Norway’s proposed GO exit

This week we focus on Europe’s Guarantee of Origin (GO) market and discuss Norway’s plans to exit the system. What form could such a GO Nexit take and how will the country be able to attract new industry wishing to source green electricity?

Listen to a discussion on the Norwegian proposal, current market dynamics and how many EU GOs the UK will import this year and next in the wake of its departure from the EU.

Guest: 

• Adam White, Secretary General, RECS International

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. In today's pod, we turn our attention to Europe's guarantee of origin markets. For some geos are the most efficient way of verifying renewable electricity outputs. While others say the system is open to abuse and should be reformed, Norway's new governments caused concerns recently where it announced that it planned to exit the scheme. Helping me, Richard Sverrisson to discuss the key issues in the guarantees of origin market. Is Adam White of RECS International. A warm welcome to you, Adam.

Adam White, Secretary General, RECS International: 0:39

Thank you Richard. Thanks for having me.

Richard Sverrisson, Editor-in-Chief, Montel: 0:41

I think we should start really by discussing the bombshell dropped by the Norwegian government. Did that come as a surprise, Adam?

Adam White, Secretary General, RECS International: 0:49

Yes and no. We knew that the Labor Party in Norway had disposition for a relatively long time, and having won the election, even without a majority, as I understand it, they sought to start to implement their policy program. I think it does sound like a dramatic announcement, but what we are staying calm about it we're encouraging our members to stay calm about it. Nothing can change overnight. Obviously, Norway is subject to European law and the renewable energy directive. Article 19 of that directive, which sets out rules on, on what member states and other EEA countries need to do in terms of guarantees of origin. I don't think and I don't think anyone thinks that Norway is gonna drop outta respecting that kind of law. So things may start to change, but we don't think it's gonna be a dramatic full exit of the guarantee of origin scheme as may have initially been heard in following the announcement.

Richard Sverrisson, Editor-in-Chief, Montel: 1:40

What are the reasons for the Labor Party taking this position? Is it quite critical of geos as a way of verifying renewable energy, or has it listened more to industry in Norway, which always has been, which has always been very critical of the system and not to the utilities.

Adam White, Secretary General, RECS International: 1:54

My understanding is that it really comes from large Norwegian energy consumers, most, most typically the aluminum smelters who use a lot of. Electricity in Norway, obviously for their manufacturing. And I think their feeling is we produce a lot of hydro energy in Norway and that kind of by right belongs to us. And so we can claim to be using renewable energy whether or not we're buying the guarantees of origin. Unfortunately, that's just not how the system works. The, what we call the production mix in Norway. So what's actually produced in the country is very renewable. The consumption mix, which is what is consumed based on guarantees of origin, is pretty much the same as Germany. So the consumers in Norway, just like any other European consumer, if they want to say they're using renewable energy, have to be canceling the guarantees of origin that go with that. I really think that is the easiest solution to this situation, that the all Norwegian consumers, they might not be happy that. The guarantees of origin that come from their hydro production are exported in very large numbers into the European market for European consumers who want to claim that renewable energy. They have equal opportunity to buy those guarantees of origin, arguably their most value to Norwegian consumers because they are their local production. And that has its own kind of cache and benefit, and they're in fact, the least expensive, often guarantees of origin on the market. Norwegian consumers could get greatest value for relatively low cost, and they should be buying the guarantees of origin if they want to claim that renewable energy.

Richard Sverrisson, Editor-in-Chief, Montel: 3:27

But for them, I suppose it's an unnecessary extra cost.

Adam White, Secretary General, RECS International: 3:30

Unnecessary. It depends on on your viewpoint it is necessary. According to European law, and they are subject to European law as an e EEA country. So it is a necessary cost for them if they want to claim their renewable energy.

