Guarantees of origin: Green or greenwashing?

The guarantees of origin (GO) market is complex and opaque. Listen to a discussion that unpicks the complexity, simplifies the jargon and lays bare the controversies in the market. With big tech looking to source more and more green energy, how can the market – projected to be worth EUR 4bn by 2030 – increase its credibility and boost liquidity? And why has Norway ruled out an exit from the GO market?

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guest: Daniel Arnesson, Manager, Renewable Power Analysis, Veyt

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly Podcast. Bring Your Energy Matters in an informal setting. Greenwashing is a term of abuse, much bandi about in today's European energy markets. How do you know that the power you're paying for really is green? Guarantees of origin is how, these are the tools or certificates that prove you're buying renewable or green energy. But do they work? And with the guarantees of Origin market projected to be worth around 4 billion euros by 2030, why are they proving controversial? And why are some companies in regions with an abundance of renewable energy? Amongst the most reluctant to use them. I'm Richard Sverrisson, and today I am joined by Daniel Arnesson of Veyt. Warm welcome to you Daniel. Great to have you back on the pod.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 0:56

Thank you, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:58

I thought I'd just start by, by asking your views on the comments made to us by the Norwegian engine system who said that Norway, despite the pledges made, when they came into power and the manifesto, they were not going to leave. The geo or guarantees of origin market? What did you make of this?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 1:16

To be honest, I am not surprised because the Norwegian government municipalities around Norway, they have a lot of money in the geo market because they own a lot of the pro production capacity. So there would be a lot of loss. If those geos were rent, useless. And also I believe I mentioned it last time we spoke, there is a, what can say, a legislative hurdle to leave the geo system and still maintain in the internal market. So I'm not that surprised.

Richard Sverrisson, Editor-in-Chief, Montel: 1:50

Okay. You know, what you're saying there is, Norway wants to be part of the internal engine market, but by leaving the guarantees of origin system, it would've jeopardized that position.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 2:01

Yes, exactly, because it's, the geo market is incorporated into the renewable energy directive, which also and also reflected in the internal electricity market directive for disclosure purposes and so forth. Obviously, it's in the latest directives or renewables too and so forth, and Norway has been quite slow on adopting this, but what I've heard, at least they are moving more quickly on those areas. Now, how has the market reacted? I would say I do think that like a lot of these risks around Norway has been priced in and in a way the discussion in Norway. I think the market is quite desensitized from this discussion on and off and so forth. But we have also seen, we have seen trades out there asking for Nordic hydro, excluding Norway. So we see that there are actors in the market that are regarding Norwegian Geos as a risk. Even in the Nordic settings.

Richard Sverrisson, Editor-in-Chief, Montel: 3:04

And why is that what they seen as problematic?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 3:07

Well, if you, for instance, trading a forward there and then if Norway would leave the system, then you wouldn't be able to. Deliver on that or acquire that

Richard Sverrisson, Editor-in-Chief, Montel: 3:19

A absolutely. So I see what you mean. But now there's that almost, well, I dunno if it's a certainty you could call it, but certainly that U-turn has maybe allayed some of those fears then.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 3:29

Yeah, no, I would say that they have they still, the issue of they have announced that they will. Make changes to the geo system. I don't know how those changes gonna look like in 2025 or Q3, I think they said. So that's gonna be a bit of a if they wanna, by the sound of it, I think they will try to link it closer to the physical electricity. But to what extent I am not certain. But also I would say that the risk that existed I think. Not many in the market were so risk averse with respect to the Norwegian geos,

Richard Sverrisson, Editor-in-Chief, Montel: 4:05

because it was for some of the core issue is that what is Norway exported I think last year about 38 terawatt hours of guarantees of origin, but only 18 terawatts of physical power.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 4:17

They exported more, if I'm not mistaken. They consumed 38 terawatt hour. So that's what they had, but for own domain cancellations. Then they do X domain cancellations in Norway as well, which essentially is an export as well, but outside of the AIB. But then they had a production of a hundred and almost 150 terawatt hour. So a large portion of that was exported.

