Brussels -- we have a code red problem

Europe's green power traders are stepping up their lobbying activities to influence decision makers currently considering new European renewable energy laws that could threaten the existing market in trade of renewable energy certificates across national borders. The call to action was raised at the recent REXchange conference, organised by RECS International, an association of renewable energy certificate traders.

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Renewable energy certificate traders and the European Commission share the same vision and the same model for achieving it, but both are in danger of booby-trapping the other's launch pad and preventing a successful market lift off

Europe's green power traders are stepping up their lobbying activities to influence decision makers currently considering new European renewable energy laws that could threaten the existing market in trade of renewable energy certificates across national borders. The call to action was raised at the recent REXchange conference, organised by RECS International, an association of renewable energy certificate traders.

The key demands of the Amsterdam conference were for a partial opening of a market for certificate exchange for countries who want to trade renewables to meet green power goals -- and for full protection of the existing voluntary market for cross-border trade of virtual green power. Certificates make long distance trade of green power possible without having to actually shift green electrons along wires that may not be there or may not have the capacity to transmit more power.

Setting the scene, Claes Hedenstrom from RECS International warned that the European Commission's proposal for a new renewables directive, published in January, steps away, instead of towards, the European goal of an internal market in renewables. There are more barriers to trade in the new proposal than in the existing one, which became law in 2001, he said.

At the centre of the conference's deliberations was the commission's system of Guarantees of Origin (GO). Under the directive proposal, GO will primarily be used to demonstrate the degree by which each member country of the EU is complying with its national mandate for green energy consumption under the EU's new overall goal for 20% renewable energy by 2020. In a further departure from current EU renewables law, the commission's directive proposes that any cross border trade in GO is ruled out until exporting countries have met their interim targets on the way to 20%. Furthermore, only GO from new plants that begin operating after the directive takes effect will be available to be traded.

Double role

"The new provisions establish a change in paradigm for the use of GO," said Dietmar Preinstorfer from the office of the Austrian power market regulator, E-Control. He explained that under the current legislative framework, GO are mainly used for disclosure purposes -- that is to prove to customers the green credentials of electricity from renewable sources and to facilitate trade in renewables. International trade in GO has been steadily increasing, he noted. But the new proposal's emphasis on using GO as a tool for target counting takes no account of the existing role of GO in facilitating the voluntary market through green labels or trade. "Since the possibilities for companies to transfer GOs are significantly reduced, their importance will decline," he predicted.

Jonny Trapp Steffensen of Dong Energy pointed to yet another drawback for voluntary green power supplies if the draft directive comes into force: it prohibits GO from being retired from the market, removing the mechanism that ensures the green power was generated in addition to what would have been produced without green certificates. In the jargon this is known as "additionality." As it is, national renewables support policies already discourage individuals and businesses from doing "something extra," he contended EU policy must not create further barriers for the voluntary market. He called for the directive to be amended to enable a more "balanced approach." This would entail a minimum percentage of trade in renewables; and purchases of renewables electricity in the voluntary market should count as additional to that being counted towards targets, he recommended.

Golden opportunities

From the commission's energy directorate (DG Tren), Tom Howes agreed that the main role of GO will be target compliance and no longer disclosure. "Why can you not have a disclosure market based on a separate certificate, not on GOs themselves?" he asked. He added that the commission is trying to make the GO system more robust and flexible and to help countries reach their targets. Sales of GO -- once member states meet their interim targets -- will allow those less well-endowed with renewable resources to develop cheaper renewable energy outside their own borders. "There will be major cost differences in deploying renewables across different member states, so there will be golden opportunities for trade."

Howes admitted, however, that the draft directive's plans to ban any country from exporting GO until it meets its interim target is likely to limit cross-borders. So to is the directive's provision saying that renewables producers require "prior authorisation" from governments to sell their GO in another country. This means countries that implement the prior authorisation rule effectively opt out of trade altogether.

"If we had unlimited trade we would be talking about a major overhaul in national renewable energy support structures," explained Howes. The draft directive is not proposing such radical change. He explained that if trade of GO across Europe was unrestricted, renewable generators would shop around for whichever national support system would give the best price for their power and sell it there, using GO as the instrument of trade. The activity would create competition among support systems and lead to convergence -- or harmonisation -- of the level of national financial support for renewables. "The appetite of member states for harmonisation of support schemes in not particularly great," said Howes, in an understatement. To date, countries have fiercely defended their own way of supporting renewables.

"We thought we would instead take this step by step; give member states a chance of reaching their targets through trade, but also give them the right to limit that trade if they so wished," he said.

From German wind farm operator and energy trader Deutsche Essent, Paul van Son agreed that the commission had to face the political reality of the 27 European member states. But from the point of view of Europe's citizens, the draft directive's focus on protecting disparate national approaches to renewables support is "disappointing." An optimised system of trading could bring costs of renewable power down by 20%, he said, by improving cost-effectiveness and utilising the best locations throughout Europe for renewables deployment.

National support systems, such as government mandated premium purchase prices, have been successful in boosting the renewables market from scratch, but as renewables' share of the market increases, many of the costs will be shifted onto other players creating market distortions, he claimed.

Transition route

Van Son called for a gradual upgrading of support towards market-based mechanisms. "We cannot change overnight; for the time being we have to keep our different national schemes." But using GO for different purposes -- not only target counting, but also for trading and disclosure -- combined with "floor subsidisation" would help provide a transition route to integrate renewables into the energy market.

Meantime, the industry needs to encourage the public and politicians to understand the mechanism of free markets and their benefits for renewables in the long term, he urged. "We should not fear the market," he said. "I see a lot of fear of the market, but markets always tell you what the true value of any commodity is."

Some member states like Sweden already have a flourishing system of certificate trading and want it to continue, commented Lars Jacobson of utility Vattenfall. It should be possible for like-minded countries to open the way for voluntary trade by a "pre-defined joint or cluster market for GO," he said. "It is a bottom-up approach which would not be a threat to feed-in tariffs in Germany." However, the draft directive prevents any such regional market from being developed, he added.

Howes said the commission is in favour of a voluntary approach. "We think the directive should facilitate that and if not we do not know why not. It can be a very neat way towards harmonisation," he said.

Slow and steady

From the Association of Issue Bodies (box) Christof Timpe cautioned the trading community against demanding too fast a route to open markets. An earlier draft of the directive, which proposed mandatory opening of borders to green certificates from other countries, merely provoked a hostile reaction from member states, he said. "They know that if they want to meet their targets, they need to keep control of their renewable generation," he said. "Politically, it would be wise to go for a softer approach."

Jan van Aken of the European Federation of Energy Traders (EFET) noted that heads of state are pushing for negotiations on the renewables law to be concluded speedily so that it can be adopted within a year. "I get the impression that no expert in the energy industry is involved in running the show. We are in the early stages of developing a market, but this will be law for the next 12 years," he said. "I think you really ought to be worried. Brussels we have a problem."

Winding up the conference, Peter Niermeijer of RECS International said that following the conference's deliberations, the organisation would be producing a position paper calling for GO to continue to be available for the voluntary market. The paper would also call for a partial opening of the renewable market to enable trade between countries earlier than allowed for under the commission's plans. He concluded with two messages. Addressing the Commission, he echoed Van Aken's call: "Brussels, we have a problem," and to members of RECS, EFET and Eurelectric he urged: "Code red."

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