Ready, steady, GO

Guarantees of origin (GOs) will be an important part of the transition to clean energy. And, at current prices companies can source renewable power at very low cost. 

This week’s pod discusses how long these weak prices could last and the use of GOs to decarbonize Europe’s gas sector. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel, 

Guest: 

• Alexandra Münzer, Managing Director, Greenfact.

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

News drives markets, and every day Monte's experience reporters are on top of the stories that shape European market developments. Can you afford to miss out? Go to monte news.com for the latest price driving stories and a free trial.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 0:30

Hello listeners and welcome to the Montel Weekly podcast. Bring Energy Matters, an informal setting. Today's pod will discuss an important at times controversial part of the energy system. The certification of renewables, otherwise known as guarantees of origin or GOs. As the list of companies wishing to prove that they source only green energy continues to grow and as subsidies for renewables come to an end. GOs are one of the main ways that firms can prove the ENG they use is green. We will discuss prices, current market dynamics, and the use of geos to decarbonize Europe's gas sector. I'm Richard Sverrisson, and joining me today is Alexandra Münzer, CEO of Greenfact, an analysis firm. A warm welcome to you, Alexandra.

Alexandra Münzer, Managing Director, Greenfact: 1:19

Thank you, Richard. Hello. I would like to give you a big compliment. That was really a perfect introduction for guarantees of origin.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 1:26

Thank you, Alexandra. I like to do my homework. I'd like to ask first of all about the current prices of guarantees of origin. Where are we and what are the main drivers?

Alexandra Münzer, Managing Director, Greenfact: 1:37

Well, Richard, you don't want to know. Yesterday I saw 12 cents for the megawatt hour for Nordic Hydro 2020. That's the price is lowest I've seen in my four years career in Greenf fact.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 1:53

Wow. At the start of the year, there were about 45 cents, weren't they?

Alexandra Münzer, Managing Director, Greenfact: 1:57

Yeah, around 30 or something. It was at least a bit higher. But we've seen prices declining. So a bit history, a bit story of price development. It was, if you take Fukushima maybe as a starting point in 2011, then we saw a little bit prices of guarantees of origin going up because of the increase demand for renewables. Then we had around 30 cents per megawatt hour, and then for years and years the price curve was relatively flat, I would say. Between 25 and 20 cents megawatt hour. And then something really beautiful happened in the end of 2017. Prices started increasing until mid of 2018 where we had the highest prices ever seen. We had two euros for Nordic Hydro. And up to eight euros for Dutch wind guarantees of origin. And then beginning of 2019, the curve declined again and it continued. So until today where we see 12 cents for the megawatt hour,

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 3:06

that's quite a crash. What are the main reasons for these very low prices? Alexandra?

Alexandra Münzer, Managing Director, Greenfact: 3:12

I would say if you look at demand supply curve, demand is definitely increasing year on year. We have an eight to 10% increase of demand because of course. All the energy companies are supplying more and more green electricity tariffs to their customers households or in the streets. So this demand is picking up. Then we do see that corporations are more and more committed to source their electricity from renewable sources. So this is definitely increasing. But then the guarantees of origin system has two reasons for growth in supply as well. One is the, I would call it the natural increase in supply. So more and more renewables are deployed, so we have more wind energy, more solar energy that is part of it. But then the European guarantees of origin works, I would say over the a IP hub. That means the more European countries are connected to the hub and not all of them are yet. The more supply comes into the market. And in 2019, for the first time a law changed, so to say, in France. So all of a sudden we saw auctions for supported renewable energy that was not there before. So they weren't in the market. That added 45 terawatt hours to the market. A huge supply coming basically all of a sudden. Then this summer we saw Portugal connected to the A IB, bringing another 13 KT hours on the table. And then also, of course, with Corona less energy demand. So you need less goss for the electricity suppliers. And then yeah. You have the situation as we see it now.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 4:55

So the A IB, the Association of Issuing bodies. That's right. That's the sort of central European association.

Alexandra Münzer, Managing Director, Greenfact: 5:00

Correct.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 5:01

So the French auction obviously has had a huge impact. You're saying 45 terawatt hours coming in. What's happened with these auctions? Have people been using them, has been a lot of uptake from them.