Richard Sverrisson, Editor-in-Chief, Montel: 4:43

So interesting. Do you think then Norway will continue to export? Geos? There'll be no change here and will heavy industry in the country. Need to buy them to comply with EU rules to prove that they consume renewable energy.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 4:59

Yes, I do the Norwegian. If you look at the power intensive industry in Norway, that is a bit more than 30 tet hours. So they will never be able to eat up the gap that they have in the oversupply. Even if they were. All of them were to consume geos or by geos. I know for a fact that some of them already do right? And they have their own production and so forth. But Norway will still be a net exporter with the abundance of hydropower that the Norway have in the country. What we see do in terms of the regulation of. Corporates and industry is that indeed you have the implementation of certain sustainability, reporting, directives and so forth. But when it comes to other more stronger incentives, so to speak, like the CO2 compensation scheme that they have in Norway, there, they are still adhering to the location based method. So they don't give any strong. Let's say financial incentive to the power intensive industry to buy geos.

Richard Sverrisson, Editor-in-Chief, Montel: 6:06

So this is at the core of, one of the controversies in the geo market where, you know, which I alluded to in the intro, where you have, you know, the market based solution, which is a certificate, a guarantee of origin, and also the location. So you're saying I'm, my site is located. In a power grid that is over 90% renewable. Therefore, I don't need to buy this because the, all the electricity I'm consuming is renewable. That's at the core of the controversy, isn't it?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 6:32

Yeah. You see that often, right? In countries where you have a lot of renewables they don't really they claim we are consuming. Electricity that comes from renewables, which is more or less right, but they also have import, right? So there is the exact amount that you're consuming is impossible to know. Like even a, even the power markets, the pitting zones that we have is a, what can I say? The closest we can get. To, tracing the electrons, if that's what what we're talking about here. And and even the PPA, like you can't trace the physical electrons in this. But still you're talking about the delivery of physical electricity. Ironically the discussion is more controversial when it comes to geos than physical power markets. But physical power markets are also more. Closer to what how the flows of physical electricity is.

Richard Sverrisson, Editor-in-Chief, Montel: 7:28

No, absolutely. I mean, and then it, there's the issue of double counting. What is that all about? Daniel.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 7:34

Essentially, lately you have seen many different concepts coming around up with respect to double counting, you have double claiming, you have double perception and so forth. Double Dutch to some. Yeah. But yeah. Can you Yeah. But essentially like it all come down to the credibility of the system. If I am using a geo for a purpose, that you are also using it. And historically, if you look at. The geo system, it has been mainly, first, it was implemented for power producers to be able to differentiate their production. Lately, suppliers was regulated so that they had to use geos for disclosure purposes. Now we have taken a third step. Where we in EU see an increasingly regulation on end consumers that they need to buy to certain rules when they disclose the electricity consumption and whether or not it's renewable or not. One of the problem is that we also have different policies that not always speaks to each other. So you have the corporate sustainability reporting directive that is, pretty clear, right? But then the commission also have guidelines on when you can give state data to power intensive industry that receive that are affected by the emissions trading scheme and how high electricity costs for that. And there we see that Norway have implemented a location-based approach. Meanwhile else in Europe, they have a market-based approach using geos and PPAs bundle or, and unbundled geos. So there. Comes also this issue, if I'm in Germany, for instance, I'm buying a geo from Norway. I'm claiming state aid for that. Meanwhile, in Norway you don't, you can just claim it by the use of the. Use of the grid electricity and using a location based method. There you also have these double counting issues and in the end, it does affect the credibility of the system and it does undermine the efficiency of the geos as a system to promote renewables.

Richard Sverrisson, Editor-in-Chief, Montel: 9:44

This is all very complex. And it, as you said, there's a huge variation between different jurisdictions, both regional and national. What's the answer here? Does you need to be you mentioned the corporate sustainability reporting director, which we'll come back to hopefully in, in later in the discussion, but. Does it need to come from the EU level to say, we will accept, we only want market based rather than locational to avoid this potential controversial issue of double claiming, double counting, whatever you want to call it.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 10:15

Yeah, I would say that it must do that. So far in the EU they have had quite an experimental approach and that's because the knowledge when it first was implemented was not that great. And in that sense it was quite good to. Set minimum standards and the national regulators, but also the market was involved in shaping the system. I would say that it has reached a point where it is more mature and it needs a little bit more top guidance now, I would say. So one of the problem, of course, is as well that we have the eu and then we have the EEA. Always right. And then beyond that, we have those that are neither of those, but still in the AIB like Switzerland and Serbia. So like we have a complex, very complex system of overlapping governance structures.