Richard Sverrisson, Editor-in-Chief, Montel: 3:42

What form could this exit from the geo market take then? Adam, you don't seem to be convinced that there's gonna be a total exit. What's your view of the way forward for the Norwegian government? Given its legal constraints as well,

Adam White, Secretary General, RECS International: 3:55

if we take the starting position that they're not gonna delegate from EU law on this because that would've wider implications for their statuses in the EA country in general. Then they are required under the Article 19 to maintain a guarantee of origin system and issue guarantees of origin based on requests from producers. So the next question is, like you say, what could they do to change their relationship with the wider European market on guarantees of origin? And the first step that's been that I've heard discussed could be that they might leave the A IB, the Association of issuing bodies. Which is a voluntary organization for the national issuing bodies of guarantees of origin to come together and discuss the kind of latest developments to share experiences, to learn from each other and also to develop and maintain the European Energy Certificate Scheme rules, which is a quite detailed rule book on how a IB Eeks geo schemes should be run. They could leave that, like any country could leave, that there are most European countries. Single market countries and EA countries are members of the A IB. I think they benefit greatly from it, but not all. Poland, for example, isn't the UK wasn't when it was still a member of the eu. So you know, that could happen and that could slow down the flow of geos from Norway into the European market.'cause another major benefit of being an A IB member. You can transfer your geos through a hub, which greatly facilitates intercountry trade of geos. So that's one thing they could do. I think that would be a retrograde step, obviously because of the benefits of Airbnb membership, like I've discussed and there are other things that, that Norway could do domestically whilst maintaining a geo scheme, whilst being a member of the A IB to encourage domestic consumption of their GOs. They could offer tax breaks, for example, to consumers of Norwegian European energy. Like I said the cost of a Norwegian hydro geo is not particularly high, so it shouldn't take too much persuasion to explain to Norwegian consumers that you get great benefit from buying these geos more than any other European consumer, arguably. And, we can support you. Making sure that you are supporting the production of Norwegian renewable energy by consuming it yourselves.

Richard Sverrisson, Editor-in-Chief, Montel: 6:16

I think that's gonna be quite some task persuading, these big industrial produ users of energy to buy GOs. But certainly that's an option. What do you think the impact will be on the wider market then, Adam? Do you expect then the flow of geos from Norway to the continent that have come to a halt or sort, trickle right down? What do you expect here?

Adam White, Secretary General, RECS International: 6:36

No, I don't expect to ever to come to a complete halt. It may start to slow down. I don't, I wouldn't want to be. Making too bold a prediction on that either though. I think, as a whole, Norwegian geos are a big part of the market, and as I understand it from our members, they do provide a base liquidity to the market as a whole. So they. Serve an important March market function and that liquidity is important in geo markets it is relatively limited. So if there was a significant reduction of Nordic hydro geos that could have a kind of a knock on effect on contracts in general which not depend, but do benefit from the. That the hydro geos from Norway provide to the market in general. So that could have a negative effect that we would like to avoid with doing the utmost we can to maintain an increased liquidity in the market. So any reduction in that would be of concern. Having said that, as in terms of, the different product groups for geos in the market, the Nordic Hydro do tend to be the longest segment of the market. We know that the geo market has historically been oversupplied or long in general when Rick International looked into this in a bit more detail earlier this year it's relatively clear, it's quite clear from the a IB statistics that it's really the hydro SE segment and the biomass segment that are the longest and actually the wind and solar segments. Are quite short and in most demand, therefore, and so it's not like the supply of hydro geos from Norway would have a, a major effect. Slowing it down wouldn't necessarily have a major effect in impure supply and demand terms because the supply is is already greater than the demand for it.

Richard Sverrisson, Editor-in-Chief, Montel: 8:25

And how about the attractiveness of Norway? As a base for industry. The tech companies or data centers, if there are changes to the rules for guarantees of origin, I, is Norway gonna be a track, those kind of companies?

Adam White, Secretary General, RECS International: 8:37

Any major corporation that wants to claim the use of renewable energy as any consumer needs to be able to prove that. And in Europe, that means canceling GOs. And that's not only the law, that's also for voluntary disclosure schemes like CDP and RE 100. There's no way a big corporate who reports on their renewable energy consumption. Would voluntarily, I think, go to a country where they can't do that, where they'd have a large amount of their consumption that wouldn't really be verifiable by groups like CDP. And so for me, that would be a retrograde step for Norway as well. They would limit the capacity to attract new manufacturers, new energy consumers who would require the kind of the presence of a geo scheme in order to be able to report their consumption.