Alexandra Münzer, Managing Director, Greenfact: 5:10

Yes. It provides a sort of convenient way to, to source GOs, I would say, from the market. And we saw Italy had, has auctions or started with auctions. Then Luxembourg has auctions, France auctions. And there was, it's a bit curious because the, how the market there is, and maybe we touch upon this later as well, a bit, the UK sources for. C-F-D-F-I-D, exemption tax exemption. Basically they can source, so utilities there can source geos from the continent, basically. And if they fulfill certain criteria and we see, for instance, if they participate in Italian auctions, that a lot of the demand in these auctions comes from the uk. And we saw that in the beginning also in France. And then at some point, if you just look at the data, all of a sudden the auctions were not sold out anymore. So in the beginning you sold, they sold all the volume and then lesser and lesser, and that had something to do with the uk. I think there was some off gem press release that there are certain restrictions regarding import of rent. GOs in the UK and then all of a sudden this, even the auction GOs weren't sold anymore. So that was really bearish sign, I would say, for the market they saw, oh God, not even the auctions are sold out.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 6:35

It's the dreaded B word, Brexit. Will that have an impact here? Will it cut off the flow of geos from continental Europe, for example? France?

Alexandra Münzer, Managing Director, Greenfact: 6:44

We don't know the exact implications yet that we will have on the geo market, but. If the Brexit, the result of the Brexit will be or would be that guarantees of origin are not basically quote unquote allowed in the UK anymore, the continental ones, then you would lose about 30 terawatt hours of demand annually that goes to the UK right now. And this would have an equal impact to France auction coming in with the supply. So you would lose the demand that would have that would be a quite huge impact. Yes, indeed.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 7:21

But is the shape of Brexit crucial here? A no deal maybe would have, a larger impact than a kind of a soft Brexit, if you like.

Alexandra Münzer, Managing Director, Greenfact: 7:29

Yes, exactly. So we don't know yet what kind or how it will affect the go market. I think the Brexit people involved have other problems with the economy to solve than the guarantees of origin market. So I haven't heard of a clear. Decision yet how it will be?

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 7:46

Yeah, I think the talk is more of fisheries and state aid and not guarantees of origin at the moment anyway. But obviously, the greening of the system of green energy transition, if you like, is of crucial importance, I think. But with, they have huge plans in the UK for offshore wind development. If we return to demand, you highlighted figures that showed in the first half of the year, demand continue to rise despite the Corona pandemic. What are the main drivers here? Where's the demand coming from?

Alexandra Münzer, Managing Director, Greenfact: 8:14

Yeah, the demand. We are now politically in a situation where the next three decades will be dedicated. To making Europe the first carbon neutral continent on the planet with the green deal and taxonomy and non-financial reporting that companies have to do now on an annual basis starting from next year. So this is of obviously one. So companies, in order to be competitive, they will have to tweak their sustainability measures or strategies. And Scope two emissions are. Part of that, but also, this is politics. This is what companies will have to do to be competitive, but obviously with. When we see Fridays for future in order, if you are a B2C customer facing business, then of course being green, doing something for the environment on many different levels, plays a role. So we do, that's obvious. So the green shift, it also touches, of course, that has an impact on the guarantees of origin as well, will become more and more important and that's why demand is increasing. You see this re 100 initiative, I just checked it for you yesterday. Now 263 members big companies that are dedicated to source renewable electricity. Yes, this is big

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 9:34

and it continues to grow. That's what I think we've discussed on earlier pods with you and with others, that the key to the green transition to this shift towards clean energy is getting the small and medium sized companies on board as well. And this is one way of doing so. But you said, Alexandra, you've told me that you had a market survey recently. What does the general feeling towards prices next year? I should think the hope is that they rise higher than 12 cents. But what's the general feeling here for 2021?

