The European Commission pledged to reduce the European Union (EU) greenhouse gas (GHG) emission by at least 55% by 2030 under the Paris Agreement. This ambition puts the EU on a pathway to achieving climate neutrality by 2050.
The energy sector is responsible for more than 75% of the EU greenhouse gas (GHG) emissions and has the responsibility to meet at least 32% of its total energy needs with renewable energy (RE) by 2030. The EU is further increasing its energy efficiency and share of renewable energy. The increased share of Renewable Energy (RE) across the different sectors of the economy combined with the European green deal is a key contributor to achieving the European ambitious plan of climate neutrality in the next decades.
In pursuit of these commitments, Guarantees of Origin originated as a tool that provides transparency and assures the origin of the electricity generated, thus encouraging the development of renewable technologies. The significance of the European Guarantees of Origin (GoO) certificate has increased in recent months with growing interest from the corporate and big industrial players in response to the political and social focus on DE carbonization.
What are Guarantees of Origin (GOs)?
Guarantees of Origin (GOs) are electronic certificates that label electricity coming from a renewable source. The aim is to provide information to consumers on the source of the energy they consume. For example, the energy can come from solar or wind generation.
To better understand the GOs and how they work, we need to first understand how the power grid works. The electricity grid contains power generated from two main sources: are non-renewable sources (such as coal and gas) and renewable sources (such as solar, hydro and wind). Once the power is delivered to the grid, it becomes impossible to distinguish one type from the other. This is where GOs come in.
Given the many environmental commodities around the globe, Guarantee of Origin (GoO) is the only European trackable instrument that gives power to the electricity consumer in choosing sustainable power production over fossil fuel-based generation. GOs were introduced in the EU market system and enforced by the first Renewable Energy Directive 2018/2001 Article 15, which provides all the criteria a GO must meet.
This commodity is traded as electronic renewable energy certificates that are not tied to the physical delivery of electricity.
How do Guarantees of Origin work?
The Renewable Energy Sources (RES) Directive requires Member States to give producers the opportunity to obtain electronic Guarantees of Origin (GO) for energy generated from renewable energy such as electricity, gas (including hydrogen) and heating and cooling.
When a producer issues a GO, each GO digital certificate is equivalent to a 1MWh of electricity generated that serves as proof that the energy supplied has been generated from renewable sources, such as; wind, water, sun, biomass, solar thermal and geothermal.
The GO is then ready to go to the market and can be traded via spot transactions or forward contracts in the voluntary markets, even bundled in Power Purchasing Agreements (PPAs). When a consumer is ready to use the renewable energy, the GO is canceled or consumed. The cancellation process is the only method of allocating the renewable energy to a single end user.
It is impossible to follow the physical flow of electricity from the source to the end consumers. Therefore, the GOs are detached from the physical electricity at the point of production and traded separately from electricity before being reattached at the point of consumption when a GO is canceled.
Canceling a GO from the relevant national registry is the only way to remove a GO from the market and redeem its benefits. This makes the accounting system for energy origin efficient and prevents double counting.
How do GOs fit in the Decarbonization policies? Why is there a rising interest by corporates?
As corporations worldwide pledge to decarbonize their operations, GO certificates are gaining ground as an essential tracking tool. The interest for GOs is on the rise given its ability to fulfill the objective of the GO system: to provide disclosure and transparency in the electricity market.
The Energy market in Europe is too deregulated. This means that the energy produced in one country can be delivered and consumed in another. As of today, GOs are the only way for consumers to choose the source of their energy production. If they consume GOs and they choose from a specific source, for instance, a solar or from a specific location, this signals to the market that they prefer renewable energy against any other type of non-renewable energy.
The corporate sector demands for GOs, and they are buying them in large volumes to comply with the EU target. In this perspective, GOs are very flexible and are very efficient to help them achieve their clean energy goals and support production of RE further.
Benefits of Guarantees of Origin
One benefit of sourcing RE through GOs is that companies can claim zero emission for that portion of energy consumed and can use the information in their carbon footprint report. They can choose to buy from a specific power plant, maybe a local producer or a power plant with an additional sustainability criteria, and use that information in their marketing and communication campaigns, this being a good way to advertise their company.
Other reasons corporations purchase GOs include:
- Customers’ expectations on the company’s behavior to social and environmental aspects.
- To maintain their reputation.
- On the economic side, companies purchase GOs to manage economic and policy risk of changing legislation around environmental laws.
- Investor expectations. Investors want the business they put their money into to have a route to net zero.
- Companies taking serious climate actions are attracting talent.
Also, domestic consumption is showing a lot of commitment on using more sustainable power as well.
On the supply side, GOs are a good way to understand the renewable energy demand. This helps companies manage investment, increase production and also increase profits. RE companies can provide green power tariffs and even design new green products for their consumers.
Supply and Demand of GOs
GOs have been trading since the early 2000s but oversupply has prevented its further development. Now, reforms in the current legislation may drive some changes. The supply and demand of GOs grew in 2020 after an undersupply in 2019. Data from AIB showed 762 TWh of overall supply and 735 TWh of demand for GOs in 2020.
Guarantees of Origin act as a push to RE investment since they create extra income for RE producers and suppliers, making it more appealing to produce more renewable energy.
Recent statistics provided by the AIB show that the supply will keep increasing as most of the AIB members are net exporters and this might skew the demand versus supply balance. Comparing the AIB data from Q1 2020 to Q1 2021, we see that hydro GOs dominate the market and account for 60% of both the supply and demand. Wind accounted for 25% on both supply and demand slightly down from last year while solar supply and demand was a little unchanged.
GOs are an effective way to prove traceability, but with their current prices, it’s difficult to show exactly how they are incentivizing the production of new renewable energy. Still, the higher the demand, the higher the prices, and the more they will incentivize new renewable energy.
At ALLCOT Trading, our mission is to promote additional sustainable impact with every transaction. If you want to know more and also have an extra positive impact on the environment by trading with us, contact us and together we will make it happen.