Richard Sverrisson, Editor-in-Chief, Montel: 9:28

So in a sense, Norway shooting itself in the foot really well.

Adam White, Secretary General, RECS International: 9:30

I definitely think that Norway would be the country most negatively affected by. Curtailing its geo scheme. Yeah. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 9:38

Okay, Adam let's look more at current market dynamics in the geo system. What are driving prices at the moment?

Adam White, Secretary General, RECS International: 9:44

We have seen that there are, big price increases in the last few weeks and couple of months, and there was a bit of a drop off and there they're picking up again. And my understanding, we're not a market player at Rex International. We represent market participants. My understanding is that this is really becoming a structural increase in market activity. There's more and more demand from more and more consumers and that is, that's what's driving the price, that there is many more transactions being made. There's, like I said, more interest in consuming renewable energy, and that's really where Rick's International's focus is on. Supporting that growing demand and that's at both ends of the market. There are some well-established market participants who are becoming more and more sophisticated in the types of renewable energy they're choosing the products they're choosing, and even driving the development of new projects. New products at which we might talk about, temporarily granular guarantees of origin and so on. But also there's massive opportunities still at the other end of the market where energy consumers might be new to buying renewable energy and wanting to buy that in a simple and secure way. And we see them also coming in. Yeah. In general, we feel that the increasing interest and the. Price rises are structural and based on growing demand for renewables, which is obviously a positive thing for everybody.

Richard Sverrisson, Editor-in-Chief, Montel: 11:04

In the past, I've heard, people criticize the geo market for being, not very transparent, being illiquid and maybe immature in many aspects, very volatile. Would you say that's the case these days, or is there quite a difference in today's geo market compared to a few years ago?

Adam White, Secretary General, RECS International: 11:20

I think it's becoming increasingly mature. I think we see. It's a well established market that's been around for a long time. It is becoming increasingly transparent. The, some of the national auctions have helped with price transparency, for example. So we see auctions with published prices in Portugal, in France, Croatia, and Italy and Luxembourg. So those are already giving a pretty good indication of prices. There's discussion of setting up exchanges for geos, which could complicate the market in some ways, but it can also. A clear price signal and increase liquidity which could have some positive benefits too. I definitely see the market maturing and like I said it has scope to mature at both ends with more complex products available where consumers want them and also. Greater availability of geos, greater ease of buying geos for consumers who want to enter the voluntary renewable energy market.'cause at the end of the day, there's no requirement to buy renewable energy. Obviously in, in Europe at least there are in some energy attributes, certificate markets, like in North America. But here it's really a voluntary market. So we do have to respond to the needs and the desires of consumers in order to ensure that we keep lifting that demand up.

Richard Sverrisson, Editor-in-Chief, Montel: 12:33

Adam, you mentioned exchanges, plural. Plans for several exchanges for GOs and is there enough liquidity in the market to justify a difference in or several marketplaces?

Adam White, Secretary General, RECS International: 12:45

No, that was probably I probably misspoke an exchange that, that I'm aware of at the moment. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 12:50

Are you seeing more interest towards wind and solar geos instead of hydro in terms of supporting new capacity? Is that something that's happening out there?

Adam White, Secretary General, RECS International: 12:59

Yeah, definitely. And this is a bit like I was talking about before that where often we see consumers enter the market in the kind of the easiest way, which is probably buying unbundled generic geos or Nordic hydro geos. Which are the most liquid, the most available, the least expensive end of the market. But then as they, participate in the market for a number of years or a bit of time, they look to refine their buying choices in much the same way as consumers of any product do. And they either look to buy geos from production that's more geographically local to them. Segments like, like you say, like solar or wind. And we do see more and more pressure in those areas. And I think this is often reflected in price differences. There are quite large price ranges, even on publicly available prices between different geo products. And that really reflects supply and demand for those different product segments. And like I said in our, in the report we published earlier this year, we see most demand. Wind and solar and that is where the supply demand is most an equilibrium. And therefore prices have started to rise in a structural way in those market segments. And it could be that products, as I've said, get more and more sophisticated as, particularly at the kind of the cutting edge of the geo market, the likes of Google and Microsoft and Facebook where they run big data centers and they have a big data capacity. Are looking to buy geos from production that happened at the same time as their consumption was happening. Now, that's a relatively difficult thing to do, and it's obviously not for everybody. We would never, ever advocate it to be for everybody. But where consumers want that and where producers and issuing bodies can provide that information, then that can be a great way of adding value to geos as well. And another aspect of that kind of added granularity. The potential to add C2 values to each guarantee of origin. So the CO2 value of the production of the megawatt hour, that's represented in the guarantee of origin obviously for wind and soda, or that's not so such an important piece of information, but maybe for hydro or bioenergy, particularly biogas, that can be a very valuable piece of information. And so adding granularity and sophistication in buying choices there. Can also be an interesting dynamic in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 15:26

