Tradable Green Certificates (TGC)
In the first decade of the 21st century, global energy markets are confronted with two issues that have increasingly dominated the international energy agenda during the last decades of the 20th century. These two issues are the liberalization of energy markets on the one hand and the fulfillment of environmental targets put forward in the international policy arena on the other hand. The best known example of the latter is the Kyoto-agreement on the reduction of CO2 and other greenhouse gas emissions. Another example is the indicative target that has been put forward in the White Paper on Renewable Energy of the Commission of the European Union.
In a system of green certificates, producers of renewable electricity receive a certificate for each pre-defined unit of electricity produced. Such a certificate represents the ‘greenness’, or in more general terms the ‘societal value’ of the production of electricity from renewable sources. By issuing green certificates two different markets are created for producers of renewable electricity: the market of physical electricity, on which they have to compete like any other electricity producer, and the market of green certificates. Demand for green certificates can originate from several sources. There might be a voluntary demand of consumers (e.g. by green pricing). Demand can also be imposed by the government on consumers or other actors in the electricity supply chain (generators, distributors, suppliers) via an obligation to generate, transmit, deliver or buy a certain amount of green certificates. The government itself can also act as a buyer of green certificates, e.g. by securing a minimum price or by a tendering procedure. In practice demand might come from a combination of these sources.
The European Commission considers this system as an option to reduce market distortions due to different state-aid schemes for renewables in the emerging internal electricity market.
The main objective of a system of tradable green certificates is to stimulate the penetration of green electricity into the electricity market.
In a green certificate system, certification serves two purposes. It functions as an accounting system to verify whether demand has been met or, when there is no demand, to measure the amount of electricity produced from renewable energy sources (RES). Secondly, it facilitates trade; through the establishment of green certificates a separate market for the renewable characteristic of the electricity will originate besides the market for physical electricity.
Green certificates are created by the producers of electricity. Producers receive a certificate for each predefined unit of electricity produced from renewable energy sources that is put on the grid. Demand for green certificates can originate from several sources. There is a voluntary demand of consumers (e.g. by green pricing). Demand can also be imposed by the government on consumers or other actors in the electricity supply chain (generators, distributors, suppliers) via an obligation to generate, transmit, deliver or buy a certain amount of green certificates. The government itself can also act as a buyer of green certificates, e.g. by securing a minimum price or by a tendering procedure. In practice demand might come from a combination of these sources.
Green Certificate Market
Consumers will pay a price for the certificates in order to meet their target. The price will depend on the market, i.e. on demand (which is fixed by the target) and supply. With low supply of green certificates, the price will be high, which will be an incentive for new producers to provide renewable electricity. Moreover, in theory renewable energy will be provided in an efficient way because those producers who can provide renewable electricity at the lowest price will be able to sell their certificates.
It is both a spot market and a forward market have been developed for green certificates. On the spot market, consumers or distribution companies trade green certificates that have been issued in the past. This market is used to buy certificates to fulfill their obligation. On the forward market consumers or distribution companies can negotiate about long-term contracts i.e. they trade in green certificates that will be issued in the future. The forward market can be used to hedge for price risks, therefore securing investments into renewable electricity projects.
Different Models of a Green Certificate System with Obligation
Distribution companies or utilities may face an obligation for electricity generated from renewable energy sources. Thus at the date of settlement, the utilities have to show the proper amount of green certificates. The price of green certificates could be passed on to the consumers of electricity in the form of a general price in-crease. However, the price of green certificates may also be passed on to those consumers who have agreed to support renewable electricity, and therefore to pay a higher price. This system, however, does not seem to be sustainable, once consumers have found out that they are paying for something a utility is obliged to do anyway. The obligation for renewable electricity can also be put on the consumers of electricity. At the date of settlement, consumers have to show the proper amount of certificates, which they have to buy from the utilities. Here, the price for electricity and the price of green certificates (green electricity) are strictly separated.
When the green certificate system is accompanied by an obligation on utilities or consumers, demand for renewable electricity – and thus for green certificates – is fixed, except for voluntary (additional) demand. Supply of green certificates is determined by the installed capacity of RES. With a general characterization of high fixed cost and low variable costs, renewable electricity suppliers will continue their production until the price is close to zero. When targets are to be met at a certain date and the certificates or the obligation is not transferable to the next period, the price of the green certificates is characterized by high volatility.
In case of under capacity, there is either a strong upward pressure on installation of new capacity or (if the time period is too short for new installations) non-complying utilities or consumers have to pay the penalty. In both cases, the price of green certificates is high. In case of over capacity, the supply of green certificates is higher than demand and competition among suppliers lead to a strong downward pressure on the price of green certificates to nearly zero.
A number of options are available to prevent this price volatility. They can be divided into two categories:
Improve the flexibility of renewable electricity generators.
Improve flexibility on the demand side by changing the rules of the game.
Examples of both options are discussed below.
Validity of Certificates
If green certificates are only valid in the year of issuing, the certificates produced in a certain year are worthless once all distribution companies have settled their obligation for that year. When in general the supply of green certificates is larger than the targeted demand, the price of certificates is decrease.
Given this situation, the prices are even reducing to zero at the end of the target year. To stabilize the system, the validity of green certificates should be extended.
Besides extending the validity of certificates to subsequent years, the validity of green certificates could be extended to meet targets before actual production of the green certificate has taken place, i.e. borrowing of certificates. This means that the expected green certificates to be generated in the next period (which can be purchased through forward contracts) can be used to meet today’s obligations. This measure would also enhance supply side flexibility on the green certificate market in a number of ways.
First, in case of shortage, the price will not reach the penalty rate, but instead market participants will purchase forward contracts to meet their obligations.
Second, this measure will automatically correct for stochastic climate factors that increase the uncertainty in supply of green certificates. In case of a year with little wind, future green certificates can be used. Over the time span of the wind turbine, the produced green certificates will match with the targets for which its electricity was sold.
Third, the extra demand for forward contracts resulting from this set-up, will help renewable energy developers to secure finance from finance institutes. It seems reasonable to restrict borrowing to a specified time period.