Guarantees of Origin – (Not) Made in Germany
Welcome to Germany, where Europe’s largest green energy fleet produces very few Guarantees of Origin (GO). In this blog, we discuss this paradox and take a look at the current legislative overhaul. Can a new law turn Germany into a GO-powerhouse that will have the strength to ease increasing European bottlenecks?
Moritz Scholz, Sustainability Consultant
Moritz works as a Sustainability Consultant in the EMEA region focusing on the development of Carbon Reduction strategies and Sciences Based Targets setting. With a background in energy procurement, he is particularly interested in the intersections of energy markets and sustainability.
Guarantees of Origin in Europe – a quick wrap-up
When electricity is generated from a renewable source, energy attribute certificates (EACs) — known as Guarantees of Origin (GOs) in Europe — are simultaneously produced in a one-to-one ratio. EACs serve as proof of that clean generation and an incentive to invest in more renewable installations. The wholesale electricity is sold into the grid where it joins the mix of electricity from all sources, while GOs can be sold into the environmental commodities market. Once purchased, the owner of the GO has a custodial right to claim the ‘cleanness’ of the corresponding electricity.
Logically, green power purchasers wishing to make sustainability or carbon reduction claims must be the owner of an amount of GOs that correspond to their electricity usage. Once bought, the GOs are canceled in the electronic certificate registry, ensuring that there is no double-counting.
The race for GOs intensifies
Over the last years, the popularity of GOs has constantly risen in Europe. According to the 2021 Bloomberg New Energy Finance (BNEF) report on EACs, the total amount of canceled GOs increased from 385 TWh in 2015 to 828 TWh in 2020. While offers historically outpaced demand and kept prices low, 2021 marked a turnaround. Companies now face serious headwinds when it comes to GO procurement, and prices are acting accordingly. French GOs, for instance, tripled in value last year. In October 2021, BNEF even reported an 18-fold increase for the UK REGO (Renewable Energy Guarantees of Origin).
The German GO Paradox
Renewable capacity is the source for GO supply into the market. Despite possessing a 122-GW-strong renewable fleet – by far the largest on the continent – Germany is Europe’s biggest net importer of GOs. According to the previously cited BNEF report, the country had to procure over 98 TWh of certificates abroad, roughly 85% of its demand across 2021. On the contrary, GO output of the neighboring Netherlands amounted to 97 TWh – with only 18 GW of installed renewable capacity.
The reason for this disparity lies in the German renewal subsidy scheme. According to the Erneuerbare Energien Gesetz (EEG), only non-subsidized installations can produce GOs. Under this law, the so-called Doppelvermarktungsverbot (Double marketing prohibition) bars producers from benefiting simultaneously from subsidies and GO sales. Given that the EEG began in 2000 and an average subsidy period lasts for 20 years, it is no surprise that the vast majority of German installations are still legally restrained from emitting certificates.
Business as usual despite legislative overhaul
Notwithstanding the major EEG overhaul by the new governing coalition, the German GO system will mostly remain unchanged. While the draft law details the abolition of the EEG contribution, which was until now mandatory for energy end-users, it maintains the incompatibility of subsidies and GO emission.
Several trends could contribute to an even more bullishness in the GO market:
- Sciences-Based Targets initiative (SBTi): With the number of companies setting Science-Based Targets having doubled in 2021, the growing necessity for Scope 2 decarbonization will likely boost the demand for GOs.
- RE100: Like the SBTi, the RE100 initiative is constantly growing, with over 370 companies committed to 100% renewable energy use. GOs will be a crucial part of meeting these goals. According to BNEF, the 43 RE100 members in the UK could have played a significant part in the above-cited UK REGO increase.
- Concerns around Norwegian Hydro GOs: Currently, GOs derived from Norwegian hydro installations are a standard in Europe, guaranteeing low prices and good availability. However, concerns regarding the actual green additionality of those GOs, deriving mainly from aged hydro plants, have begun to surface. For instance, the recently created Dutch word sjoemelstroom (fudge power) explicitly targets energy labeled as green through this type of GO.
How to prepare for further disruption
Despite the mounting price pressure in Germany, it is not likely that another EEG overhaul will follow that would result in a flood of GOs into the market. Hence, it is vitally important for C&I buyers to understand the various options for involvement in green power markets beyond buying GOs.
This could include onsite (distributed) generation, short- or long-term direct power purchase agreements, financial (or virtual) power purchase agreements, and utility green tariffs, to name a few. Which products are best suited for an organization will depend on their assets and sites, their budget, their tolerance for risk, and their emission reduction and public relations goals.
With all the headwinds from the current market disruption, all buyers are recommended to pressure test the role of GOs in their clean energy strategy and seek opportunities to diversify where appropriate.