We're also gonna be seeing the revised renewable energy directive and the discussion around that. What are the implications there for guarantees of origin, Adam, what's being discussed there?

Adam White, Secretary General, RECS International: 15:35

The commissioner made its proposal, obviously, and it's gone to the Parliament and the council now. The biggest change that the commission proposed was. Requiring the issuance of guarantees of origin for all renewable energy generation. So in the current red two that is still obviously enforced. Countries had the option not to issue guarantees of origin to producers that benefit from a public support scheme. And most clearly this happened in Germany Basically. Those producers benefiting from the relatively generous German support from renewable energies, were not able to request the issuance of a guarantee of origin. Now, if that proposal from the commission were maintained by the Council in Parliament and into the final law. That could change things relatively significantly in Germany and therefore for the market as a whole. Because there is a significant chunk of renewable energy generation in Europe that goes un certified mainly for regulatory, but also sometimes for market reasons. And that would obviously bring that supply in. And we do support this because we see it as a step towards certifying the generation of all energy and a step towards. Full disclosure. Now full disclosure is where all energy generational consumption is certified. And so no one is making a claim based on the residual mix. So what is left from the production mix after the certify mix is taken out. And there are different ways of doing full disclosure, it's not a kind of. A one size fits all, and the members of Rex International have supported full consumption disclosure, which is really what they have in put in place in the Netherlands as the best option. And that is where every megawatt hour of energy consumed needs to have a an EAC or a guarantee of origin canceled for it in order to prove where that energy came from. And we think that's important for a couple of reasons. Firstly, it levels the playing field.'cause at the moment, it's only consumers of renewable energy who need to cancel the certificate to prove that consumption. And also it really makes everyone conscious of the energy they're consuming. If you have to cancel a certificate against your consumption, and you were. Assuming to yourself that you were consuming relatively clean energy without really paying too much attention to it. What if you're confronted by a certificate that says, no, this was called production from an old plant in, somewhere quite a long way away. You might think, oh, actually that's not what I want to be doing. I'm gonna make a more conscious choice about where my energy is coming from.

Richard Sverrisson, Editor-in-Chief, Montel: 18:08

So is this linked to also some schemes and some measures we're seeing in recent months? About 24 7 tracking of geos rather than, or reporting it on a live base, real time basis rather than an annual basis. Is this sort of linked to that, Adam?

Adam White, Secretary General, RECS International: 18:23

Not directly. The full disclosure is really about the certification of all energy generation, whether it's renewable or not. 24 7 tracking is the idea of placing more temporal granularity on each certificate. So at the moment, a, when a producer requests a GOV issue for their generation. Kind of the timestamp on that geo can be up to a month. For example, it could just be a geo produced from solar in July, 2020, which doesn't give the consumer much granularity about exactly when that energy was produced. Some consumers, as I mentioned, particularly those with large data capacity. The internet companies, Microsoft, Google, Facebook, and so on, have said they want more temporal granularity and matching on their consumption. So they wanna say we consumed this data center consumed five megawatt hours from one o'clock to two o'clock on July 31st, 2020. We want to buy five megawatt hours of geos that were produced at the same time, and often in a relatively local proximity to that consumption. And the reason they're doing that, as I understand it, is there's a number of reasons. One of which is they want to as closely match the certificates to the. Physical reality on the grid at the time. They feel that gives them the most reliable form of renewable energy consumption. It's the most likely that what is coming out of their plug is closely related to what their certificates tell them they're buying. Now you can never make that match a hundred percent. The reason we have a certificate market is because you cannot track electrons or gas through a grid or a pipeline from production. To consumption point. That's why you have to have a certificate market. But like I said, some of the more sophisticated consumers are making these choices, which are perfectly valid for them in an effort to make the kind of the physical reality match the certificates they're buying as closely as possible. And we don't block that at all. We are engaged in two major initiatives. And the Euro 24 7 initiative to ensure that these markets can work. They can be integrated within existing EAC schemes in Europe and elsewhere as well. And that can, as I said, provide something that the most sophisticated consumers want.