Richard Sverrisson, Editor-in-Chief, Montel: 11:07

Absolutely. And on top of that, you mentioned the different layers. So you have the ETS, you have carbon compensation schemes, you have subsidy schemes. Yes. You have, so a bundle of different other elements that, that you can throw into the picture here as well. So it it is very complex. But before we go further, I think also, I think the listeners maybe want to would appreciate your views on current market dynamics. We've seen prices for this year. Four below one Euro a megawatt hour and geo prices for next year. Four below two euros a megawatt hour. What's happening here, Daniel?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 11:41

Essentially what we've seen is that hydropower output has been very beneficial. 2023 and 2024 against the dry year in 2022. And also the reservoir levels has been good. But on top of that, we have seen a. Record capacity buildup in solar and wind, and that from 2023. And obviously that is not something that just disappear, right? That's here to stay for a while at least. And that essentially creates this oversupply and the demand side. Have not picked up as quick. We have if we look at 2023 demand did increase with about 8%. If we look at the disclosure, the main disclosure period between, april, 2023 and March, 2024 when it's the disclosure deadline in most countries. So there it increased with 8% from 2022. So we have an increase regardless of the decrease in electricity demand that we saw last year. The question. Is though, like the demand side is a little bit of a black box. And it is especially interesting now when a lot of new regulation is coming into play, which is favoring geos when it comes to disclosure for different purposes. So it's gonna be interesting to see how the demand picks up. Theoretically the demand can pick up a lot faster than the supply because the supply generally, if you disregard auctions of course requires infrastructure developments. Meanwhile, the demand can pick up without those costs, so we can see that demand pick up.

Richard Sverrisson, Editor-in-Chief, Montel: 13:31

I'd like to return to demand a bit later, but one of the other, as we say, the unique element or anomaly of the the guarantees of origin market is that you can still trade last year's contract. So 2023 is still listed. What's that all about? S Donia, can you explain that to those listers who find that particularly strange?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 13:48

Yeah. And and it is it is a bit hard to maneuver and some in the market are obviously, taking advantage of that. And there's arbitrage opportunities presented. But the reason for this is that some countries in the AIB allow for 2023 vintages to be used against 2024 disclosure. And that comes with a geo from the renewable energy directive. Have a 12 year expiry date. 18 some

Richard Sverrisson, Editor-in-Chief, Montel: 14:18

12 year or 12 months?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 14:19

Sorry, 12 months. Yeah, of course. Otherwise well, would be easily to explain. Yeah. But obviously those 12 months can expand over two years. But in some countries like Spain for instance, there, they only allow. Geos from 2023 to be used for disclosure in 2023 and so forth.

Richard Sverrisson, Editor-in-Chief, Montel: 14:36

This is also another example of this regulatory variation.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 14:41

Yeah. So you have this diversity in the system that makes it a bit difficult to maneuver. And that's why you see also, like you see a difference in the prices between 2023 and 2024, for instance, and that is because 23, 23 as it is now, they have a less addressable, less big size of of the addressable market. 2024 addresses the entire AIB right? Meanwhile, 2023, only those that allow disclosure like across vintages.

Richard Sverrisson, Editor-in-Chief, Montel: 15:13

So just before we go further, the AIB that's the Association of Issuing Bodies, which is the organization which all countries. Countries that you know, basically issue guaranteed property.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 15:23

Yeah. They essentially make it, so in the eu, the transfer of geos should be feasible between all countries, but technically it's difficult. The AIB which is the Association of Issuing Bodies, as you said, cater for that with technical solutions and a regulatory framework. And the national issuing bodies are members of this association, but not all EU members are. So Poland is not there. So that there you have a more isolated market.

