Nordic exchange launches credit trade

With several years of experience under its belt, Scandinavia's power trading exchange, NordPool, is to launch a marketplace in Sweden for trade of green power certificates. The hope is that it could become the model for a European exchange for cross border trade of green power

NordPool's decision to launch a trading exchange for Sweden's green electricity certificates will be a trail blazer for the electricity industry -- and not just in Sweden. If the exchange starts to function as planned in the first part of next year, it may well set an example for the rest of Europe to follow. Market players in Sweden and Norway have been waiting for the launch for months so it has come as little surprise.

Initially the plan is to limit trading to Swedish certificates only, though in the longer term it is likely that a similar Norwegian system will be introduced in 2005 and possibly a Europe-wide market further down the line. NordPool has yet to confirm a final date for the launch as much will depend on the success of testing and evaluating systems prior to the start of trading.

"We have been asked by many players in the industry in Sweden to set up such a market," says NordPool's Morten Johnsrud. "Now seemed to be the most appropriate time. Although we are aiming for a first quarter start up, we cannot be sure, because various systems and routines have to be in place and functioning properly beforehand."

Warm welcome

The news has been greeted warmly by Swedish wind power producers, not least because an active trading market will give an increased validity and sense of sustainability to the whole concept of green certificates. There has been speculation over the long term viability of using green certificates to recognise the added value of renewable energy, along with question marks over how a trading exchange for certificates can work and about its costs and administration. With a marketplace set up by an experienced power exchange operator, some of these questions can be answered. The feeling among industry observers is that the system is here to stay whether they like it or not.

A fully functioning green certificate exchange in Sweden will make a launch of certificate trade in neighbouring Norway that much more likely. "We are aware of the Norwegian thinking and the possibility of a system being in place as early as 2005, but we took our decision based on Swedish certificates alone. It is possible though that we could build up an international framework at some stage in the future," says Johnsrud.

"Although it is hard to say what kind of impact the new trading will make, we will certainly have the advantage of a transparent market where pricing will be very clear and a greater feeling of stability." he adds.

While the Swedish wind energy association was initially adamantly opposed to selling the environmental attributes of renewable energy through trade of green certificates, objections to the concept appear to have softened in recent months. The focus is now on lobbying the government to tweak the system into place, rather than continuing to demand the introduction of a fixed premium price for wind power production, as in Germany.

"The department of trade and industry is working with the proposals we have put forward because, as it stands, this system still does not promote new investment in wind power," says Matthias Rapp of Windforce Svenska. "In the system proposed by government, the penalty for not buying from renewable sources is too complicated. If the penalty price is linked to the long term electricity price over a ten year period it means we can sell certificates forward, which is necessary for financing future projects."

How it works

All electricity consumers in Sweden are today required to buy green power certificates to demonstrate that a specified proportion of their electricity comes from renewable energy. The purchases are done on their behalf by their electricity retailer. The proportion of green electricity they must buy is to rise each year. For 2003 it is 7.4% of electricity consumed. Next year the mandate will increase to 8.1%.

Producers of renewable energy, which must be generated in Sweden, are allocated one certificate for each megawatt hour of wind power output. Any generator looking to enter the green certificate system -- and foreigners are welcome -- must be approved by the Swedish Energy Agency (STEM). So far all certificate trade has been bi-lateral between generators and electricity retailers (acting on behalf of consumers). The plan now is to introduce a green certificates trading exchange.

Failure to meet the mandate triggers a penalty for each certificate short of the obligation. Until the end of 2008, STEM is offering a guaranteed price to electricity generators for the preceding years' electricity certificates in order to secure them a market. For 2004 that price is SEK 60/MWh (SEK 0.06/kWh). It will be reduced to SEK 50/kWh the following year and drop by SEK 10 each year until 2008.

The government's fixing of the certificate price in this way has been a subject of debate. Some generators say the lack of a guaranteed price beyond 2008 is a serious problem. They argue that to be able to make long term project plans, they need to be able to enter into long term power purchase agreements. For that to happen, an indication of the future price of green certificates is necessary.

There is also the potential problem of political uncertainty. The utilities are wary of making long term price commitments under the existing green certificate system, because they are afraid that a change of government could bring about a change of policy and even a scrapping of green certificates, so they are unable or unwilling to take a long term position on pricing.

In Britain, where there is not enough green power generation to meet the renewables mandate, the laws of supply and demand have pushed up certificate prices to surprisingly high levels -- sparking a rush of wind project development. The same could well happen in Sweden argues Rapp. But just like in Britain, a system that does not allow prediction of future prices prevents the signing of long term power purchase contracts essential for gaining finance.

"At the moment demand is outstripping supply, because there is a shortage of certificates built into the system, which is a favourable situation for us. The average price has so far been very good, above our first projections, but even despite this fact, it does not give a good idea about the longer term." A trading exchange, structured properly, could provide the certificate price certainty missing today.

Good prices

The average certificate price since the introduction of the system on May 1 this year, is some SEK 210/MWh, or SEK 0.21/kWh (i0.023/kWh), which is above the penalty level for the first year. Prices should also reach SEK 0.20-0.30/kWh next year as well, so in the short term developers have no complaints, says Rapp. "It is further into the future that concerns us," he adds. Certificate prices have risen gradually since their introduction and are now at around SEK 0.24-25/kWh.

Eurowind's Magnus Rosenbäck agrees with Rapp. "Prices are pretty good so far and well above what we originally had in our budgets, so to this point things look optimistic," he says. Rosenbäck is confident the government knows it will need to adjust the system to make long term power purchase agreements (PPAs) possible.

"NordPool setting up an exchange should be a step in the right direction for us because everyone is aware that they have a standard and routines in place for selling electricity that everyone is already familiar with," says Rosenbäck.

Mikael Jakobsson of Airicole is also preoccupied with the long term. "The banks need long term PPAs, he says. "The utilities are still unable to take a long term position on pricing due to the uncertainty the system brings with it. There is also a political aspect to this, in that the utilities may be prepared to commit to deals in the short term, but they may be thinking: what if the government changes, or the current leaders decide to scrap the entire system? Our position has certainly improved, but we still need the system to be tweaked, which we are confident will happen."

Satisfied government

From an operational point of view, Jenny Hedström at STEM, the energy agency, is satisfied with the uncomplicated way in which green certificates are allocated and sold today and the response from both electricity retailers and consumers. "It has been a relatively smooth transition so far, and will be improved in time," she says. "From next year domestic consumers can register for the handling of certificates, but this will incur fees and most will continue to let the retailer do it for them."

STEM is hoping that success in the short term in Sweden could well lead to an efficient European wide system for virtual trade of green power across national borders.

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