Alexandra Münzer, Managing Director, Greenfact: 10:01

Yes, we do this annual survey over the summer and ask market participants. Can be producers, can be traders, intermediaries can be consumers. In general when it comes to pricing, we ask for prediction 2021 Nordic Hydro. And the most respondents answered with the price between 10 and 30 cents, and the median was 25 cents per megawatt hour. So this is still a bit more than 10 cents above what we have now. But there is no, quantum leap expected when it comes to prices because the market is aware of the supply coming in. But on the other hand side, the market is also aware that the demand is just picking up every year as well.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 10:40

So not a massive leap, but still doubling from current levels. That's the feeling anyway from market participants. What, was there anything else that came outta your market server? What do. Market players think about policies needed to strengthen the guarantees of origin market?

Alexandra Münzer, Managing Director, Greenfact: 10:54

That's a good question, and I think it's really crucial question because we do see with a lot of supply coming into the markets and with the, some flaws a bit in the nature of the system, that there is a support needed when it comes to legislation. And the market participants. And also I think when I talk to the creators basically of the market designers, everyone is calling for something that is called full disclosure. That means and standardization in the different EU countries because as per EU law, every country needs to have a guarantees of origin system. However, there is a lot of freedom when it comes to the different member states and this needs to be standardized so that trade gets easier. Market participation in the market gets easier, things get more transparent. And with full disclosure. That means that you have guarantees of origin, not only for renewable electricity, but also for any other type of electricity source may be coal, nuclear whatsoever. And the effect that this can have, we saw, for instance, austria has this system. They have it in Switzerland, and when they implemented it in Switzerland, we saw prices, for instance, going up for Swiss Hydro because with the implementation of food disclosure, electricity suppliers were not allowed to have a certain amount of gray electricity. They had to really disclose to the end client, where is your electricity? Every, every megawatt hour? Basically, where is it coming from? And when your end consumer sees. There is some quote unquote dirt electricity in their energy mix. They don't want it, and all of a sudden the demand for renewables goes up. And this has a really nice effect. And if you have that all across Europe. That would help strengthening the system and the system's credibility a lot.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 12:42

You gain trust and your transparency here is obviously very important. What needs to happen for pool disclosure, as you say, to be in place? Does this, is this part of the revision of the renewables directive? Is it, does it have to come from the commission or is it more about a national regulators and national bodies?

Alexandra Münzer, Managing Director, Greenfact: 13:00

Yes, unfortunately, every, all the market participants and I think also the designers of the go and the EECS system, they were hoping that it would be in the revision of the renewable energy directive, but it they didn't put it in there. So it's not there. And now it depends basically on every single member state if they want to have it or if they don't want to have it. But in the end, I would say it needs to be a top down. It needs to be in the revision of the renewable energy directive so that every member state needs to do it, otherwise it won't happen.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 13:33

And that standardization, I think, is all important. So we're all, we're all aware of what we're talking about rather than any sort of national divergences. I think that would, certainly, that would help. Aand we're in the second wave of the COVID-19 pandemic and, it seems that this situation may last quite a lot longer than was initially suspected, but I'd like to ask you about the impact on the guarantees of origin market or how has Corona hit the gar? The trading of guarantees of origin.

Alexandra Münzer, Managing Director, Greenfact: 13:57

Yes, we see from our market survey, but also from the chats that we have with our clients and with the market participants in general. That COVID, of course, had a huge impact on, of course, the demand because if there is less electricity demand, naturally less geo demand comes with this, and then the liquidity as well. And if you talk with market participants that used to trade in the guarantees of origin market, they're saying now they only do back-to-back deals. This means if a client has a request for a certain volume, they will go out in the wholesale market and procure this volume for them. So this is a huge impact on liquidity. That's unfortunately what we see right now.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 14:41

Okay. And what's the view then for next year? Will we have to come outta the pandemic for that to change?

Alexandra Münzer, Managing Director, Greenfact: 14:47

Depends. So when it comes to electricity demand, I would say to a certain extent, yes. And I will see as soon as the economy picks up and companies are out of their budget freezes. It also is there, of course, when it comes to sustainability strategy and the way the companies want to go forward. As soon as we see an end of that, we will see, actually, I really believe all these renewable shift picking up quite quickly and then we see it, back to a reasonable level again in the guarantees of origin market as well.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 15:21

I want to then maybe talk about another sort of potential ray of lights here, Alexandra, for guarantees of origin, and that's the role in the decarbonization of the gas sector because obviously with these very clear targets that are being currently being discussed in Brussels net zero by. By 2050, a 60% cut in emissions by 2030, the role of gas is gonna be crucial here and clean gas in particular. So what do these targets mean for, the use of guarantees of origin in the gas sector? And clean gas in particular.