Richard Sverrisson, Editor-in-Chief, Montel: 20:48

Do you see this trend? Do you see it will continue? Do you see that there's a growing demand for this kind of temporal granularity, Adam? There's

Adam White, Secretary General, RECS International: 20:54

definitely relatively strong interest, I would say, for my kind of best guess. It will never dominate the market, but it will always, it could be an important segment of the market. Picking up on something in your previous question as well, it's important to remember that 24 7 matching doesn't necessarily mean real time matching. So you can still do, and it will be the case that we will be doing retrospective matching of temporally granular certificates. So you might get, even if it's to the end of the day or the end of a week or the end of the month. Consumption for every hour in that period, and then match it by buying certificates for production at the same time. Real time matching kind of almost. Matching of consumption with production through certificates. No one's sure that's even really possible, I would say, and that's definitely a very long way off so that it's still a kind of a retrospective product and effect in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 21:55

Finally, Adam, we started off by talking about a potential Norway exit from the geo system. Also I'd like to turn to the UK that's exited the eu. What can you say about the acceptance of EU GOs in the uk? What's the outlook here?

Adam White, Secretary General, RECS International: 22:11

Yeah, so this all stems from part of the red two which says that. EU member states can only trade geos with third countries, which of course the UK is now, if there's mutual recognition of the guarantee of origin schemes between the EU EEA countries and those third countries, and that affected most immediately Switzerland and the uk. So in Switzerland's case, they had a, or they do have a very sophisticated, well-functioning geo scheme that's they're a member of the A IB for example. And they were fully integrated in these to the European market, and now no longer are because they don't have explicit mutual recognition of their guarantees of origin and the same. Became true of the uk when Brexit was finalized. And what is challenging for those countries is that it's not clear how mutual recognition can be achieved. So it's not defined in law and the kind of informal indications we have from the European Commission that it has to be based on quite well developed. Trades agreements basically. So as you'll know, Switzerland had a number, like many bilateral agreements on different product and services areas with the eu, they have negotiated an into institutional framework agreement, which is like a, an overarching agreement to bring all of those into one deal that was ratified. The EU side, but actually was never ratified on the Swiss side and the Swiss government have put that ice effectively. And so the commission said we will only discuss mutual recognition of guarantees of origin with Switzerland if and when. That inter institutional framework agreement is ratified by Switzerland. And so that gives an indication of. Situation for the uk, which is where we started, and the Brexit agreement, as is a very thin agreement. And at the moment, the uk, like Switzerland, in fact have said that. But even if we can't export our geos. Or in UK's case, Regos to the EU market. We will continue to accept that EU Geos can be imported to the UK and Switzerland. Switzerland have decided to do that indefinitely. The UK government has said that it will continue to seek mutual recognition. What is uncertain is how long the UK will maintain that position, basically, and so there is uncertainty in the market there. We would encourage the UK. To simply maintain that. The UK is a net importer of geos to the tune of tens of terat hours. And so if for political reasons, the UK government decided to end that net import, it would have a major effect mostly on UK consumers blocking them from to choose. Renewable energy of their choice and it would have some effect on the European market too by removing a large demand center,

Richard Sverrisson, Editor-in-Chief, Montel: 25:07

something that we'll have to keep a very close eye on as well as developments here in Norway. So Adam, thanks very much for joining the On Our Weekly podcast.

Adam White, Secretary General, RECS International: 25:15

Thanks very much for having me, Richard. It's been enjoyable.

Richard Sverrisson, Editor-in-Chief, Montel: 25:18

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