2.6. Guarantees of Origin (GOs)
Renewable energy certificates, used in European Union, are called Guarantees of Origin, or simply GOs in short. GOs provide proof that the energy has been generated from renewable sources (namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases), specifying the source of the energy; the dates when it was produced; the identity, location, type and capacity of the production facility; whether the GO relates to electricity or heating or cooling; whether and to what extent the installation has benefited from support; the date when the installation became operational; the date and country of issue; and a unique identification number.
Typically, both fossil fuel and renewable energy generators provide electricity into the power pool (grid). Renewable energy generators receive a guarantee of origin for each 1 MWh produced from renewable energy sources. Power and GOs can be sold as a bundle, or separately to the end consumer.
End consumers of electricity are businesses, such as corporate and industrial companies, as well as retail households. Businesses and retail households receive electricity from utility companies, and in very rare instances they buy it directly from energy generators (through a form of the power purchase agreement (PPA), but the structure still involves a utility company for balancing uneven renewable energy production).
Very often there are middlemen involved in these transactions. Between energy generators and utility companies, there is often a trading house involved. Also, there can be a trading house involved between a generator and a business (for GOs). As for retail households, nowadays they always end up buying from utilities.
Possible pathways for GOs for reaching end consumers:
- 1.Energy generator > business (very rare contracts called PPA - power purchase agreement that typically lasts as long as 10 years, and might still involve a utility company to balance energy production and consumption pattern misalignment)
- 2.Energy generator > trading house > business
- 3.Energy generator > trading house > utility > business
- 4.Energy generator > trading house > utility > retail household
- 5.Energy generator > utility > retail household
There is no possibility for retail households to acquire GOs without the inclusion of at least 1-to-2 middlemen, resulting in massive margins left in the pockets of middlemen.
Unlike CO2 allowances, GOs have certain unique limitations. Firstly – they are valid only for 12 months after the production took place. This means that due to market inefficiencies, some GOs expire without being consumed. To put it in perspective, in 2019 the total amount of GOs issued in the EU reached over 773,000,000 MWh. Out of that 773 million GOs, over 67 million GOs have expired. This means that approximately 8.7% of total renewable energy GOs never reached the hands of the final consumer. Applying the current spot market price (€0.60/MWh in 2021/06/09), this shows an economic loss of over €40 million.
GOs limitations are that the product is not as homogeneous as CO2 allowances. Due to having a lot of different attributes, such as a production period (which also defines expiration date), production location, technology, commissioning date and many others, it becomes quite complex to have a centralized exchange where market participants are able to buy/sell their GOs.
Similar to EUAs, whenever a market participant, whether it is a renewable energy plant operator or an energy consumer, wants to buy or sell GOs, an intermediary – typically a trading house – is needed. This results in additional time and costs related to brokerage fees, administration and legal expenses. Not only that, but consumers often misestimate their GO purchases when they budget at the beginning of the year, resulting in some GOs expiring or being sold back into the market at a much lower price. If the producer or consumer is low scale, then handling GOs can become costly. As for retailers – they have no way of accessing this market directly. As prosumers (producing consumers) are entering the power markets more and more, it is evident that more easy and more optimized access to GO trading is necessary.