Alexandra Münzer, Managing Director, Greenfact: 15:53

This is definitely big alone. Just in our market survey we asked them most important tools for decarbonization of Europe and of course there's the EU ETS, but one of the big ones was guarantees of origin for renewable gases. And this is clearly, if you look at the decarbonization efforts, renewable gases will until 2050 substitute natural gas. And we are talking. A lot of natural gas consumption in whole Europe and now we already have certification and GU I guarantees of origin in some countries and registries for that. But we don't have something like the A IB like in hub where we can cross border a trade easily among the different member states. That's not there, but it will come next year. We have next year, so we'll see. Very similar to the system that we have for renewable electricity. We will see it in the renewable gas because it's basically, you have it similar to the electricity grid. You have a gas grid, and then. All the similarities apply for GAR guarantees of origin for gas, and it is in the red tube that is not only for sane, but also it includes at the later stage hydrogen as well. So this is really interesting, and when I talk with the industry corporations that are actively engaged, of course in the green PPA in the CPAs is they have long term agreements for. Renewable electricity during the summer where no one could travel. They all did their homework when it comes to their natural gas consumption, how to green it. And they were really asking me, okay, in the first stage they would like to procure a green gas certificate. And then at the later stage they are also looking if it's viable to have PPAs for green gas. This will be huge I think in the next, in the coming years.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 17:45

Green gas PPAs that's extraordinary. But what could the policy makers and the commission learn then from the experiences so far in, in the electricity market for the guarantees of origin for electricity, and what can they then take to the revision of the renewable energy directive?

Alexandra Münzer, Managing Director, Greenfact: 18:01

What can they learn from their renewable electricity market? First, I

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 18:05

what should they do differently, or,

Alexandra Münzer, Managing Director, Greenfact: 18:06

differently? I'm not sure we will get if there will. The same problems will arise that we have in the electricity renewable electricity GOs. But what is crucial and what is easier than for the gas people, so to say, is that they can learn they already have the a IB and the hub and how it works with the cross border trade of certificates and they can just copy more or less the system and transpose it to renewable gases. So I think this starting and, building up the system will happen much quicker. Then we've seen for renewable electricity, and this is already a huge advantage, but we have to start with this first. And of course, what can they learn? Standardization, make it as simple as possible. In my opinion. Don't give the member states too much freedom to do their own thing, but there will be. Yes, we will see a very similar system to what we have now in electricity. We also, what I see now, we do have far higher prices. Of course we have for the megawatt hour of gas at the moment, between six, eight to 15 euros per unit, per certificate. So this is a very, really interesting market.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 19:21

Absolutely. And with the prospect of higher carbon prices, this would certainly make, green gas. Very viable.

Alexandra Münzer, Managing Director, Greenfact: 19:27

Absolutely.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 19:27

There's huge prospects for growth, for guarantees of origins there, and I can see that for green hydrogen and for biogas. This is a very exciting prospect Then. So thank you very much Alexandra for your insights and your views on this market, even though maybe they're a low price at the moment, but the future seems to be very promising. So thank you again, Alexandra, for joining the Monte Weekly podcast.

Alexandra Münzer, Managing Director, Greenfact: 19:48

Thank you, Richard.

Richard Sverrisson, Editor-iRichard Sverrisson, Editor-in-Chief Europe, Monteln-Chief Europe, Montel: 19:49

That's all for this week. But you can now follow the podcast on our own Twitter account called the Montel Weekly Podcast. Please direct message any suggestions, questions, or let us know if you'd like to be a guest. You can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in the energy markets on Montel News. You can subscribe on Apple Podcasts, Spotify, or wherever you get your podcast from, and please rate and review us if you can. That helps us to improve. Thank you and goodbye.