilaterally between producers and retail power companies. Portfolio management companies, such as ECOHZ and Kinect, manage substantial volumes of GOs on behalf of small and medium-sized power producers. These companies act as counterparties to both sellers and buyers, aiming to create value by optimising their client's renewable energy strategies. Trading houses such as Axpo and STX aim to create value by taking a speculative position in the GO market. All retail consumers and most businesses buy GOs from their retail power suppliers, while some large companies purchase GOs directly in the wholesale market or as part of Power Purchase Agreements (PPAs).

Why is the GO market important?

The EECS-GO market has grown by an annual average growth rate of 23% since 2012 due to increasing environmental awareness in Europe. Last year, around 726 million GOs (transaction side) were cancelled in 26 European countries that are part of the AIB, equivalent to more than 50% of total renewable electricity generation in the European Union. With the increasing demand for green electricity from households and businesses (through initiatives like RE100, UN Global Compact) the GO market will continue to grow in importance.