Record high certificates prices bring renewable energy buying in focus

Debate about the best way to buy renewable power has been heating up recently after strong demand from corporate buyers helped push European Guarantee of Origin (GO) certificates to all-time high prices.

The tradeable certificates issued when renewable power is generated have seen prices increase more than tenfold through 2022.

Platts, part of S&P Global Commodity Insights, assessed the most actively traded GO -- Nordic hydro 2022 -- at Eur9.82/MWh ($10/MWh) on Nov. 30. Prices have been surging since early September and compare to levels of less than Eur1/MWh as recently as late 2021.

Much of the rise is due to a shortage of hydropower following a summer of drought in Europe, according to GO market players, but also resilient demand from corporate buyers keen to meet emissions targets by buying renewable energy and doing so with certificates.

While much lower certificates prices encouraged skepticism from analysts assessing their impact on new renewables development -- particularly as many come from old, existing plants -- the surge in value has increased revenues for renewables producers and demonstrates strong demand for green power.

But whether that will encourage the development of new capacity is still up for debate.

Additionality concerns

The extent to which buying certificates was 'additional' -- a term used to describe whether an environmental commodity supports new projects that would not otherwise be built -- could indeed depend on price, according to Matthew Brander, Senior Lecturer in Carbon Accounting at University of Edinburgh Business School.

"Current higher prices make it more likely that GOs achieve additionality but it cannot be assumed that they do," Brander said.

"Investors will only factor GO prices into their investment decisions if they think those prices are certain and relatively long-term."

What is needed is an "investment additionality test that shows the revenue from the GOs made the renewable project investable," Brander said.

While there have been no signs of a slowdown in prices yet, the record levels could also encourage some buyers to look for other ways to source green power, one GO trader said.

"Expectations are for [prices] to keep rising, nothing is really suggesting much of a slowdown," the trader said. "It will either be a supply boom that causes a crash or prices reaching a level where it is not worth it for corporates to buy anymore."

Analysts at S&P Global Commodity Insights forecast average solar and wind GO prices in the range Eur5-8/MWh from 2023-2030.

"At this price range, our models suggest that, all things being equal, some 4-5 GW of newbuild per year could be encouraged across Europe," said Bruno Brunetti, head of low-carbon electricity analytics at S&P Global Commodity Insights.

With power capture prices expected to decline in future, "GOs represent additional revenue streams for merchant renewables plants, which would complement declining wholesale/energy revenues. In that, this would help merchant renewables newbuild, which otherwise wouldn't happen without subsidies or other supporting mechanisms," Brunetti said.

Tighter certificates rules

As well as higher prices, a tightening of rules on location and a move to match supply and demand on an hourly rather than annual basis could help improve the impact of certificates.

"If you were to buy hourly renewable certificates from a producer on your grid that matches your demand profile, then I think it is more likely that you have contributed to new renewable energy than if you bought it annually and not from the grid specifically," said Anders Bjorn, a post-doctoral fellow at the Technical University of Denmark.

The RE100 -- a group of big companies committed to 100% renewable energy – in October said members should only claim green power from projects less than 15 years old in another move to help increase demand for new capacity.

"Restricting certificates to those from projects less than 15 years old will reduce excess supply of non-additional certificates. But I understand the 15-year rule already exists for US RECs (renewable energy certificates), and the empirical evidence shows that US RECs still do not achieve additionality," Brander said.

More accessible PPAs

Another way for companies to buy green energy is through signing long-term power purchase agreements (PPAs) with renewables developers that can help underpin project financing.

"There has been a problem historically that PPAs have mainly been an option for really big companies that are credit worthy and have enough power demand. We are seeing power purchase agreements becoming more accessible. I think power purchase agreements are more likely to lead to new renewable energy production than trading GOs," Bjorn said.

He cited a model whereby a group of smaller companies were aggregated together -- accounting for their individual demand profiles -- to sign a single PPA with a developer.

Price volatility and uncertainty around market intervention meant PPA market liquidity was currently low, according to the S&P Global analysts. "Despite these constraints, corporate activity has increased markedly," they said in a recent report.

The International Energy Agency advocates a range of approaches for buying green energy including on-site generation, PPAs, and certificates, for which it favors a time-stamped design, it said recently.

"The most critical requirement is that voluntary procurement actually goes beyond existing government mandates and initiatives," the IEA said.