Richard Sverrisson, Editor-in-Chief, Montel: 15:55

Again, regulate fragmentation. Yeah, Daniel, it's it's fascinating. And I'm sure many readers will, find this in many ways enlightening, but you talked about the difference or the spread between 2023 and 2024 prices. But certainly we're seeing, the spread between this year. And 2026 and 27 much larger. So the prices are much higher. Why? Why is that?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 16:21

Yeah. And also 2025 there. And that's partly I would say that indicates that the market expects the supply and demand gap to close. And that also goes in line with our models and scenarios for the coming years. So that is one explanation. Another one is that you don't really know also like how the weather condition's gonna be then. So that's one thing, right? Now for 2024, you have a better view of it generally or often you see that in September market participants know more or less how the supply gonna look for the year. So then you can see certain movements in it. Yeah. But that, that is one explanation that market participant expect prices to. To go up and the and the demand supply demand gap to close. But with that said, the different vintages have some impact on each other. So soon you will see 2024 in certain countries. Will be possible put to be used in 2025. So the outcome on 2024 is also important for 2025. That's why I would say that you have a gap also between 2025 and 2026 and 2027. It's more certainty there.

Richard Sverrisson, Editor-in-Chief, Montel: 17:45

Yeah, it's thought about that. And certainly, predicting the weather is very different. I think with with the only certain thing we can say that it's gonna become much more volatile, hotter, potentially wetter and more instances of, dramatic weather conditions, but. I would like to move this subject onto maybe another controversial subject matter, Daniel, which is the issue of auctions. You alluded to them earlier now, they often are unders supplied and don't seem to be so popular amongst market participants. What's the reason for this? A, them being undersupplied and B the lack of should for a better word, popularity.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 18:20

Yeah. So personally. Or from the outset, I am positive to auctions because they do they do contribute to greater liquidity. But it also requires the demand side to pick up, right? In order for buyers to, reach prices or buys and sales quickly at. Relatively stable prices. But one of the problem with geo auctions, it's not their existence possibly, but maybe the risks maybe their introduction. They have been introduced now in a re relatively short time span from Italy started in 2013, I think it was, and then from 2018, we have seen more and more. The problem there is that. Relatively fast, have supply increased in an already oversupplied market and we still have some risks of it. And that is Germany, for instance. Although I don't, you should never say never. We have a scenario too. Try the sensibility. What happens if they start issuing for supported geos and then you have Serbia and Ireland. I think those are the only countries where they don't auction supported geos. But the problem there is that it introduce a lot of supply in a relatively short time span based on policy, a policy change, which maybe not all market participants were aware of. So it presents risks, essentially

Richard Sverrisson, Editor-in-Chief, Montel: 19:53

thats flooding more supply into no supply market. Yeah. Yeah. I see. And because then some of those years, if they're not if they don't find a home or a buyer, then they reach market anyway and have quite a bearish impact on prices. Often it, wouldn't it be fair to say often the cap is placed quite high.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 20:09

Yeah. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 20:10

So moving on to demand here. You mentioned the corporate sustainability reporting directive and potentially that's a way for companies to report what we say, which is the scope two emissions, right? So anything that's related to the the electricity that they purchase in a way for them to declare that what they're, or to verify that. The electricity, the energy that they consume is renewable or green, but the potential here is huge in terms of demand. Is it not, you're saying this could affect what, 50, 50,000 companies across Europe who would then be in the market for guarantees of origin or their equivalent.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 20:48

Yeah, it, the potential is huge. That's for sure, or the scope of the regulation is huge and it also have potential ripple effects because even a reporting company's scope three emissions can be suppliers scope two emissions, right? So some companies can put pressure on their supply chains and it can actually have ripple effects beyond the COVID sectors or industries. However. It is mere a disclosure, like it doesn't oblige you to buy geos. So it is mere that you need to disclose this in your sustainability reporting. Obviously that exposes you if you are not buying any, and it does show what kind of greenhouse gas intensity you have for your organization. But. It would be good, I think to couple that with also other forms of incentives. And that can be public sector, for instance, in public procurements. I have seen it that they say that if you use a hundred percent renewables for your production then you score higher in the public procurement process and so forth. So I think it needs to be coupled with other incentives. Yeah. Yeah. The incentives as well.

Richard Sverrisson, Editor-in-Chief, Montel: 22:06

What's the timeframe here for that directive, for the corporate sustainability?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 22:10

The directive is already in place. It's. It's implemented for the reporting next year, but that's for this year.

Richard Sverrisson, Editor-in-Chief, Montel: 22:16

Okay. So the company is already looking to,

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 22:18

to do that. I think there is a role like certain industries had to start before, I don't have it on the top of my head. But obviously other. Companies and so forth need to look into this already.

Richard Sverrisson, Editor-in-Chief, Montel: 22:33

And I'd just like to then turn to the form of companies that we all know about and we all use regularly. The big tech the Amazons, the Google the Meta. That was a very interesting article in the Financial Times last week about the certificates market and how. Big tech and the approaches they take to to verify or certify their green energy consumption. But they seem to be taking quite diametrically opposed views. Some are saying we need to track it 24 7, and some are saying we can know and we can go into market once a year and prove it. I mean, why are they taking such opposing views do you think?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 23:09

Some of it might be vested interest. I know that Google pioneered the t Tacs or like the. Oh, what is it? What does the T stand for now? Again, I can't remember, but it's 24 7. Okay. Yeah. Essentially matching time-based, time-based that, that's right. Time-based energy attribute certificates. Okay. Yeah. With pilots in Ireland and market in the Netherlands. So obviously they have a bit of vested interest. They have invested in this system. Meanwhile you have others that don't and like Amazon's. But what's the right way to go about that? That's difficult to say here, right? One of the thing is that when you are tightening, when you are having a more stringent temporal matching requirements and so forth, and higher granularity in the system, it will jeopardize liquidity. That's a be balance that needs to be made.

Richard Sverrisson, Editor-in-Chief, Montel: 24:04

So some like Amazon, they want the flexibility to use certificates anywhere in the world, right? So yeah, that's and arguing this helps the market find the cheapest way to cut emissions, whereas Google has a different approach where, you know, both the sort of propositions seem reasonable, but what's the best solution? Do you think the EU will find ways to streamline this or to. To say that only one of the propositions is viable going forward?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 24:29

As I said, with liquidity there, that is one aspect, right? But then the another aspect is also credibility.'cause credibility is important for people to. Rely on the system here. And in a way, this is maybe the two principles that you are balancing here. So the approach of sourcing it from anywhere of the world, right? That might undermine the credibility quite a lot. Especially if you look at the discussions that you have in the eu. And also regula regulation is going, I would say, in certain areas, it is going towards a more stringent temporal and geographical requirements. And the production of renewable hydrogen for target compliance is one such sector, although they have different AP approaches depending on how. Carbon intensive or renewable or the renewable share of the grid in a bidding zone. But the general approach is that you need to have like you need to source, you need to have a PPA, and then you need to source the geos within that bidding zone or neighboring bidding zones.

Richard Sverrisson, Editor-in-Chief, Montel: 25:40

Because Otherwise, and I think you are, you've nailed it on the head there. I think Daniel, because if I have a site data center, say in, in Sweden, and I'm using certificates from, I dunno from Croatia. That were produced last year to, to certify my renewable reduction this year. That lays the system open to a lot of questions and especially around the credibility of how useful is that? How viable, how sustainable is that? So I think the issues of that then forcing or not forcing. Certainly incentivizing companies to buy in the time that they produce and in the place that they produce, like in the bidding zone is maybe that's where what the EU is looking at. Is that, would that be a a summary of what you're saying, Daniel?

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 26:25

Yeah, I would say that they do that in more, what can I say more regulated area. So like when it comes to target compliance they call it renewable fuels of non-biological. Origin, like fuels that are produced with electricity, like electrolysis and so forth. In those areas where you have targets connected to it, I think they will have strong requirements. Meanwhile, when it comes to the corporate sustainability reporting directive, there, it will be more lax. So I think you might see a development where the market is actually developing to, into. Directions. One that is more, like stringent when it comes to granularity, another one that is more flexible.

Richard Sverrisson, Editor-in-Chief, Montel: 27:12

More flexible. And that may be, yeah, I think from what you're saying here, Daniel the, there's the outlook is not for less complexity, but potentially even for more going forward.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 27:21

Yeah. Maybe.

Richard Sverrisson, Editor-in-Chief, Montel: 27:23

Daniel, thank you very much for being a guest again on the Montel Weekly podcast.

Daniel Arnesson, Manager, Renewable Power Analysis, Veyt: 27:27

Thank you very much. It was a pleasure.